Braskem Buffeted By Challenges On All Sides

Not much has gone right for Braskem (OTCPK:BRKMY) since I last wrote about Brazil’s leading basic chemical producer. Not only have the buyout talks between LyondellBasell (LYB) and Braskem’s controlling shareholder (Odebrecht, or ODB) collapsed, but Braskem is facing collapsing spreads as its products go through a cyclical downturn, an environmental problem with a salt mining operation in Brazil, and compliance issues that have led to the shares being delisted from the NYSE for the time being.

I’d previously written that a collapse in the LYB talks could push the shares back down in the low-to-mid $20’s, and with the added pressures of the environmental problem and the cyclical downswing, Braskem’s ADRs are now around $20. I do believe that the environmental issue is manageable, that management will get back into compliance and get the shares relisted on the NYSE, and that the business will likely bottom out in 2020, but what will happen with ODB’s bankruptcy remains a major open question. I do believe the shares are undervalued now below the low-to-mid $20’s, but there are a lot of issues for investors to digest, and I can understand why most investors would steer clear.

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Braskem Buffeted By Challenges On All Sides

Compass Has Successfully Monetized Some Assets, But Core Growth Remains An Issue

Kudos to Compass Diversified Holdings (CODI) management with the sales of Manitoba Harvest and Clean Earth in 2019, as the company obtained strong valuations (at least in terms of EV/EBITDA and EV/revenue) for those two assets. With around $950 million coming in, Compass has more options for redeploying capital, including some debt reduction alongside more M&A.

One of the biggest issues I’ve had with Compass still remains, though, and that’s the relatively weak prospect for core distributable cash flow. Cash available for distribution has grown at only a low-to-mid single-digit rate, and the distribution hasn’t changed in over five years, tempering the excitement over the 7%-plus yield that it offers. I can’t say I’m all that excited about the underlying businesses within the Compass family, though the shares do look reasonably-priced for investors who want a more income-heavy return structure.

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Compass Has Successfully Monetized Some Assets, But Core Growth Remains An Issue

CK Asset Holdings's Strategic Shift Has The Shares Trading In No Man's Land

Originally created as a pure-play property development and management company (primarily from CK Hutchison (OTCPK:CKHUY), CK Asset Holdings (OTCPK:CHKGF) (1113.HK) has since elected to abandon the pure-play property strategy and is instead essentially “re-comglomerating” itself into a more diverse company with a growing array of income-producing non-property assets. Unfortunately, management doesn’t really have a demonstrated track record here and the company’s transition process is lumpy – property still generates the large majority of earnings, but the land bank is dwindling and there’s no real visibility as to what sort of income-producing assets will come into the mix in the coming years.

CK Asset hasn’t earned back any real benefit of the doubt, and the shares are down about 5% from my last report on the company. Although I do think CK Asset looks undervalued, there’s huge modeling uncertainty, since so much of the company’s long-term earnings-producing asset base isn’t even owned by CK Asset today. Buying in today could lead to significant gains in the future, but that’s really just a gamble/speculation on the management team at this point, and that’s not really my preferred investing approach.

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CK Asset Holdings's Strategic Shift Has The Shares Trading In No Man's Land

With Mexico Looking Wobbly, PINFRA Looks Even More Attractive

Mexico’s economy doesn’t look all that strong now, with uncertainties regarding the trading relationship with the U.S. leading companies to defer/delay new investments and less activity from the government than expected in terms of supporting investments into improved public works. Against that backdrop, I believe Mexican companies with solid, less cyclical base business and strong overall financial positions will do better, and PINFRA (OTCPK:PUODY) (PINFRA.MX) definitely qualifies in my view.

Despite a weaker than expected first quarter and an initially worrisome change to a concession agreement, PINFRA shares are still up about 20% from my last article, as the shares have recovered much of what I thought had been panic-driven selling at the time. Although PINFRA isn’t immune to a weaker Mexican macro environment, I believe the shares are still undervalued enough to be worth consideration. I will note, though, that the ADRs are not particularly liquid.

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With Mexico Looking Wobbly, PINFRA Looks Even More Attractive

CapitaLand Looking To A Large Acquisition To Accelerate Value-Creation

As I’ve lamented in the past, Singapore’s CapitaLand (OTCPK:CLLDY) (CATL.SI) seems stuck in the S$3 to S$4 range no matter what the company does. Although capital recycling, earnings and ROE exceeded expectations in 2018, the stock couldn’t break out of that range. Likewise with the thesis-changing acquisition of Ascendas-Singbridge (“Ascendas”), though the shares are at least a little higher now than when I last wrote about the company.

I continue to believe that CapitaLand is undervalued, and the Ascendas acquisition should not only meaningfully diversify the company, but also create a richer opportunity set of capital recycling options. On the other hand, while CapitaLand is a pretty well-known name in Asian property development and the Ascendas deal will make it a top-10 global player, it’s not well-known to U.S investors, the ADRs are not particularly liquid, and real estate development companies aren’t exactly growth stocks. Consequently, while I do see enough upside here to consider it a long idea, it’s not going to suit all readers or investors.

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CapitaLand Looking To A Large Acquisition To Accelerate Value-Creation

Lydall - An Execution Story That Isn't Executing

I thought that Lydall (LDL) offered a little upside back in September if management could make progress on margins, but that progress hasn't come and the shares have lost half of their value. Between a weaker near-term outlook for margins, weakness in autos, and emerging weakness in heavy machinery, not a lot is pointing favorably for the company over the near term, and management really needs to start delivering the long-expected margin improvements.

In September I said, "Betting on a company to get itself together and improve its operating performance always involves risk, and it is entirely fair for readers to question why they should bother unless and until the segment-level margin performance at least stops getting worse." I still believe that is a very relevant consideration with these shares. Although there is definitely a risk in missing out on gains waiting for hard evidence of margin improvement, there's not much value here if that margin improvement doesn't materialize and management hasn't really earned much benefit of the doubt.

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Lydall - An Execution Story That Isn't Executing

Cemex Subjecting Investors To Mexican Cement Torture

I wasn’t overly fond of Cemex (CX) earlier this year, as I was worried about the demand outlook in both Mexico and the United States, and management’s inability to generate real value for shareholders despite following a generally sound plan. The shares have fallen another 20% since then, and the outlooks for both Mexico and the U.S. are heading in the wrong direction. Additional asset sales do underline management’s interest in improving the company by selling under-earning assets, but they don’t really create all that much near-term value.

I’ve reduced my modeling estimates yet again, and the shares still seem quite cheap. At this point I do find myself asking “how much worse can it really get?”, but that’s a question that the market has a way of answering along the lines of “this much worse!” Mediocre near-term growth prospects are likely to weigh on results, but I can definitely understand the appeal to patient value-hounds.

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Cemex Subjecting Investors To Mexican Cement Torture

Alps Looking At A Steeper Climb For Growth In The Near Term

Alps Alpine (OTCPK:APELY) (6770.T) has been one of the most disappointing calls I’ve made in recent time, as the shares are down about one-third since my last article, with the company seeing even weaker than expected volumes for its camera actuators to go along with a general downturn in the auto sector. Making matters worse, actuator volumes aren’t likely to get better soon, while newer, higher value-added auto components aren’t likely to contribute meaningfully for a few years.

I’m not keen on doubling down on a bad call, but Alps Alpine does look undervalued even on what I believe to be conservative assumptions. Even with a weaker long-term addressable market in smartphones, I think the auto business can drive 2% to 3% long-term revenue growth, with mid-single-digit FCF margins supporting a fair value close to $45/ADR. Investors should note, though, that the ADRs are illiquid.

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Alps Looking At A Steeper Climb For Growth In The Near Term

Broadcom Reportedly Ready For Another Enterprise Software Acquisition

Investors are still split on the merits of Broadcom’s (AVGO) 2018 acquisition of CA, but Broadcom management apparently isn’t letting those concerns get in the way of their strategic plans. To that end, Bloomberg is reporting that Broadcom is in advanced discussions to acquire Symantec (SYMC) at an enterprise value of over $15 billion.

The key attraction of Symantec would be similar to that of CA – high operating margins and theoretically consistent free cash flows, boosted by Broadcom’s aggressive cost-reduction efforts. That argument makes sense to a point, but given the challenges Symantec has seen in its business and the lack of a “moat” relative to CA, I expect this deal to be even less popular with some investors, not that that will dissuade CEO Hock Tan from following his plan.

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Broadcom Reportedly Ready For Another Enterprise Software Acquisition

Renesas Looking For A Clean Start With New Leadership

To say that the inventory correction process at Renesas Electronics (OTCPK:RNECY) has been painful would be tantamount to saying that Michael Jordan was pretty decent at basketball. Renesas has been hammered not only by a global slowdown in auto production but also significant weakness in China and among its Japanese clientele that serves Chinese customers (like Fanuc (OTCPK:FANUY), Mitsubishi Electric (OTCPK:MIELY), and so on). On top of that, it looks like my worries about market share loss have proven true, with even management acknowledging share loss in its core auto business (although they claim it's due mostly to discontinuing lower-margin products).

When I last wrote about Renesas, I thought there could be at least one more significant correction to expectations on the way, and that has been the case, but the pessimism on the shares was such that they're more or less flat with where they were at the time of that last article. With the inventory correction process mostly over, a new CEO, and IDTI now in the fold, Renesas should be able to return to a more growth-driven plan. I do believe the shares are undervalued, but there are still outsized risks to consider with this stock, including suboptimal ADR liquidity.

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Renesas Looking For A Clean Start With New Leadership

Euronet Thriving, With All Units Contributing To Growth

I thought Euronet (EEFT) was undervalued back in August, as fears of what the EU might do regarding dynamic currency conversion (a meaningful source of high-margin revenue for Euronet) weighed on the shares. Since then, not only did the EU opt for the best-case scenario for Euronet, but Visa (V) lifted its restrictions on DCC via ATMs globally, and businesses like money transfer and epay continue to grow nicely.

I’d previously valued Euronet on a risk-weighted basis that accounted for the risk of more severe DCC restrictions, but not only are the down-side scenarios off the table, the Visa decision marks a material improvement to the outlook. Although I don’t think Euronet shares look all that cheap now, these shares have a history of above-average volatility, so I’d keep an eye on them from time to time (or program a price alert) in case the shares sell off yet again on market jitters.

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Euronet Thriving, With All Units Contributing To Growth

With Nokia It Feels Like "2 Steps Forward, 1.9 Steps Back"

Nokia’s (NOK) share price is about the same as when I last wrote about this telecom equipment vendor, but there has been a fair bit of drama in between, with the shares going over $6.50 early in 2019 before a big sell-off into and through first quarter earnings. Along the way there have been optimistic sell-side pieces on the prospects for Nokia to benefit from Huawei’s troubles, but also some bearish pieces on Nokia’s tech roadmap relative to Ericsson (ERIC), concerns about whether Samsung could emerge as a more disruptive force, and whether Nokia will ever be able to execute on a consistent basis.

Of all those concerns, the execution issues concern me most, and first quarter results reminded everybody of just how consistently inconsistent this company has been. While I do think Nokia is relatively well-positioned in 5G and can look to gain some share on the back of Huawei’s troubles, the stock really needs a steady pace of financial improvement in the underlying business. Although I do think these shares could trade into the high single-digits if and when EBITDA margins move into the mid-teens and revenue growth picks up on 5G deployments, I think a fairer risk-weighted fair value range is in the $5.25 to $6.50 area for now.

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With Nokia It Feels Like "2 Steps Forward, 1.9 Steps Back"

Schneider Electric Reassures On Margins, But Macro Remains A Risk

Schneider Electric (OTCPK:SBGSY) has continued to do reasonably well, slightly outperforming the broader industrial group since its first quarter earnings release and pulling ahead of the group on a trailing twelve-month basis. With the company’s Wednesday investor day in the books, the company took the opportunity to reiterate and further explain its margin improvement targets, as well as outline some key longer-term growth opportunities like data centers and smart factories.

I liked Schneider before, and I still like it now, though valuation is more “okay” than exciting. While success on its margin improvement efforts could drive another point on the forward EV/EBITDA ratio, the near-term trading is likely to be more concerned with the macro environment, as Schneider is vulnerable to a slowdown in Europe, decreased capex in China, and a slowing U.S. market.

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Schneider Electric Reassures On Margins, But Macro Remains A Risk

MTN Group Making Operational Progress, But Macro Challenges Loom Large

MTN Group (OTCPK:MTNOY) shares have certainly recovered from the panicked levels of September 2018 as investors have had a chance to digest the real likelihood of the company having to make significant payments (again) to Nigeria’s government, as well to observe the real progress that the management team has been making with the business.

With the shares up more than 50% from my last article, sentiment has improved, but there are still serious ongoing uncertainties about the business in Nigeria, as well as the possible impact of sanctions (or worse) against Iran. On the other hand, management has been delivering on goals like increased data usage, expanded fintech usage, and monetization of non-core assets. MTN Group shares continue to trade at a discount to their fair value, but investors need to be aware of the above-average macro risks that seemingly always accompany the story.

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MTN Group Making Operational Progress, But Macro Challenges Loom Large

Bimbo Has Been Outperforming As Margins Improve

It took longer than investors wanted, but the last couple of quarters have finally shown the margin improvement investors have been waiting for in Grupo Bimbo’s (OTCPK:BMBOY) U.S./Canadian operations. Unfortunately, top-line momentum has been fading in both Mexico and U.S./Canada, and management has acknowledged limited capacity for price increases.

I thought Bimbo was undervalued back in June of 2018, and I think the share price outperformance since then has been reasonable. I still think the shares are undervalued, particularly if management can get its Latin American and EAA operations on better footing, but the discount to fair value isn’t as large anymore and it’s hard for me to be as bullish on this stock relative to the underperforming Gruma (OTC:GMKKY).

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Bimbo Has Been Outperforming As Margins Improve

Challenges In The U.S. Weighing On Gruma

Mexico’s Gruma (OTC:GMKKY) may be defensive insofar as it is a leading food company and a leading player in tortillas and corn flour in the U.S., but “defensive” doesn’t mean immune to share price declines. Largely due to weaker results in the U.S. business, Gruma shares have lost about 13% of their value since I last wrote about the company – a decline that seems outsized relative to the actual erosion in performance and expectations.

Gruma is well-run and has room to grow its business in both Mexico and the U.S., but it’s not a particularly dynamic company and it’s hard to see what would shift sentiment quickly. Steady execution will bring the Street around in time, yes, but that could take several quarters. More clarity on management’s priorities for free cash flow could help, particularly given the concerns that the company will make value-destroying acquisitions. This looks like a name for investors who want to shop in the bargain bin, but sentiment is lousy with the stock at four year-plus lows.

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Challenges In The U.S. Weighing On Gruma

Rudolph And Nanometrics Hoping To Unlock A Little M&A Synergy Magic

As the complexity of chip design continues to intensify, it's requiring more and more R&D from semiconductor equipment companies to keep pace, and that is making scale a more significant competitive factor - memory, foundry, and logic companies want "partners" (and yes, I use quotations deliberately there) that they can trust to deliver the goods, and that's making it harder for small players to stay in game. To that end, the combination of Rudolph Technologies (RTEC) and Nanometrics (NANO) announced earlier this week certainly makes some sense as a way for both companies to stay competitive in the process control/metrology/inspection markets they serve.

Whether the two companies will achieve their synergy goals from the deal is, of course, an open question now. The expense synergy targets look reasonable at first blush, but integrating operations will still offer challenges and the revenue synergies may prove harder to achieve than it would seem at first blush. For me, this is a "don't love it, don't hate … but I get it" sort of transaction, and the new Rudolph (the surviving entity) will be a name worth watching as the semiconductor equipment (or SCE) space recovers.

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Rudolph And Nanometrics Hoping To Unlock A Little M&A Synergy Magic

Better Execution At Natural Grocers Counterbalanced By A Tougher Operating Environment

These are tough times to be in the grocery business. With intensifying competition from newer entrants like Aldi and Lidl, steady pressure from Walmart (WMT), and growing online sales, it's hard for everybody, and it's even harder for organic/natural-focused grocers like Natural Grocers (NGVC) and Sprouts (SFM) as "regular" grocers increase their organic assortment and continue to pressure pricing.

Natural Grocers shares have fallen 40% since my last update, and the company is now largely uncovered (two analysts currently have published estimates). While the company has not done quite as well as I'd hoped six months ago in terms of boosting margins, it looks like a tough macro and a negative sentiment toward the sector has more to do with the underperformance. I do see the shares as undervalued now, but the grocery space is getting more and more challenging, and Natural Grocers has relatively less room for swallowing higher COGS than its peers/rivals.

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Better Execution At Natural Grocers Counterbalanced By A Tougher Operating Environment

Ongoing Improvements In Rail Sweeten Cosan's Story

I liked Cosan Ltd. (CZZ) roughly a year ago, and between significant ongoing improvements in the rail business and a buyback at the holding company level, the shares have risen about 80% since then – outperforming the local performance of both Cosan SA (CSAN3) and Rumo (RAIL3), to say nothing of peers and rivals like Adecoagro (AGRO) and Sao Martinho.

Cosan has taken a “hunker down” approach to the current weak environment in sugar, while continuing to grow the retail fueling business and focusing considerable attention on the rail assets. The valuation discount for Cosan Ltd. has shrunk noticeably, and with that management may feel freer to invest its cash flow into growth (instead of buybacks), something management has made clear would be their preference. Although I still think Cosan is a very well-run company and a great collection of assets, I don’t see the same striking discount to fair value as before.

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Ongoing Improvements In Rail Sweeten Cosan's Story

Strong Productivity And Asset Management Bode Well For SLC Agricola

It's been a while since I've written about SLC Agricola (OTCPK:SLCJY), and the shares have had quite a ride since then, trading up as much as 30% relative to the price at that last article before starting a downward slide that now has the shares trading about 20% below where they were last year. While they're all different companies, that net performance largely mirrors the disappointing performance at Adecoagro (AGRO) (which does some farming, but is predominantly a sugar/ethanol company), and significantly lags the performance of other Brazilian ag/sugar/ethanol players like Cosan (CZZ), Sao Martinho, and BrasilAgro (LND).

Commodity companies are difficult in general, and agricultural commodity companies are even more difficult given the significant impact local/regional weather can play (among other factors). At SLC, though, I think the company's consistent superior productivity must factor into the valuation as well as management's strategy to go asset-lighter and conduct more sale/leaseback transactions. I see fair value in the $5.25 to $6.25 range, though I would note the liquidity on the ADRs isn't great.

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Strong Productivity And Asset Management Bode Well For SLC Agricola