market folly

Earlier today we posted up Corsair Capital's Q1 letter.  Now, we present their investment thesis on one of their latest positions: SunCoke Energy (SXC).  SXC was spun-off from Sunoco last year and the hedge fund thinks investors misunderstand the company's business model.

Corsair believes that "SXC offers both steelmakers and equity investors a compelling and valuable proposition.  SXC has modest debt, generates a tremendous amount of cash, and management has invested in SXC since the spin.  At 10x 2012 run rate EBITDA less Maintenance CapEx ... we derive a target price over $25."

That's some compelling upside seeing how SunCoke Energy currently trades around $14.  Corsair says that one of the main things that attracted them to invest was SXC's highly-structured contracts, recurring cashflows, and incremental (low-risk) earnings growth.

The hedge fund also sees growth opportunities as compelling as well as the potential to convert coke operations to an MLP structure.

However, the main risk here is that Arcelor Mittal (MT) accounts for 70% of the company's sales and they only have three primary customers.

As far as valuation goes, Corsair writes:

"Based on $300 million of EBITDA (2012 guidance plus Middletown for a full year of operations) less Maintenance CapEx of $60 million valued at 10x yields a target price of $27."

Embedded below is Corsair's investment thesis on SunCoke Energy:



Be sure to also read the rest of Corsair Capital's Q1 letter for updates on their other investments.