We just got done with the annual Value Investor Conference in Cyprus. You can see scenes from the event in this video. The event which this year had a 40 person cap was fully booked and participants enjoyed 25 presentations over the 2 days, as well as numerous activities including a private beer tasting, tour of the museum and a magic show. 22 investment ideas were presented and I’d like to share with you my presentation.
The investment idea I presented was Graftech (EAF). The firm produces graphite electrodes. Graphite electrodes (GE) are essential for use in an electric arc furnace which is used to produce steel. Steel is produced in either a blast furnace or an electric arc furnace. The number of electric arc furnaces are growing in demand as they produce 75% less carbon dioxide versus a blast furnace. There is no substitute for a graphite electrode and as it is less than 5% of steel production cost manufacturers are willing to pay a premium for quality, reliability, and consistency. GE acted like any volatile commodity until recently where prices are currently surging. This is because not only is there additional demand but also product supply has dropped by 20%, the industry has consolidated with 2 of the top producers merging, and there is an alternative use for a key input.
To produce GE, you need petroleum needle coke and there is no substitute for this input. Petroleum needle coke is also used in lithium batteries in electric vehicles. 10% of current petroleum needle coke goes towards this use. This demand is expected to increase 10-fold! As a result, this key input is rising in price. Graftech though is the ONLY vertically integrated GE producer globally. Over 66% of its long-term needs are met internally, and so has a huge cost advantage. Essentially, the cost of production using their own needle coke is less the market price of needle coke alone! According to management, it will take at least 5 years to see changes in capacity and hence the company will likely earn more for longer than the market expects. A 10x P/E implies 49% upside to while a 7% FCF/EV implies 60% upside and this does not factor in the higher spot prices that are expected to be realized for 1/3 of production in 2019. An additional catalyst is a potential special dividend or buyback which could be announced this year.
My slides from the event are shown below. If your browser shows an error, you may need to do a hard reload of your browser to clear caching. Browser hard reload keystrokes: Windows: Ctrl + F5, Mac/Apple: Apple + R or Cmd + R, Linux: F5
2018-Sophocles-Sophocleous-Investment-Idea
