Investment Case: Luxfer Holdings
One of the largest positions (at the time of writing this article) in the Kempen Global Small-cap Fund is Luxfer Holdings (as of 24 August 2018). Whereas we typically look for small-caps with a focused business model, Luxfer’s model is more diversified. Still it fits our investment philosophy nicely: Luxfer is a strong player in specific niches and overlooked by many equity analysts and investors. Their new management team identified improvement potential, and is open for a dialogue with engaged long-term shareholders like Kempen. We are encouraged by the management’s transformation strategy and happy to join the company on this journey.
Luxfer was founded in 1897, when inventor James Pennycuick established Luxfer Prism Company in Chicago. The company produced glass panels to redirect sunlight from windows to light up an entire room. Luxfer prisms were particularly popular in cities and towns where electricity was not yet widely available, but demand started to decline as the use of electric lighting spread. In the 1930s Luxfer transitioned to manufacturing metal products, and in 1958 Luxfer introduced the world’s first seamless high-pressure aluminium cylinders, initially targeting the beverage industry. In collaboration with pioneering undersea explorer Jacques Cousteau, Luxfer developed the world’s first aluminium scuba tank in 1972.
In 1971 Luxfer started a collaboration with Alcan Aluminium, which resulted in a full take-over of Luxfer by Alcan a few years later. In 1996 the business was sold to British Aluminium. In 2012 Luxfer was carved out from British Aluminium and separately listed on the US stock exchange.
Today’s company overview
Today, Luxfer can be described as a mini industrial holding. The commonality of its business activities is in engineered advanced materials.
Luxfer is a leading producer of high-pressure gas cylinders, for instance those used by fire men and scuba divers, and in fire extinguishers, medical and industrial gas applications. Moreover, Luxfer produces high-pressure cylinders for the use of alternative fuels such as compressed natural gas (CNG) and hydrogen.
Next to the cylinder business, Luxfer develops and sells several products based on its metals and chemicals expertise. Its patented magnesium alloy is used in light-weight high-performance structures. It is for instance used in helicopter gearboxes and passed testing and certification for the use in commercial aircraft seating. Furthermore, Luxfer’s magnesium powders are used in flameless meal heaters, sold to the army or humanitarian aid organisations in case of catastrophes. Lastly, Luxfer also has metal photo-engraving and foil stamping capabilities used in the packaging industry.
Luxfer is relatively modest in size: it generated $441 million in revenues in FY2017 and has a market capitalisation of $583 million as of 24 August 2018. Nevertheless, Luxfer is a global company with 20 production facilities in six countries with distribution centres in another four countries.
Because of its small size, the high level of complexity and the large number of business activities, Luxfer tends to be an overlooked company on the US stock exchange. Luxfer is only covered by 1 equity analyst (source: Factset, 24/8/2018).
New management here to unlock value
Last year, a new CEO was appointed, Alok Maskara, who graduated as materials engineer, previously worked at McKinsey, GE and Pentair, in various leadership positions. In our discussions with Mr. Maskara, he explained his motivation for joining a smaller firm: as the CEO of a small-cap you have much more direct impact on the business, the ability to really ‘move the needle’.
In his first year at Luxfer, Mr. Maskara engaged in a full strategic review of the firm. Subsequently, he communicated a transformation strategy to the market. This plan starts with simplifying the company and its set-up. Because Luxfer originated out of British Aluminium, the company was registered in the UK, reported according to UK accounting standards, but was listed on a stock exchange in the United States. This was confusing for many (potential) investors. Luxfer is currently in the process of becoming a so-called domestic issuer in the United States.
Secondly, Mr. Maskara is refreshing the management team and supervisory board, imposing a high-performance culture with the aim of attracting more talent. This resulted, for instance, in the appointment of a new CFO, Heather Harding. The new management team identified significant room to improve productivity and enhance the cost efficiency of the firm; this will drive future earnings growth even in the absence of sales growth.
The last step of the strategy update is about revitalising growth opportunities, improving customer loyalty, with an increased focus on commercial excellence and targeted product innovation, and portfolio optimisation.
Source: Luxfer, Investor Presentation May 2018
While Luxfer only just started executing on its new strategic plan, the very first positive signals are starting to appear. We believe this is reflected in the recent share price development, as shown in the figure below.
Source: Factset, share price in $, from initial listing on 3/10/2012 to 24/8/2018
Kempen is happy to join the management team on its journey
In 2017 we met Mr. Maskara in person for the first time, just after he had been appointed as CEO. We were impressed by his initial observations and the opportunities he identified. More recently, in August 2018, we met the new CFO Ms. Harding, who also made a solid impression.
Over the last year, we have been in frequent contact with Luxfer’s management team. We discussed quarterly results and current market developments but, more importantly, also the strategic direction of the firm. Luxfer’s management turned out to be very open to an active dialogue. Our views align nicely with the ideas expressed by the management, which is encouraging. We support the current management team on its journey and look forward to continuing to be a long-term shareholder of Luxfer.
This document is prepared by the fund managers of Kempen (Lux) Global Small-cap Fund (‘the Fund’),managed by Kempen Capital Management N.V. ("Kempen‘’). The views expressed in this document may be subject to change at any given time, without prior notice. Kempen has no obligation to update the contents of this document. As asset manager Kempen may have investments, generally for the benefit of third parties, in financial instruments mentioned in this document and it may at any time decide to executebuy or sell transactions in these financial instruments. The information in this document is solely for your information. This document is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, no investment recommendation, no research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. This document is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. The views expressed herein are our current views as of the date appearing on this document. This document has been produced independently of the company and the views contained herein are entirely those of Kempen.