Prem Watsa Invests in Canadian Steelmaker Stelco

GuruFocus.com
0
In this article:

- By Holly LaFon

Prem Watsa (Trades, Portfolio) acquired a stake in Canadian steelmaker Stelco Holdings (STLC.TO) last week through his investment vehicle Fairfax Financial Holdings (FFH.TO).


Watsa, whose investing style has been compared to that of Warren Buffett (Trades, Portfolio), purchased 12.2 million shares, or about 13.7% or Stelco. He bought the shares from Netherlands-based Bedrock Industries NV, a private equity firm, for C$20.50 per share, near their closing price of C$20.68 on Nov. 19. The price has since declined to C$19.50 at close Monday, down 13.7% for the year.

Hundred-year-old Stelco filed for bankruptcy in 2007 before U.S. Steel bought out the company. Bedrock Industries then purchased it in 2016, taking it public in November 2017. After its transaction with Fairfax, Bedrock retained ownership of 46.4% of the company.

Fairfax said it may discuss with company leadership possible changes, such as a merger, sale shakeup of its management or board.

With a market cap of C$1.79 billion, Stelco Holdings has a price-earnings ratio of 12.45, higher than the industry median of 11.68. Its price-book ratio of 3.84 exceeds the industry median of 0.99.

In the third quarter, the company reported adjusted Ebitda of $154 million, compared to $7 million in the same period a year prior. The company, which is subject to U.S. steel tariffs, reported tariff-adjusted Ebitda of $193 million, increased from $7 million a year prior. Stelco attributed its improvement to higher steel prices, low costs and strong domestic demand. In the fourth quarter, it is expecting "a significant increase in shipments, stable pricing and higher earnings."

Steel tariffs remain a contentious issue among Mexico, the U.S. and Canada as they seek to sign the USMCA, the replacement for the North American Free Trade Agreement, by Dec. 1. Canadian Prime Minister Justin Trudeau has said that the country is pushing for President Donald Trump to lift steel and aluminum tariffs before it will sign the agreement, but may move forward even if Trump does not.

"Our plan of action utilizing our tactical flexibility business model is to increase margins even further by selling higher value margin products while also reducing our tariff costs on shipments to the United States in 2019 to as close to zero as possible, while the government continues its discussions on removal of the 232 tariffs," the company said in its third-quarter results on Nov. 13.

While Watsa has almost half of his portfolio invested in communications equipment company BlackBerry Ltd. (BB), and shipper Seaspan Corp. (SSW), he has a small stake in one other steelmaker, South Korean's POSCO (XSWX:PKX), worth 0.73% of his portfolio.

Watsa invests the excess cash of his insurance conglomerate, Fairfax Financial, in a model similar to Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (BRK-A)(BRK-B). His portfolio was valued around $1.71 billion at the end of the third quarter.

See Prem Watsa (Trades, Portfolio)'s portfolio here.
This article first appeared on GuruFocus.


Advertisement

Recommended Stories