Kian Ghazi, is the founder of Hawkshaw Capital Management. Kian is currently presenting his best idea at the Value Investing Congress in New York. Hawkshaw Capital Management is a value, event driven, concentrated value hedge fund.
In 2011 the fund was down 12% and faced significant capital withdrawals in the first part of 2012. It was a tough decision, but with sub optimal capital he decided to wind down the fund. At this point they have returned capital to investors, after 9 years of being in business. Currently they are in the final stages of winding down, and he is reflecting before taking his next steps.
Kian’s best idea was in his fund, but is now only in his personal account:
LAYN: Layne Christensen
LAYN is the largest water well driller in the United States. There is a mineral exploration business that is ~25% of revenues but the majority of profits. Bears believe that these elevated margins are unsustainable. The water division is under pressure, with exposure to municipal governments. He believes government exposure is out of favor and has a variant view from the bears.
The mineral exploration business is only 24% of revenues, but the majority of profits. With 189 owned drill rigs, and over 200 rigs available through affiliates, they have combined the #3 global share in drill rigs. The #1 and #2 players are publicly traded and recently guided down for the back half of 2012. Kian believes the perfect hedge for the cyclicality of this business is shorting MDI: Major Drilling Group International. His estimate of intrinsic value for this business segment alone is $19 a share. Even if the mining cycle is in a cyclical downturn, the stock is trading at tangible book value providing downside protection.
The Water Infrastructure business is currently at an -8% margin, but 3 of the 4 units within this division are doing well. The problem child is the construction division which represents 40%+ of the Water segments revenues. The construction margins are getting crushed and the sole driver for pulling down the overall Water Infrastructure margins. Management is focusing on completing certain civil projects by the end of the year which should help limit losses within the construction division. Kian spent a lot of time talking with competitors in the heavy civil business, many of which are private. One private CEO they talked with believes the construction business is a 6% – 8% pre-tax margin business, so Kian is hopeful it can return to at least a 4% margin.
The long term driver for the business is LAYN shifting its mix more towards the Industrial/Energy segment which offers a higher margin profile. Through research Kian has found that project margins range from 8% – 30% within these segments, which provides a margin recovery option for LAYN.
The key risk prevention is tangible book value, which historically has provided a downside for the stock. Currently shares are at tangible book value, and Kian believes any price below this is an even better bargain. He thinks the mineral segment alone is worth $19 a share, and the water business is masking overall intrinsic value. With a new CEO on board, who has a history of turnarounds, the water business is rebounding and overall the stock has 40% – 60% upside potential.
10:10 EST: Q&A
Whitney Tilson is making a few comments about scope of research in the Q&A section. Kian’s process is research heavy, and he tends to get very granular. Along with typical analyst work like SEC filings, modeling, and talking with management, they also layer on incremental information through extensive calling of industry competitors and customers. Through this calling he received very good reviews from former colleagues of the CEO, which increased his confidence in the turnaround efforts.
10:14 EST: Closing Remarks
Feedback from the crowd revolves around concerns over the general economics of the industry and competition, specifically in the Water segment. Kian is confident in the new management team and believes that overtime the business will shift towards higher return areas.