THAKRAL HOLDINGS
Thakral Holdings (ASX:THG)
is an Australian-based property group operating in three
main areas: hotels, retail/commercial, and property
development. On the hotel side, Thakral’s portfolio consists
of over 2,500 rooms, making it one of Australia’s largest
hotel owners. The portfolio includes several landmark hotels
located in Sydney, Melbourne, and Brisbane. Thakral’s
commercial and residential assets, which receive over 30
million visitors annually, provide a steady stream of cash
flow. At the end of 2006, the hotel group had a fair value
of AU$622 million and the commercial properties were valued
at AU$256 million.
Like many parts of the
world, low interest rates and a strong economy have fueled
Australia’s real estate sector. The S&P ASX 300 Property
Index is up 70% since 2004. Despite this broad-based
strength, Thakral Holdings continues to trade well below its
net asset value. Using a sum-of-the-parts valuation, we
derive a net asset value of $1.15. This NAV includes the
value of the Company’s real estate assets plus the present
value of its various development projects.
While many of the
Company’s development projects and real estate assets are
well known in Australia, Thakral itself maintains a
relatively low profile. In addition, 40% of its float is
held by Thakral Investments, the Thakral family’s investment
vehicle. In 2001, the Thakral family considered selling its
interest because it felt its large ownership position and
lack of public liquidity unfairly punished the Company’s
market valuation. The situation is mostly the same today,
and it is interesting to note that in March 2006, Standard &
Poor’s removed Thakral from the S&P/ASX 300 property index.
Another reason behind
the current discount to net asset value is the impact that
the adoption of AIFRS (Australian equivalent to
International Financial Reporting Standards) will have on
the financial reporting of its property development
division. Before AIFRS, profits from project development
were recorded on a “profit emerging basis.” Going forward
after 2005, a project’s profit will only be recognized upon
completion. The value of large projects such as Alchemy,
Trilogy, and Ultra will not be recognized for several years.
Considering that most
of Thakral’s peers trade at an average premium of 30% over
net tangible assets, the Company may elect to commence a
strategic review process to unlock the value of its
portfolio. Even without such an initiative, we believe that
it is only a matter of time before the market recognizes
Thakral’s undervaluation.
POLARIS MINERALS
CORPORATION
Polaris Minerals
Corporation (TSX:PLS) came to our attention late in the 2005
calendar year. Management, led by Marco Romero, was raising
equity to build an aggregates quarry in B.C. The term
“aggregates” refers to the crushed stone, sand and gravel
found in naturally occurring deposits and used in
construction. We were immediately drawn to the extraordinary
economics of the business and the tremendous forecasted free
cash flow. We purchased just less than 10% of the IPO,
making us one of the largest institutional shareholders.
Polaris owns 88% of
the Orca Sand and Gravel Quarry, located on Vancouver
Island. The quarry includes a ship loading facility capable
of handling 70,000 tonne vessels and is permitted to produce
6 million tonnes per year. The Company also owns 70% of the
fully-permitted Eagle Rock Quarry, located near Port Alberni.
Production will be shipped to coastal urban markets,
particularly northern California. To guarantee access to the
target market, Polaris owns a 70% stake in an aggregates
storage and distribution terminal in the Port of Richmond,
San Francisco.
The huge California
market is currently facing a supply deficit, caused by
steady growth of housing and infrastructure and
environmental opposition to new quarries. The California
Department of Conservation has estimated that approximately
13.5 billion tons of aggregates will be needed over the next
50 years but just 4.3 billion tons of supply has been
permitted. Amazingly, the cost to ship from Orca to San
Francisco Bay, a distance of about 1,200 miles, approximates
$5 per ton and is comparable to trucking the material 25
miles. According to the Company’s prospectus, operating cash
flow is expected to stabilize at $46.6 million by 2013,
based on flat pricing for the balance of the 25 year mine
life. However, sand and gravel prices have increased
steadily over the past 15 years. In consequence, we believe
that cash flow growth should actually outpace inflation over
the life of the quarry.
Although the initial
public offering wasn’t a “hot issue”, shares of Polaris have
almost doubled since October of last year. The Orca Quarry
was completed on time and under budget and the first
shipment was loaded onto a Panamax-class bulk freighter on
March 31, 2007. Upside to the Polaris story comes from
stone, sand and gravel price increases, production from the
Eagle Rock Quarry, further quarry acquisitions and the
potential for a takeout due to the strategic importance of
the Company’s assets.
