a brief comment on the Asian Infrastructure Investment Bank + $ACM

Back in 2010, Xi Jinping, then the VP to Hu Jintao, gave the keynote address to the World Investment Forum, the importance of which - overlooked and ignored at the time - was its elaboration on Chinese investments in overseas infrastructure.

The speech was the initial indication of where the future premier would emphasize his goals and strategies for Chinese growth.


Back then, the speech stuck in my mind for awhile, and re-emerged two months later after Chris Christie cancelled the ARC (Access to the Region's Core) project, which would have added a new rail tunnel b/t NJ and NYC.

I actually wrote Christie a letter citing the speech and recommending that the Chinese pay for the tunnel, describing it as a win across the board; for the region, for his national aspirations, for labor and even for our national pride b/c when the project went over budget (as they all do) it would be a chance to really screw them. It was half serious, half tongue in cheek. Had I known he was a Cowboy's fan it would also have been half hate mail.

Now, I'm again reminded about the speech as global interest grows in the Asian Infrastructure Investment Bank, a reflection of President Xinping's long interest in promoting Chinese investment in global infrastructure.

Some European countries + the IMF have just signed onto the bank. The US objects because the bank hasn't done enough to ensure fair labor practices, which is probably the right thing to do. The labor component is certainly a solvable problem and I hope it is resolved so we sign onto it.

I have a narrow interest in the AIIB as a recent investor in ACM, which has a lot of exposure to Asian infrastructure. I haven't mentioned ACM here but on 2/13/15, I wrote the following as a quick idea on sumzero:

"A lot of reasons to hate this company - too many to name here - plus forced selling creates a "margin of safety" around a business that generates prodigious cash under the current CFO."

I didn't write about it here b/c I know the company very well - I covered it for years - and there was no process of discovery for me, which is what I usually like to write about. But there was a brief moment of discovery that I'll mention here, and it had to do with margin of safety.

Late 2014, with the stock in the mid-$30's, I'd talked with a bull who tried to convince me it was a good investment. I scoffed. These guys get paid on EBITDA not cash flow, I said. They'd buy EBITDA and get paid and shareholders got screwed. But that was old news; apparently they'd changed comp structure. So I dug in. The most recent proxy says 35% of ST comp is OCF and 50% of LT comp is FCF. That's new. Before 2012 cash flow was an afterthought but since 2012, cash flow improved dramatically. Amazing how incentives work.

But still, so much to hate. E&C deals always blow up. ACM mgmt has never delivered organic rev growth or promised EBITDA margin expansion. They are destroyers of shareholder equity, obliterators of value. Etc.  

So when I saw the stock in the mid-$20's it was a sad shock. URS once a proud company was now just l/t debt on the balance sheet. The market gave zero value to the combined companies and I was in disbelief.

I weighed all the reasons why I hated the company, which were many, and on the other side, 10x EBITDA against an $800M EBITDA forecast (mine, not the street's). That's a pretty normal valuation. Hold it steady and every $1 in debt paydown is +$1 to equity holders. Plus, a 25% FCF yield. Insane. Then on top of that you had URS stub holders as forced sellers.

It finally dawned on me that all the reasons I hated ACM explained the inexpensive value.

I contacted a large l/t shareholder - a value investor - just to check my pulse and share my revelation: "So this is what you mean when you talk about margin of safety?" It was a bit of a revelation for me.

The thing is, at these levels, ACM  doesn't need growth. It doesn't need margin expansion. Just pay down debt, and there's $4B of it. That's a lot of upside. And with money from the AIIB supporting large projects, it helps my thesis.

But where the AIIB really resonates with me is as a counterpoint to recent criticism among parts of the GOP regarding the US Export-Import Bank, which I presume will be a shrill voice in the upcoming primaries. How different are the directions of our countries when China seeks to promote its growth and power through capital allocation while certain leaders elected officials in the US seek to retract the same?