On August 15th, KHD Humboldt Wedag International AG (US OTC KHDHF, Germany Ticker KWG) released its YTD financial performance and it reported a loss of €175K, or -€0.0037 EPS for the first half of 2012. We have held a long position in the company and its predecessors since 2010 because we saw that the company had a significant level of excess cash on its balance sheet and we were expecting the company to use this cash to unlock shareholder value. We also noticed that the market price of KWG was trading at a discount to its book value and this discount persists today as the market price of KWG is at a slight 0.5% premium to its book value and a 12.65% discount relative to its cash and cash equivalents held on its balance sheet. Another reason why we are attracted to the company is because of KWG’s presence in fast growing emerging markets and its strategic partnership with AVIC, which took a 20% ownership stake in KWG last year. Also, Peter Kellogg (22% owner of KWG’s former parent MFC Industrial (MIL) owns 6% of KWG’s shares).
Source: KWG H1 2012 Earnings Release
KWG released its H1 2012 results on August 15th and while the quarter’s results showed the continued weakness in global macroeconomic conditions, we saw a number of positive takeaways. KWG’s H1 2012 revenue was €102.5M and it declined by 4% year-over-year due to delays in execution of customer orders. These delays were caused by global macroeconomic weakness pushing customers to delay and defer projects. Cost of goods sold declined by ~1% year-over-year but was not enough to offset the €4.1M revenue decline year-over-year, resulting in a gross profit margin of 19.9%, which was 2.4% less than the 22.3% achieved in H1 2011. Sales expenses for the half-year under review, rose by 11.5% to € 7.1M (H1 2011: € 6.4M), primarily as a result of an increase in tendering activities for new cement plants. General and administrative expenses remained largely unchanged at € 8.8M (H1 2011: € 8.7M). The rise in other expenses, from € 2.7 million to € 3.2 million, is mainly due to higher costs for research and development. We think that’s a good thing, if operating income is going to decline due to lower revenue, might as well go the full nine and increase R&D to when you’re going to have a down year anyway.
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