Big Business Economy HawaiiWritten by Havre On 16 December 2011
A&B: Are the Parts Worth More than the Whole?

Alexander & Baldwin (ALEX, NYSE, 12 month range 55.50 – 33.09) has announced that it is their intention to split the company into two separate entities, A&B (real estate and agriculture) and Matson (shipping transportation).  This should be completed in the second half of 2012 with shareholders receiving one share of each for every they own share in the present company.

A&B feels that the timing is right, as “the increased size, capabilities and financial strength of both” will enable the two companies to expand and compete as stand alone entities. Each has over $1 billion in assets. It has always been an issue in the investment community on how to categorize A&B, since it is both a real estate company and a shipping company. The investment research becomes complicated in respect to which analyst follows the company and which industry matrices are used respect to valuation. The result has been that virtually nobody follows the company; both Yahoo Finance and CNBC show only two analysts following the company, compared to nine at smaller Hawaiian Airlines.

The idea is that the two will generate a higher overall price, i.e. increasing shareholder value. This was made apparent when back in the spring Bill Ackman’s hedge fund Pershing Square filed a 13D with Securities Exchange Commission (SEC) indicating that they had amassed an 8.6 percent stake in A&B, about 3.5 million shares, at an average price in the low $40 range. Ackman is well known on Wall Street as an “activist” shareholder, creating speculation that he would press for the now proposed split. This news drove A&B’s shares to their 12 month high of about $55 per share from the low $40s. Subsequently, the share price had been trading at more rational values until the announcement from the company earlier this month, which also generated a one-day jump of 16 percent.

The question is: Where will the two companies be trading when the split is actually completed? That is hard to say and will be heavily influenced on where the general market is trading at that time. When the Ackman filing was announced, the S&P 500 was around 1320, resulting in a move to the mid $50s. When A&B made its announcement, the S&P 500 was around 1230 resulting in a move to the mid $40s. Another factor for the lower price was that the news services — Reuters, Wall Street Journal, etc. — all mentioned in their coverage of the company’s announcement that shipping out of China had slowed. Who knows where that will be in the second half of 2012, or even the stock market in general. So bottom line is it is all speculation at this point.

A&B reported that over the last 12 months, ending Sept. 30, 2011, Matson had revenues of $1.5 billion and profits of about $104 million. There is anticipation that after the split, Matson will pay a dividend of approximately $0.70 per share. Using those figures you can make the argument that shipping industry comps for price/earnings of 16 would give Matson a price of about $40 per share (41 million shares outstanding). But if you go the dividend yield route of the industry average of a 3.5 percent annual yield, the price drops in half to about $20 per share, a very big range that still will be subject to whatever the current market conditions are at the time.

As far as the other side, the real estate and agriculture divisions reported in the last 12 months, ending September 30, 2011, revenue of $371 million and profit of about $102 million. There is no anticipated dividend, at least at first, to use as a comp, and that industry currently is all over the place as far as matrices are concerned. Analysts look at occupancy rates, portfolio diversification and/or concentration by region and type, consumer spending, residential housing market, interest rates and myriad other factors when pegging values to these types of public companies.

The long story short of this is that present shareholders should just wait it out with there holdings. It is a very well run company that is financially strong, balance sheet wise, and continues to receive its dividend, which is currently yielding 3.8 percent on an annual basis. Speculators should sit back and wait to see what’s in store for the markets in 2012, watch the transportation index and the real estate market, and re-crunch the numbers when the event comes closer, maybe one quarter out.

Photo: Courtesy Alexander & Baldwin, Inc.

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Randy Havre has a wealth of experience in the financial industry. In 1987, he established his own full-service stock brokerage firm, which was also registered with the SEC as an Investment Advisory Firm, managing money for the State of Hawaii’s pension fund, among other portfolios. In 1994, he started his first of three Hawaii based Venture Capital Funds. Additionally, he wrote a weekly stock column in the Pacific Business News for 21 years, taught Finance 315 Portfolio Management and Investment Strategies at the University of Hawaii for five years and is on KHON’s Morning News as a business/financial analysis twice weekly. Over the past nine years, Havre has been active in South America doing business development work for some of his portfolio companies, mentoring entrepreneurs and advising investors.

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