ISX 'Hidden Gems' Await Discovery

By Mark DeWeaver.

The ISX-listed industrials are best known for their main products, which include everything from polyvinyl chloride pellets (used for plastics production) to refrigerators and air conditioners. These companies are typically partially state-owned holdovers from Saddam Hussein’s time. Many have difficulty competing with imports. Often their factories are overstaffed, have obsolete machinery, and are running well below full capacity.

Yet some of them are sitting on a gold mine—the land their factories were built on. Typically this was bought decades ago and is recorded on the balance sheet at a cost of only a few hundred thousand dinar. Even back when one dinar was worth over US$ 3, these valuations were seldom equivalent to much more than a million dollars. Since then, years of money printing, inflation, and deprecation have reduced the book values of these factory sites to almost nothing.

The market value of this property, however, is a lot more than zero. Land in Baghdad, for example, may be worth anywhere from US$ 350 per square meter to well over US$ 1,000 per square meter. It is easily conceivable that many of the companies are now at steep discounts to their market-price adjusted net asset values.

Unfortunately, this discount is not usually easy to calculate. The annual reports generally include only the value of a company’s land at cost and no details on its size, location, or current market value. So far I have been able to find this information for only the following three names:

Al Hilal Industries (IHLI) holds 86 donums of land in the Zafarania industrial zone (in the southeast corner of Baghdad). (One Iraqi donum is 2,500 square meters.) Assuming a value of US$ 350 per square meter in this location, this site is worth about US$ 75 million. In addition, the company also owns about 20 donums in Kamsala (Camp Sarah), probably worth at least US$ 900 per square meter. This might easily be worth another US$ 45 million. The combined US$ 120 million market value for these sites compares to a market cap for the company of only US$ 6.6 million.

Electronic Industries (IELI) holds 66 donums in Zafarania and a total of 22,500 square meters at several other sites around Baghdad. This land might be worth around US$ 70 million, which compares to a market cap of US$ 19.2 million.

Modern Paint Industries (IMPI) holds 98 donums in Zafarania, possibly worth around US$ 86 million. Its market cap is only US$ 17.6 million.

If these cases are not atypical, there must be many more such hidden gems waiting to be discovered by investors.

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