Should I still be holding Steel Partners LP?
This is the first in my series of reviews about each and every portfolio holding. I’ve started with Steel Partners (SPLP) because the unit price is approaching the sell target established when I began accumulating units in the second quarter of 2012. Now that we’re approaching that target price should I be selling or has the intrinsic value of the holding company increased such that I should continue to hold?
In looking back over my prior posts on SPLP I realize that my last look at the partnership was dated November 2012. There have been some structural changes at SPLP in the interim, primarily acquisition of an equity interest in Moduslink in March 2013, disposition of an interest in an English insurance company, Barbican Holdings, and consolidation of one partially owned subsidiary, BNS, into another, Steel Excel. Additionally, a number of purchases and sales of subsidiaries have been made at Handy & Harman, a 50%+ controlled subsidiary. So, movement has been both toward simplification of the partnership structure as well as opportunistic purchase and sale of assets. But what we are mostly concerned with is the change in the value of the underlying assets and to what extent this has been reflected in the market price. Have the partnership assets increased in value and has the market price reflected this?
When I first made my case for SPLP my reasoning went as follows: “My investment thesis for SPLP is rather simple. I bought units at about 70% of their net asset value and got the management of a very successful activist investor, Warren Lichtenstein, as part of the deal.” I valued the NAV of the partnership’s underlying assets at about $17.35 per unit and was able to purchase units for an average price of around $11.65. In November of 2012 I upped my per-unit estimate of NAV to $18.40 based on additional information and increases in the market value of partnership investments, and targeted a sale price of around $18 for my units. With the year-end 2013 price at $17.35 have we now reached full value and should I sell?
To answer this, I’ve laid out my most recent valuation below. Note that full-year 2013 numbers are not yet available so the analysis may be somewhat deficient, but because many of the partnership investments are publicly traded we have some pretty fresh data for many of the pieces of this sum-of-the parts valuation.
|% own||Shares||Price||Value (mil)|
|HNH||Handy & Harman||54.3%||7,228.7||$24.21||$175.0|
|Equity method investments|
|Fox & Hound||50.0%||$23.5|
|SP Liq. Trust G (China)||$6.2|
|SP Liq. Trust H (Japan)||$4.5|
|SP Liq. Trust I (other)||$0.5|
|Available for sale investments|
|Handy & Harman note||$21.6|
|Handy & Harman warrants||406.3||$14.53||$5.9|
|Units outstanding (in millions)||29.655|
|Est. NAV per unit||$28.24|
|Price per unit||17.35|
|Discount to est. NAV||38.6%|
The major changes since my 2012 valuation have been the revaluation of the Handy & Harman share price, the ModusLink investment and my revaluation of the value of the Webank subsidiary based on the last two years of operating results. Of course, the estimated cash on hand at the partnership level is just a guess and may be off significantly (I await the annual reports to calculate a more accurate figure). Furthermore the number of units outstanding has been going down over the past quarters as the partnership has been repurchasing them; the latest count is from November, and by year-end this may have been reduced by more buybacks. Additionally it should be noted that the partnership announced a further $5 million buyback approval after the last annual meeting in December. While the buybacks have not been substantial enough to close the market discount to NAV for the units, they are certainly a move in the right direction.
Based on the above valuation, the current discount to the underlying asset values reflected in the market price seems to have increased rather than narrowed over the past year. I’m not particularly unhappy with this, however, as it has been caused by a revaluation upward of the asset values while the market price has somewhat lagged. So I will continue holding, hoping that WL will continue to ‘share the wealth’ and not pay himself more than other ‘partners’. Oh, by the way did I mention that the unit price increased some 47% last year, besting the S&P 500 index by over 15%? Now if just all my other investments followed the same script……