seekrit squirrel
Stuff => General Discussion => Topic started by: galumay on April 24, 2015, 12:48:53 PM
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I recently read about the value of having a decision journal to record the thought processes behind decisions, the risk analysis involved, the predictions of outcomes etc so that one can check whether outcomes are the result of correct/good decisions or inspite of them.
Its possible to have a good outcome, but the reason for the outcome was luck, not a good decision, eaually one can have a bad outcome, but the decsion was still a good decision!
Anyway, I thought it worth giving it a shot so here is my decision journal!
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13/4/2015
Bought $9500 NWH shares, they are the worst performer in the SMSF, falling from $1 to 20c, the rationale is to follow a set strategy, reinvest returns in the worst performing company to average down.
The strategy relies on there being no holdings which should have been sold out of on FA, NWH sails close here, dividend suspended, victim of the massive downturn in the sector and disputed contract at Roy Hill with Samsung. In the end its a contrarian position, and therefore its consistent with the strategy to invest cash flow from dividends into it.
I predict that there will more than likely be a +ve outcome from the samsung issue this month, impairment has already been taken and 0 profit written to the project, dividend suspended, good news on the outcome will see a strong rebound and with an average entry of 42c now its foreseeable that I will be back in the black this year.
If I am wrong, no or bad news on samsung issue, continued depressed business case, debt covenants come into play, potential for further downside. A longer wait for turnaround.
If I am absolutely wrong, catastrophic risk becomes real and total loss is possible.
Reflections for today, flat battery on the car again, it now looks like the passenger door not shutting properly caused the interior light to stay on and drain the new battery! I now think this was the cause of the old battery being flat, and dying. It must have been dead because it actually got worse rather than better with the 20 minute drive, whereas the new one today charged up in a 10 minute drive.
I also realise now that I made a poor judgement with buying the car, as the $800 cambelt replacement shows. I had a concern about it from the start but let the owners talk me out of getting a mechanic to check it - which in all liklihood would have drawn attention to it. The error was FOMO. Also some psychological thing going on with bias there, not wanting to push too hard with nice young couple,(social bias), trusting them because he was a teacher, (authority bias).
Interestingly sometimes FOMO is the right feeling! Last night with booking the flat in Istanbul feels like that, only 4 weeks till we get there, vacancy rate low, only property in the price range available, if I had stuffed round too long maybe cost us a lot of money? The other interesting decision is to deal directly with the owner, I didnt really save much, maybe $100, some risk remains that we will be ripped off, although I think its very small, the guy has a valid FB page, has 2 flats in the property rented thru different agencies, everything was consistent name, details, bank details etc. I think there is a point to be made for having slowed the process down a bit more, taken a bit longer to make a decision and booking thru the agencies to mitigate the minor risk.
I predict that it will work out fine, and in fact the way we engaged may well lead to a strong personal relationship to our benefit when we arrive.
My prediction was correct, Serdar has become a true friend and everything was perfect with the apartment
If I am wrong, we will lose money, have significant short term stress and waste time - for what would have only been a saving of $100 anyway!!
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23/4/15
Bought 25000 AHZ for the SMSF @ 8c
I bought into AHZ because I think this may be the last chance to by them cheaply before the price takes off on the back of real profit in the business. Its a bit of a speculation because we havent seen the results since they have increased sales and maybe costs have also increased, but the reward could be large if they turn into a profitable pharma.
Risk is a poor result will see them hang around the sub-10c mark, upside on good results is very large. The range of outcomes is probably still from zero in that there is still some catostrophic risk there, but the upside is probably north of 50c even with current capital structure.
My prediction is that once the next 4c is released, AHZ will never be 8c again.
Well, never say never, despite all good news in the 4c and subsequent news, as of 21/9/15 they are languishing at 0.066!
AHZ continues to wallow, has had a 1 for 10 consolidation and is now trading at 43c - or 4.3c in the old structure
Still looks like a poor decision - trading at 33c now or 3.3 in the old structure. I stand by my confidence in this speccy and have put more money into it in both portfolios. I dont mind the timing being wrong, as long as I am eventually right!
Oct 31, 2017 (another year on)Well they are under 25c now - or 2.5c in the old structure!! Patience is an essential virtue for investors!!
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25/4/15
Looking at a company called ICU that a friend who runs a small investment fund has been discussing, this is what he had to say,
At the 14c price today, the market cap is about $18.9m, normalise for cash & debt & EV is around $16m. I think they are capable of earning nearly $4m in 2015 with the ARTE acquisition and the growth rates are quite explosive.
4x EV is extraordinarily cheap for a cashed up company that looks set to grow revenues and earnings rapidly. Directors underwrote the recent capital raising, so they have real skin in the game (which I like).
The smart part about their play is that they are targeting the segment of population with no access to bank accounts or credit cards. So this neatly sidesteps Apple and Google. I suppose one possible threat is the telco’s withdrawing support. This is mitigated to a certain extent if ICU could keep building their content. Both telco and ICU benefits from increasing ARPU, so at least their interests are aligned.
DNA spent nearly $9m for iSentric. iSentric bought Arte for $18m. 2 years of growth later, a combined purchase value of $27m is now worth $16m EV on the ASX.
When I look at them its hard to find much info because its a reverse listing and the history is just not there in the financials, some takeaways though, NVAVPS is 0.05c, with a current price of 14c that means they are not a bargain in the old Graham sense of NVAV or net/net - but then nearly nothing is!
I cant see where Tony sees 4m NPAT this year, 1/2yr revenue is 4m roughly so lets call it 10m for the year with strong growth, costs would have to be around $5m and opex $1m and even without D&A or tax backed out that means a total of $4m. Maybe he sees more increase in revenue than that, because I cant see costs being a lot less.
Even if we accept a much lower figure, say $2m NPAT, thats still an EV/E of 8 which makes it very cheap by that metric alone. Although I think the EV will be a bit more than the 16m he postulates because they will burn some of the cash in that time which will mean it rises a bit, but that wont have a material effect on the ratio.
Much as I am tempted to have a punt on this company, I simply dont have any capital available at the moment to allocate to it. I think it could only be a small allocation as there is significant risk attached to this investment, no track record of profitability, untested business model, developing market, no income stream etc.
My prediction is that its next announcement will show the company is profitable and the price will reflect this within 12 months. Based on EPS using a NPAT of $2m i get an IV of around $1.
Tony and I were both completely wrong on this one, even Mr Market was too optimistic, profit completely evapourated, to be about $20K - rather than $4m or $2m or even $250k. It was always risky but didnt see this train wreck coming! Guess I will hold to see if they can pump the tyres up and get it moving. Still cant quite see where i went wrong to such an extent??? 21/9/15
OK did some more analysis of the AR and emailed tony with my thoughts, "It seems to me that basically I grossly underestimated the costs associated with the transition to a new business and was overly optimistic about an increase in profitability in the available time frame.
Now my thoughts have turned to increasing my holdings in ICU, I think its been oversold at current prices and my rough calculations suggest things could improve considerably this year. It would also allow me to average down which will certainly help my position if the price does turn around.
Looking at the Annual Report and backing out the “non-recurring” items of roughly $1m I get a NPAT of about $850K, now while that might be well under the $2m+ we had expected, its still a reasonable return on current equity valuation - a multiple of about 13.
NPAT should improve drastically as the benefits of the new entity flow through the full year, as long as the one off, non-recurring costs and write downs are completed!"
Ok, ICU released an update this week, 6/10/15 - on track for $3m EBITDA, so maybe $2m NPAT, jumped over 100% on the news!
If they only manage $1m NPAT it would mean an IV based on EPS of around 50c and if Tony is right and its $4m then it will be around $2.00
Some very crude FCFE analysis gives me an IV of about 50c based on NPAT of $2m
Invert, invert always invert, says Munger, so Mr Market thinks ICU is worth 14c, leaving my usual growth rates in the formula it suggests an eps or 0.8c in Mr Market's valuation, which translates to a NPAT of $250K.
SO Mr Market thinks that based on all the available information, NPAT of $250K is the likely outcome for this company currently. Another possible inversion is that the market expects FCFE similar to my calculation, but is attaching a Risk Free Rate of 15% to the company.
This is more plausible to me, accept the likely earnings, but apply a much higher discount rate due to the risk.
All in all a pretty compelling buy! I will have to think some more about how and where to free up capital for this opportunity.
Aug 16 Well better late than never, ICU had a much better year and delivered over $2m NPAT, trading at about 5.5 x for EV/E looks like its turned the corner. Market hasnt really reacted much yet.
The other companies on the top of my watch list are TRG Tassal Group and ICS a medical software company.
TRG are at near 52 week lows, no doubt the combination of concern about potential restrictions due to investigation of environmental concerns and also the report from HUO about the impact of Norwegian Salmon dumping on the Australian market due to russian boycotts has had this impact.
Again inverting, the current share price suggests the market has either revalued the growth, risk or earnings - one would imagine its the earnings and or growth, and the price suggests a 30% hit to earnings. The notice from HUO suggested the likely impact for them will be 20% hit to earnings so there may be some over reaction in the market. Although +/- 10% is hardly significant.
Interestingly the following article points out the ban will likely end in August! http://www.seafoodsource.com/all-commentary/27645-norway-s-seafood-exports-unscathed-by-russia-s-trade-ban
Still, I think at around $3.20 I am keen to be a buyer.
My prediction is that neither the environmental issues or the norwegian imports will prove to have as much impact as Mr Market has priced in, so i would expect that once the financials for the 2nd half are released the price will recover to around $3-50-$4.00. Its quite possible the dividends will not be impacted at all.
Seems my prediction was on the money this time, trading at $3.95 in a very soft market. Nice to get one right!
Worst case scenario is that both the enviromental issues and supply issues conspire to impact earnings more than i have predicted, the current price should give a buffer to one or the other, but not both. In the event of both risks turning to reality, I will have made a poor decision and capital will be at risk
ICS is fully valued now that its trading over $1 and so it goes back on the watch list.
My pediction is there will not be much growth unless there is consistent good news on earnings growth
So that very good news on earnings growth came to fruition and they would have been a much better buy than ICU in hindsight! With the recent fall in the market i reckon they are cheap at $1.25 and i would love to have some free capital to allocate. 21/9/15
in looking at what I could sell to free up capital, the obvious contenders are BRG, RCG, RFG, CCP and ANZ.
ANZ I feel are pretty fully valued at current prices and any softening of the property bubble will have a negative impact, wouldnt mind waiting till they went ex div though, CCP when I revist them I think they have more value to be unlocked yet, RFG is much the same, the early figures on the mixed business are looking awfully strong, RCG probably need to take a clip at some point, another $15000 @ 70c coming in the CR - and they would be worth around $23k at current prices. (note - not quite, will get clipped on over subscription.)
BRG i suspect I paid pretty near fair value at the time I bought, I dont think there is a lot of upside left in them so they may be the best choice to divest.
So at this point strategy is to sell out of RCG to rebalance to $20K approx, and sell BRG to reinvest in TRG and ICU. There will be CGT implications with these trades as they have been held less than 12 months, but being in the SMSF it will still be low.
On thinking about it, better not to rebalance RCG at this point, $20k from BRG is enough to take initial stakes in both TRG & ICU. WHY DID I THINK THAT! must put reasons down. Reviewing it I think its better to rebalance RCG, when i went back and looked at all my research on BRG, yes I probably paid near fair value at the time, but they are still a company I want to own and they are a business i understand very well. Selling the excess of RCG provides enough capital to take a position on both TRG & ICU so that is the direction i will take.
I predict both growth and yield will be better from TRG & ICU than from continuing to hold BRG,
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Well things didnt quite work out as expected, tryed to sell down RCG yesterday but the price was very soft, very few buyers and most of them well below the last trade price. It opened at 1.07, and settled at 1.04 - but my offer to sell at 1.04 never looked like getting taken up. At the same time TGR was dropping, down about 4c to $3.16.
I tried again to get out of RCG at 1.035 but again the buyers just moved away from me. I reassessed the decision to sell RCG, I was either going to have to drop to 1.02 or so or else sell down something else.
Rather than sell down that low I instead sold down CCP, my position size was rather large on these due to accidently buying an extra parcel when i first bought them. So I sold down CCP so that I once again held a parcel of about $20K and used those funds to buy TGR & ICU.
Of course the market had moved against me the other way with TGR! An Investor briefing today was full of positivity and good news so the price had firmed to $3.22.
Now the real test is to measure the decision, i predict that the overall value of the TGR and ICU postions will grow faster in value than if I had left the capital in CCP.
7/16 funny to read the comments about RCG now, I had forgetten how bloody hard I tried to sell those shares!! Now the best performer in the SMSF by far, a triple bagger today as they hit $1.87. Thank fuck I couldnt find any sellers back then!!
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Ok, so revisiting the prediction above, I am actually wrong so far! TGR have performed well and the $7200 investment is now worth $8832, but the investment in ICU has droppd from an initial cost of $7180 to $3686 for a combined value of $12518. Had I just held onto the CCP shares they would have dropped in value from $14248 to $13872 so as it stands the decison to sell some CCP and buy TGR and ICU has cast me $1354.
I will revist down the track, 5 months is a very short time to be reassessing the decision, hopefully the situation will improve!
This week I made a decision to transfer Sal & my tax returns into the SMSF, we got about $8866 in total and I decided that the best way to ensure we didnt just spend the money was to move it to the SMSF. I bought more UOS shares after deciding they were the company trading at the biggest discount to intrinsic value in my portfolio.
I predict that this investment will ensure growth in the value of this years tax returns in line with the UOS shareprice as well as an income stream from the dividends.
A good lesson in how fickle the markets are over shorter terms, just a week or so later and those CCP shares had dropped to what i paid for them, so parcel value, $11744 and the combined TGR & ICU holdings were worth $13469 which makes the decision look much better!!
And the lesson continues, ICU up 100% in 2 days on positive profit guidance, combined holdings now worth $19000
Update 20/4 TGR initial stake of 2236 shares now $8497, ICU now worth $7659 so total of $16156. The 1252 CCP I sold are now worth $9.94 for a total of $12445 so this decision seems to continue to be vindicated.
7/4 TGR $9279 ICU $5026 for $14305 CCP now $15562 so a little bit wrong at the moment! The better decision in hindsight would have been to put it all into TGR
5/8/16 TGR $9168 ICU $4069 for $14237 CCP now $19732 so $5000 down now. Looking more like I should have left the money in CCP, even had I only bought TGR they would be worth about $18400 so still worse off. This decision has flip flopped a few times so its really hard to come to a strong conclusion. The most consistent point seems to be that the real damage has been done by the stake in a speculative position with ICU - but of course another 6 months and that could turn around.
1/9/16 -this has really been an interesting comparison, little doubt now that just staying in CCP would have been the best of all results, they have taken off and the 1252 shares would now be worth $20500. TGR worth $9279 and ICU $5265 - as above, even had i only bought TGR I would still be down on hanging on to the CCP ( TGR - $18500 ) Lesson - dont sell shares in good companies to buy another good company - sell shares in bad companies!
Another year, oct 2017, still would have been better leaving the money in CCP.
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Time to consider reinvestment of dividends options, we have about $5000 available to invest, I think I will keep $2000 aside as cash and invest the balance.
Options include increasing holdings in UOS as company trading at greatest discount to value
Increasing holdings in ICU in the expectation of a turnaround and averaging cost down
Increasing holdings in AHZ while price is low
Increasing holdings in SGH to average price down
Buy into ICS
Initial thoughts are that I really cant find any certainty about SGH's cash flow and my gut feeling is that they may not be off their fair value unless they can improve FCF.
I am reluctant to take another, small new position with ICS, i would probably feel more confident if I was closing another position, but i fell like I a already holding too many positions.
So investing more into UOS ensures an income from the investment, it also should have the most liklihood of capital improvement given that its trading at such a discount to value and NTA, on the other hand the opportunity to average down into ICU while increasing my position leaves me well positioned if as i expect this year sees a revaluation of the company based on the profit from the acquisition of Arte starting to flow though to the bottom line. Also an increasee in the holding in AHZ exposes me better to the upside once this company becomes profitable as I expect.
I currently hold $2000 worth of AHZ and $7200 of ICU (well thats what the stakes cost me.)
Increased my holding in AHZ by $2500
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Ok, I have another $3750 in dividends to reinvest. The question is where to allocate the funds.
The options to me seem to be all the previous options,
AHZ, SGH, ICU and ICS
Plus CCP which have fallen hard back to my original purchase price.
So thinking thru the options, AHZ now holding about $4000 which is close to my position sizing for a non divvy paying spec, SGH I still have concerns about as an investment full stop, although the greed side sees the biggest potential capital gain here. ICU I am also probably a little over size in my position given the speccy nature of the company, and ICS would require opening a position in a new company - something I have been reluctant to do.
Well i decided on increasing the holding in CCP and have chased the price for 2 days! Up from $9.38 back to $9.94 now! Not sure whether to chase any further or just bide my time.
On looking at my holdings further the other opportunity to increase stake is in DWS which has quite similar metrics to CCP, it has made a couple of small aquisitions this year, which if they pay off could see an increase in earnings and a resultant re-rating by the market.
I think i will sit on it overnight and make a call in the morning.
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I realise that I have skipped the decision journal for some of the biggest decisions of my life - surrounding the work to win the NBN contract and all the decisions involved in that process! Lets hope at least mentally i fulfilled some of the process!
Anyway, some more dividends to consider investing, this time I realised there was another option - leave the dividends as cash because there may be investment opportunities that arise down the track that I need capital for. I actually made the decision to leave them as cash - and then of course the very next day an opportunity presents!
Tassal Group, TGR, the salmon producer released an announcement that I think the market completely misread, and hence the shares fell over 7% to $3.55 - and in fact were down as far as $3.46 during trading.
This is the body of the release,
Tassal rebalances sales channels to optimise returns
Tassal Group Limited (ASX: TGR) today announced that in line with its strategy to rebalance
sales channels and optimise returns, it has decided to withdraw its tenders for two domestic
retail supply contracts – Coles’ fresh Salmon Deli business and fresh Salmon to Simplot for
supply of packaged Salmon to Coles. The supply contracts for Coles fresh Salmon and Simplot
will finish on 4 June 2016 and 30 June 2016, respectively.
This decision was taken to ensure Tassal continues to generate sustainable returns moving
forward in light of warmer water impacting growing conditions for near term supply. As Tassal
is rebalancing its sales channels to maintain sustainable returns, this decision is not expected to
impact revenues and earnings going forward.
Tassal has had a long and enduring relationship with Coles. This relationship is not expected to
change, and Tassal will continue to supply a wide range of other Salmon and Seafood products
to Coles.
The domestic wholesale salmon market has had, and continues to have, supply restrictions and
increased pricing to ensure impacts from a warm summer can be mitigated. This provides
Tassal with the opportunity to redirect salmon production into other domestic markets to
optimise returns following completion of the above contracts.
The export market continues to present favourable conditions given supply shortages globally
that are expected to continue for the next two years, with increased pricing and a low Australian
dollar. Tassal will continue to utilise the export market to balance sales volumes in line with
optimising shareholder return.
The market has read it as firstly saying that TGR has issues with stock due to the warm weather and water temp, and secondly that this represents management lying to shareholders because when HUO notified the market of stock losses due to weather TGR replied that they were unaffected.
The release says the market has been affected, not the company. I think its a classic mis pricing by the market and as the situation clarifies the SP will recover.
Revisiting my valuation for TGR I believe they are cheap at $3.55 although my FCF valuations are a bit rubbery because of the CapEx and the impacts of the DeCosti acquisition. Overall I believe they are worth more than what I payed for my original holding of $3.22 which ws prior to DeCosti, and under the shadow of the senate enquiry and was pretty near the bottom of the market - I think the SP of around $3.50-60 is at least as cheap as $3.22 was at the time I bought the initial parcel.
If I am wrong and there is a significant issue that effects profit for TGR I still think the price is ok, EPS would have to drop from 34c to 20c for the IV to drop to the current price.
I predict that $3.55 will prove to be cheap and within 6 months the share price will rise to reflect the mis pricing by the market.
29/4/16 Well, it didnt take long, closed this week at $3.90
1/9/16 $4.15
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Didnt manage to fill my order totally for TGR before they made a strong retracement back up to $3.80.
Still have $4K or so to potentially reinvest.
Started looking at SMX, an IT company that has had a very large fall in SP and looks like it may be trading well below IV. I considered taking a position at around $1.66 today, my reservation is that my rough FCF IV based on the H1 figures is only $1.70. They had a pretty poor H1 and the business is in some form of transformation. My dilemma is if I wait until the good news come they will quickly recover, if i buy now and they are failing on their transformation then the price may fall a lot further.
Inverting, and asking why should I avoid this company, the financial fundamentals have been steadily falling the last few years and margins are slipping - combined with falling revenue thats not a good recipe. The market has hammered the SP over the last few years. The EPS this year is similar to 2006 - when the price was about the same.
Also inverting the share price and looking at what that might indicate for earnings, FCF simple calc would be about 7.6c ps - about inline with 1H figures, EPS indicated would be around 10c - impossible given that 1H earnings were 10c, unless they make a 2H loss.
I think this one goes in the thread discussing companies I didnt buy!
8/16 Now up to $2.15 from the $1.70 I started looking at this one, failed to run the FY15 numbers in my spreadsheet - I suspect i would hold them had i done so!
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I ended up increasing my position in DDR, I had a lengthy internal battle with myself about the debt levels, everything else about the company is compelling but I wish they would do more to reduce the debt level. Dicker Data have fallen in recent weeks to what appears to be a cheap price on any metric. I played devils advocate at length in a thread on HotCopper, http://hotcopper.com.au/threads/ann-fy2015-results-presentation.2725548/
I got in at $1.53 which has averaged down my holdings to $1.66
Ultimately I dont like adding new holdings to the portfolio unless the case is compelling - and it wasnt in SMX's case. So looking at existing holdings to build into, UOS is already a pretty big part of the portfolio, CCP is also built to about as much as I am comfortable with and the others are either in out of favour sectors or fully priced. So DDR it was, the binary option was SMX so my prediction is that DDR will likely perform better in the long term than SMX, with lower risk. Its possible SMX will outperform DDR if they can turn the business around, but there is a fair amount of risk that it wont turn around and it would have meant a new company in the portfolio - so lets see where these two head in the mid term.
Now a week later DDR are up to $1.70 - right for the wrong reasons, as soon as i bought DDR issued an announcement that 1st Q results were ahead of forecast by $1m - but SMX were up about 15% in the same week!!
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TGA reported profit impairment and downgrades this week, they appear to impact NPAT by about -30% and therefore EPS will reduce from around 21c to 14c.
Underlying NPAT would appear to basically be flat, which means EPS should return to around 20c and NPAT circa $30m next year, the current price of $1.40 seems very cheap on those metrics and the fall of 20% in the SP seems disproportionate to the long term impact of the downgrade.
To average down and take advantage of this potential mispricing I would need to sell another holding, considered options are selling SGN for a small profit and reinvesting in TGA or selling CAB at a larger loss and reinvesting in TGA.
Revisiting my analysis of CAB its worth so much more than its share price, cheap on every possible metric. The disruptive impact of UBER has smashed the price as has the regulatory changes, yet the company has not suffered anywhere near the impact the share price would suggest. I think it would be madness to sell at a loss.
SGN have recovered and with a review of operations and a merger with WPP they now look a lot more solid than when i took a punt on them originally, they pay a good dividend and are up to $1.07 from the $0.91 i paid. I am very reluctant to sell these to take the punt on averaging down into TGA.
I also have the UOS i bought to trade the +/- 5% in SP, if these can make it back to 50c while TGA are 'cheap' I may choose to swap over for a trade on TGA rather than averaging down.
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Well still waiting for UOS to recover to a sell, on market at my buy price of 48c - I picked up the divvy of $520 anyway so would be happy with that exit and then buy TGA. Will see if Mr Market meets my price!
17/7/16 - managed to get back out of UOS for 48c. banked the profit of $520 and retored capital to bank.
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ICS This is a little company that has been on my watch list for quite a while, I am thinking about taking a position. Its currently trading at about $1.65 and I have a note on my scratch sheet to look at them again at anything below $1.70.
I suspect the price has suffered a bit from the fact that nearly all their revenue comes from the UK, and there will obviously be some short term currency impacts, but the business itself should be uneffected by whatever Brexit ends up looking like.
I like the fact that they have no debt, some cash and the core business is simple to understand and seems resilient.
Thinking about the risks, I guess someone else could develop better software and market share might shrink. The other risk is probably management doing something stupid - they have a bit of form! The most recent ones being the seemingly unecessary consolidation - about which KTP on the other forum, made the pithy observation, "211 million shares on issue was considered too large".
Too large for what? Are they counting them by hand?" Also the rather bemusing move into the edu sector - with a tiny investment of $250k. Didnt really make a lot of sense to me.
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Also decided to sell the last of my corporate bonds, discovered the bastards at FIIG are charging me a $30 per month fee - which have no memory of! Will add it to the cash postion in UBank.
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so we have quite a bit of cash in the SMSF bank account, accumulated dividends and the proceeds of the sale of the last of the corporate bonds.
The first decision to be made is whether to leave some cash in the account, or to leave all of it, or to invest all of it.
The benefits of keeping cash in the account is that its easy to take advantage of investment opportunities that arise at short notice, so for example AHZ have a rights issue we will want to partake in, by having cash at hand we can invest without having to sell something else - and that seems to me to offer a significant advantage because it removes the need for a detailed, time consuming and stressful decision making process about just which shares to sell and the ongoing reflection and assessment of the desicion that entails.
Previously we have held enough capital in corporate bonds to allow them to be sold down for these sort of opportunities, now we have exited the corporate bonds completely that option is removed.
So it seems to me the decision is now clearer - hold all the cash or invest some of it. The attraction of investing some of it is firstly - its doing something! One of the more difficult aspects of long term investing is that its long periods of inactivity indispersed with moments of indecesion! The temptation to take a new position is strong, my research leads to new companies coming to my attention and FOMO makes me wish to be invested.
So even if investing part of the cash is the decision I come to, the secondary decision is whether I simply increase my holdings in an exisiting investment or add a new company to the portfolio. Again there is a strong temptation to buy into one of the new opportunities I have uncovered, its doing more than just increasing position size in an existing holding. On the other hand increasing the number of positions has 2 sides to it, it can be seen to reduce risk but that is tempered by the fact that it also reduces potential. So more positions mean the impact of one going bad is lessened - but more positions mean the really successful ones will be smaller and have less positive impact on the portfolio.
If I had bought just one share that the portfolio holds, RCG, and held it adding to my position as cash were available, I would have more than tripled our capital.
If I had bought just one share that the portfolio holds, VET, and held it adding to my postion as cash were available, we would have no capital at all, zilch, zero.
So back to the decision, cash requirements for the AHZ issue will actually be under $500, so its really irrelevant, but I think that opportunities that might require up to $5000 capital are not unlikely so we should keep a minimum of $5000 in cash.
Update - after a week of consideration and revisiting my research, I realise I will have $10k to invest and still leave $5k for unexpected opportunities. I think I am close to committing to entering SXE and TNE. One thing that crossed my mind is that there may be trading opportunities that appear this reporting season and I may well choose to "paper play" them to see if its worth looking for trading ops round reporting periods.
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Today saw the vindication of what I think was a good decision for the right reasons! We bought a 2000 Toyota Camry for $2000 in April, when i saw the car for sale I believed it was for sale at significantly less than its true value, also we knew we had lots of visitors coming over the ensuing 6 months so having an extra car would be very helpful.
So I bought it, paid $450 for 6 months rego, $380 for tyres and a wheel alignment, $77 transfer fees, $45 for a roadworthy and $30 to fix a puncture over the 6 months. We rented it to people as they needed it for $25 per day and made $1115 income from rentals. So that bought the base cost back to just under $2000.
This week I decided to sell it as we are not expecting any more visitors for a fair while and the rego will be due again in a couple of months. I decided I wanted $2900 for it, which I believe was a fair price for the car in the condition its in with still under 100,000kms on the clock.
It sold to the first person to view it this morning for $2900 which left us with a profit of over $1000.
I do believe that in more than 35 years of car, truck, motorbike and boat ownership, its the first time I have actually made money from one!
So it was bought based on the decision that it was selling at a discount to value, that we would get both monetary income from the rental and virtual 'income' in the sense that it would make our friends' visits more amenable, and that there was a reasonable chance we would make a capital gain on it.
Obviously the risks were that the car might be written off in an accident, or suffer some unsuspected, expensive mechanical fault or prove to be worth less than I thought. None of these risks came home to roost so my profit was well and truly at the upper end of expectations.
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15/8/16
I felt like I had done enough decision analysis about how to invest the cash in our SMSF account. I have given consideration to as much information as possible, I have thought about reasons not to invest and also reasons in favour, I have inverted, extrapolated, considered and discussed!
The end result was that I placed orders for $5k parcels of ADA, SXE and TNE - I realised that we had over $15k in the account with quite a bit more to come in the tax return for the SMSF so I upped the investment from my original target of $10K.
There are some unique aspects to these positions, I have never bought into companies that I perceived to be trading at such a premium to intrinsic value as measured by my DFCF model (in the case of ADA & TNE), but I have gained some condfidence from watching how really good businesses that are growing strongly will run ahead of value calculations based of PRP. Time will tell whether I have read this right, but particularly in TNE's case, i dont think there will often be dips to buy into in any case.
SXE is more typical of my buying, an unloved sector, an unloved company, but good management, no debt, loads of cash, diversifying business. I suspect the shakedown of NBN contractors in northern WA may put business their way too.
My prediction is that ADA will run or re rate based on their annual report numbers, strong growth update for 2017 would be the best case result.
TNE I would expect to come in with slightly better than expected numbers, further evidence of profitibility in the Cloud and UK business sectors and a strong 2nd half, which should push the SP along.
SXE will probably be more of a sleeper, although if the annual report surprises stongly to the positive then it could also move up. I think the headwinds of the sector will constrain capital growth in the short to mid term.
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31/8/16
Today was an example of rushed decision making, I tried to slow down, but still made a critical error of omission in my haste. The background was that I saw one of the micro caps I have shares in had released its annual report, ICU announced very strong growth in all their metrics, profit, revenue and cashflow. It was a massive turnaround from a disappointing year last year.
I checked and the price hadnt moved, in fact there were no sales for the day yet. I double checked the numbers and thought it was a perfect opportunity to make a quick trading purchase - pick them up for about 10.5c and sell within a week or so at whatever they rose to on the back of the good news.
Looking at the market depth I realised I would pick up about half my order at 10c, most of the rest at 10.5c and the next seller was at 12c so unlikely to pick the whole parcel of $10k up. This suggested to me that as soon as i soaked up the sell orders under 12c the price should move - but obviously there were no other buyers as excited by the AR as me!
The critical point i missed was that the results were not exactly a surprise, while slightly better than guidance, the half yearly report had pointed to profit in this order of magnitude.
This decision is an extension of my foray into UOS as a short term trade - that ended pretty poorly - I did make a little bit of money but nothing worth the bother.
The overall strategy is based around the idea of short term trading in companies that you dont mind getting caught with the shares if the market moves against you - and for that reason alone ICU is not a fit. (UOS was).
I may prove to make money from this decision, but it was a poor one and i should have slowed down the process - written about it here first would have been the obvious action!
Lets see anyway, maybe Mr Market will see the results and like them in the next day or two!
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Time for some more reflection - rather than hasty decision making, this is a case of failing to follow thru on a strategy due to paralysis!
I bought a small parcel of ADA a few weeks ago, and I deliberately made the position size quite small as the company seemed pretty fully valued to me - although good prospects of increased and sustained growth. My thinking was that with a smaller parcel I could add in the future if it dipped lower in a soft market etc.
What happened is that for a couple of days it rose from my buy at $3.02 to a high of $3.27 before the annual report was released on the 24/8 and they fell like a brick - although there was nothing but positives in the report, earnings up, revenue up, profit up...except the market didnt like the lack of guidance for 2017.
It fell to a low of $2.35 but basically traded for nearly a week around $2.50 - which is when I should have added according to my strategy, but I think it was so close to the time of my entry that I was unable to convince myself to average down in a new entry.
THen last week ADA released an outlook guidance for next year and the share took off again! Back up to $3.17 before settling out around $3.00.
An opportunity missed to significantly average down, in line with strategy and with immediate results!
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I decided to add to the ADA holding, price has been drifting around the low $2-90's so it averaged the cost down a smidge and was an allocation of cash from dividends and tax return.
I have also been having an internal battle trying to decide whether to sell some holdings to move the capital into better quality investments, both in the SMSF and the personal portfolio.
I have been mulling over selling ANZ, WES, QBE, MOC, CAB & WPP, I bought ANZ & WES because they are 'blue chips' and i thought at that stage I needed some blue chips in the portfolios. In hindsight they have both gone sideways for a couple of years and I dont see any likely growth in the short to medium term. QBE I bought because I thought I should own an insurer, hopefully I am getting over these compulsions to hold specific sectors!
MOC, CAB & WPP are all in the personal portfolio, CAB I should have sold when they were well over $4, would be happy to take a small loss and move the capital to a better home. MOC has been another sideways drifter, I worry about the exposure to the housing 'bubble' and would probably be more comfortable not holding. WPP i bought when they were SGN and it was a turn around punt, I thought they had been unduly re rated and presented opportuinty for a quick profit. In the end the profit (turn around) took longer than i expected, picked up some divvies on the way but I dont have a compelling belief in them long term.
So far the only move has been to sell WES, made a very small profit plus the divvies over the time invested.
The capital is probably going to find a home with my latest discovery from research, REH, Reece the plumbing supplier, great financials, another fully valued company at current prices but as with ADA and TNE, strong recurring growth means the premium is likley warranted, again nearly debt free, great cash flow conversion, very well run business, very tightly held by family management. All the things I like to find!
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Sold WES for $43.905 and bought REH for $44.975. My prediction is that REH will demonstrate more growth in earnings and hence SP while also being more recession proof than WES.
Continuing to consider selling ANZ & QBE in the SMSF and ANZ, CAB & WPP in the personal portfolio.
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VRS - I have found a new company that I really like the business, in the mining services sector but well diversified.
The core of the business is a roll-up model of acquired premium survey companies, so surveying, design, town planning etc.
They also provide non process infrastructure construction and maintenance services for government, resource and related industry sectors. In-house capabilities cover design and construction, hydraulics, maintenance, communications and asset management. This was the core of the business before they developed the strategy of entering the Surveying sector via the acquisition roll-ups.
The metrics all look good for the business, the only issue i discovered in my analysis was
"so far the only real concern I have is that the profit for last year is inflated by about 100% or $10m by tax benefits- including a one off due to overpayment of tax previously.
I have tried to price the impact of the tax benefit. Overall the income statement shows tax benefits of $9.75m, when you break this down its hard to separate out the way the $7m tax credit impacts the bottom line - the AR says the impact is $4.2m on income and $4.2m as a deferred tax asset on the balance sheet. (which i can't get my head around, I suspect they are offsetting the $3m tax that otherwise would be owing)
I have assumed an impact of $4.2m on NPAT which means when you take the one off out EPS drops to 5.8c from 7.4c
It still looks very cheap on those metrics, I just wonder how the market will react when the next report shows a significant drop in NPAT due to the normalising of tax benefits.
(Posted elsewhere & quoted)
I will enter by picking up a small parcel in our personal portfolio.
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Sold out of ANZ in the SMSF, that allowed me to build a larger position in TNE which had fallen since my initial entry, and also take a new position in SDI, a dental products manufacturer. SDI is basically a family business gone public, all the things I like, very tightly held by owners and managers, low debt, solid profitable business, flying under the radar due to small size of company.
It was brought to my attention by an online friend and fellow investor who lives in China, Andrew and I share a number of investments in various companies and obviously have a similar investment strategy. I have spent a month or so researching the company and although its already had a strong run in SP, I think there is plenty of growth to come. Bought in at $1.055.
I have an IV of around $1-1.20 based on past earnings and cash flow.
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A decision that I didnt document - and was more impulsive than I have trained myself to be, AHZ released an announcement that they had received FDA approval for one of their improtant medical valve repair patches and the market spiked up, as this seemed to me to be final confirmation that real profitability was arriving and it was moving from being a speccy to an investment grade company, and as our average cost of holding was higher than the price AHZ was trading at, it seemed the right decision to average down the overall cost of our positions in the SMSF and personal portfolio.
I ended up getting more at $0.465 which reduced our average cost to nearer $0.50. The shares traded as high as $0.55 and I was congratulating myself on my decision!
Then 2 days later they released great news about further success with the herpes vaccine trials and I fully expected another leg up in the share price - but it just kept falling and settled back around the $0.40 mark - something I now realise it always seems to do after good news - jumps up and then settles back in the previous range - this is the second time I have been cought with this behaviour by AHZ's share price so I am obviously a slow learner!
Today the 4c released and they fell hard again! Nothing but good news in the 4C and on track for cash flow positive by the end of the year. I resisted the temptation to find some capital to buy more at $0.375 - they will probaby drop back to even lower based on previous experience!
Correct! they have traded about 33c in the mean time up to the end of the year message from the company - which really had no news, just confirmation of guidance and they popped back up to 36-37c
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Another forced, rather quick decision today. I saw right on the close of trading yesterday, that SDI had dropped over 30% and on checking there was an announcement, very poorly written, regarding profit guidance for this half year. It seems the market took a dim view of the news, and with the AGM in 2 days time it certainly spooked Mr Market.
I cannot see anything in the news that would impact the actual intrinisic value by anything like 30% so I decided to sell my QBE (which i have been considering for some time - i bought them for entirely the wrong reason - (because I thought i should be in the insurance sector and they seemed the best value at the time.). I got out of the QBE for a small loss (around $1k) and put another $10K into SDI which more than doubles my holding (put $10K in at around $1 originally)
Picked up the parcel of SDI at 70c which was within a whisker of the low today at 0.685
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Once again I have been a bit lax about documenting some decisions, hopefully the quality of decision is not directley impacted!
I took a postiion in SRV, and I have documented the rationale in a sperate thread in the Shares forum. Then I saw one of my favourite situations, VOC had a very sharp and big fall in their share price based on an announcement that was poorly worded and did raise issues about underperformance in a couple of areas of the consolidated company. Its not easy to get a read on the total financial situation of the group due to the mergers and acquisitions last year, but it dropped in price to the point where I thought there was an opportunity to buy at well below value. So I sold our ANZ in the personal portfolio and took a position in VOC.
The next decision I took was that I wanted to try to build a position in KTP, a very thinly traded stock. My reason was largely purely based on the fact that Tony Hansen at EGP had outlined the case for investment, i couldnt find fault with his buiness case and agreed that if the business proceeds as planned there is a lot of value to be unlocked. Its probably a 3-5 year timeline to get to that point but could be well worth the patience if it delivers.
To free up capital I had to select something to sell, and I realised that due to averaging down as they crashed over the last 2 years, and then a very strong correction as it came out of its troubles, my holding in NWH had grown to a lot larger than my normal position size so I made the decision to sell down to an average size position to free up capital.
At the same time another apparent over reaction of the market came to my attention - MYX fell by about 50% from their year highs based on an investigation into the USA arm of the business. I will detail better in the Shares forum, but suffice to say I once again judged it to be a significant overreation by the market to bad news and took the opportunity to pick up a parcel of MYX, I also got my order filled for KPT.
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Some reflections - I am no good at short term trades, I failed with one in UOS, one in AHZ and now one in ICU. From now on I will avoid short term trades unless the reason is a hell of a lot more compelling than the past!
I have made some errors of timing this year, in hindsight I sold ANZ & QBE at small losses when some more patience would have seen them sold at a small profit - and to make it worse the postions i swapped into fell further so there was opportunity cost there too. This is less of a serious error compared to the trading one, its impossible to get timing perfect and really the decision to swap out of one business into another can only be viewed over a much longer time frame before making assessments about its merit.
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another year has passed! goodbye to 2016 and hello 2017!
I am not much of one for resolutions, but i do have a couple of processes to follow next year, a focus on healthier eating, cutting back sugar & alcohol further and no smoking. I also am implementing a more rigorous process with monitoring my investments, adding some new metrics and revisiting my analysis more regularly.
I shall also attempt to develop mental models that prevent me making stupid decisions!
Finally I will be exploring processes to allow me to be a better husband and father.
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2017 looks like a year where we will have to make an important decision about our future housing. Rio has announced they are evicting us from the company housing at the end of the year so we have some options to consider,
* Move into our investment property
pros - cost of living would be low.
cons - we would lose the significant income from the positively geared investment.
* Buy another PPOR.
pros - we would keep the IP and have a home of our own
cons - getting finance may be problematic, cost of living would be higher.
* Re- rent this property through Rio's excess housing manager.
pros - we get to keep the IP
cons - we would have to pay much more rent ($450) and wouldnt be paying off a PPOR.
Next step is to sound the bank out about finance
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Ok, we have pre approval for a loan of $275,000
So with the money in the offset, $134,000 currently, we could buy for $400,000 with costs.
If we added our share portfolio we could buy for $550,000
More options have become apparent,
as above,
and buy a IP that is a more profitable IP than the current one and move into current IP.
Pros - there are better yielding properties than ours. Particularly because we paid so much for the IP.
Cons - we potentially lose a great tenant in Care flight
Also buy another property as PPOR but rent it out in the short term and keep paying rent while we can in Lacebark.
- pros - Rental income would far exceed rental expense at this time.
cons -
Other thoughts,
If we are going to move into AIsa St we should spend money now to improve while its still an IP.
(in any case if we move into Aisa St we need a valuation for CGT purposes.)
RISKS - mine closing and values falling hard again, housing crash in Australia generally, Sal looses her job and cant get another, I cant make enough from the business and cant get a job. Over invested in a high risk, low growth town with no exit strategy, or an exit strategy trap of falling values. Rio puts its vacant houses on the rental market at true market rates.
Safest option is continuing to rent here and paying down and improving Aisa St.
If Wuyal Rd houses are an option then selling Aisa, buying Wuyal Rd and continuing to rent here is another option
...or sell Aisa, buy Wuyal and move in.
Problem to be considered - bank will lend an extra $275K so if we buy a new property as an IP & move into South, or stay here, then we would need a bigger deposit than 20% to buy a suitable property. ($275K + 20% is $330K) This is not tax effective so we would need to talk to the bank about restructuring.
Another couple of days thinking has us deciding not to proceed with any of these options. We have a number of issues with buying another property, or even selling one and buying another. Firstly we would be totally committing all of our savings and investments into property in Gove, we would have no buffer at all and if anything went wrong we could lose everything. The transaction costs and realised capital loss on Aisa St if we sold it to buy say a Wuyal Rd house would also leave us fully committed with no buffer and all for a bigger and newer house.
If property values fell further, if we were unable to rent out properties, if our income dropped significantly - any of these things could basically wipe us out.
On the other hand, even if things went well, we ould have an IP we have 0 equity in, and a PPOR with a large mortgage, so its hard to forsee anyway that we would not have ongoing significant mortgage or rent obligations when we want to reduce our working hours as we approach retirement.
By not borrowing and purchasing another property we retain our investments, have a healthy balance in the ofset account and we can continue to rent here while we do any improvements we want to Aisa St while its tax effective due to the IP status of the property. It is possible to see us owning this property outright in our retirement which really should be our primary objective for the next 10 years.
Next issue to explore is converting Lacebark to a DEAL property so we can continue to rent here if we wish to.
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Made a decision to sell DWS shares after they announced another aquisition, this has transformed them from a net cash business to a heavily net debt, and they would fail to meet my criteria for debt to equity if I were looking to buy. I have made a profit of over 38% before dividends in 2 years so its time to take the profit. There are signs the business is in structural decline, this table from Madamswer over at HC shows the problem in brief,
"NPAT ($m)
DH2011: 9.5
JH2012: 8.7
DH2012: 8.4 ($10m acquisition made)
JH2013: 8.5
DH2013: 7.8
JH2014: 6.7
DH2014: 5.7
JH2015: 5.0 ($10m acquisition made)
DH2015: 7.7 ($17.7m acquisition)
JH2016: 9.0 ($7m acquisition)
DH2016: 9.1 ($1.0m acquisition)
Put into context, the company is basically at the same level of profitability as it was 5 years ago, except that it has needed to spend over $40m in acquisitions - a not-insignificant ~25% of the value of the business today - in order to just maintain profits."
I am increasingly wary of businesses try to build balance sheets purely with aquisitions as a proxy for growth and will look to disinvest where I hold.
I expect that this may well prove to be a poor choice of acquisition for DWS, and unless it can quickly translate some synergies by mid year it may suffer a strong re-rating by then.
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Well its dividend time again and we have accumulated quite a wad of cash to spend, in the end I added 2 parcels of SRV to the SMSF. I felt that of all our holdings they were currently the most undervalued. Also we had only entered with a small parcel so this gave us the opportunity to average the price down while increasing the position size to nearer the average.
We picked up the first parcel last year at $7.70, some more in March at $6.09 and now more at $6.16 for an average price of $6.96
Hopefully a bright half year will see a recovery in the price and we can get back in the black!
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Although not good news, its nice to see a considered investment decision turn out to be correct, I first looked at Nant Whiskey and the investment in their barrels of Whiskey about 4 years ago, basically the whole thing has gone to shit in a hand basket - worse than i predicted. I was concerned about the risk of ending up holding the Whiskey in bonded storage if things went wrong - but they were actually crooks and people didnt even end up with the whiskey!
Bad enough if you could at least drown your sorrows, but losing capital and being sober is a poor combination!!
Here is what I posted on ASF 4 years ago,
"I did a bit more research on this company and found they are also seeking to raise money via a $5m convertible note issue, minimum $50K, 3 year term, 10% paid quarterly.
I thought a bit more about the risks with either investing in the barrels or the notes and I dont think the returns are enough to offset the risks.
The barrels in particular would leave you in a very bad situation if Nant folds, sure you own them and the whiskey within, but they are in bonded store in Tasmania, you will need to pay excise and then find a buyer, organise freight and gain access to the store to secure possession - the potential to earn 9.2% compounding seems to me to be far too little for the risk.
The other thought that I had was I would only risk a small amount of capital in such a high risk and speculative purchase, so even if everything went smoothly the overall gain in dollar terms would be small - i would then regret not having risked more capital! Conversely, if they folded I would likely lose most of my initial capital - and regret having gambled on such a risky proposition.
So at the end of my consideration it appears to be a "lose, lose" situation and I decided to give it a miss."
and elsewhere, more recently, ( i under estimated the worst case here too!)
" a nice case where my due diligence paid off. I looked into in detail and posted my thoughts in an earlier thread on the subject. One of the assessments for any investment for me is what i call 'catastrophic risk' – what is the worst possible outcome I could imagine and what would the impact be for me.
In the case of Nant the high returns were compensation for very real catastrophic risk, if the main business went under for any reason, the best case scenario were that you were left with barrels of whiskey, in bonded storage, at the end of the earth – with no idea of the potential cost to retain that storage and no practical way to recover any capital. In my assessment that made the risk/reward matrix untenable and I passed."
Anyhoo here is how the story ended,
http://www.abc.net.au/news/2017-03-09/hundreds-of-nant-whisky-barrels-never-filled-audit/8338106
...well not quite ended yet!
http://www.abc.net.au/news/2017-08-23/nant-whisky-to-be-investigated-by-tasmania-police/8836186
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I am thinking of selling our holdings in SIG, for my thoughts to date see this thread,
click here to view (http://www.galumay.com.au/forum/index.php?topic=58.msg175#)
I will do some more thinking, practice a bit of inversion and see where we end up!
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A friend is selling a boat that we are thinking of buying, its for sale for $85000 so its a significant amount of our savings if we were to buy it.
Its a 7.2m Cairns Custom Craft, built specifically to be a trainable live aboard boat for the tropics. Its powered by a 240hp Yanmar diesel.
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It has only done 260hrs and the boat is in immaculate condition, it was professionally built at a cost of around $200,000.
CONS
Its sooner than we planned to buy a big boat
Its not as big as we would have liked
It is a loss of investible capital
We might not use it much in the next few years
It will increase our budgeted spending each year
We will get a lot of new 'friends'
PROS
Its here
Its liveable and trailerable
Its economical to run
Its in incredible condition, the odds of finding another like it, in town, at a later date are remote. The cost of getting something similar here from out of town is likely to be over $15,000
By having it now we could use it for up to 1 week trips while Kai is busy with finishing the last 3 years of school
Even if we don't use it much it will not deteriorate much as its in such good condition
The ability to have the insect screens all round the cockpit is pretty unique.
ALTERNATIVES
Spend $15,000 per year on a charter or fishing camp based holiday
Wait and buy something later
Buy a newer better small boat
Do nothing
WORST CASE SCENARIO
We don't use it, we don't enjoy the lifestyle it offers as much as expected, we realise it was the wrong boat for the job. We have to sell it and lose a significant amount of capital.
BEST CASE SCENARIO
It turns out to be perfect for what we want to do and we get to explore much more of the coast and transition to retirement thru it.
OPTIONS
Buy outright ourselves
Go halves with Dave
OTHER CONSIDERATIONS
Insurance.
FURTHER THOUGHTS
I have spoken to as many people as I can think of about this boat, and basically looked for non-confirming opinions, reasons not to buy the boat. The consensus seems to be that it is a good boat to buy. Also looking extensively at all boats for sale in Australia I cant find anything as good as this for anything like this price, there are cheaper similar boats but they need a lot of work done - and they are not here.
Talking to Brad Smith he says that the minimum cruising speed you need up here is 10kts and there is almost nothing on the market that is bigger and roomier - and cruises at 10kts, they are either slower (6-7) or much faster with a much higher fuel burn than I want. Brad suggested that around 10m gives you more room while still being able to be pulled out on a trailer and stored at the yacht club. I cant find anything in that category - at any price so its rather achademic. The closest is a BlackWatch 26 in Perth I have considered, but its more fuel burn - 30lt/h at 20knts, for sale at $79k, plus needs a trailer, $10k? plus its in perth so maybe $10-15k to get it here.
Brad also pointed out when its shit here no boat is comfortable - even the 20m Hama Pearl 3 was uncomfortable when it really blows!
Charlie Bronson also couldnt come up with any reasons not to buy it, he pointed out how well built CCC boats are, how well they ride and how suitable the boat is for a couple to spend extended time on. He pointed out that even when its not that nce here, once you get round the corner from Wilberforce, you have a hundred miles of protected coastline from the SE's.
SECOND LEVEL THOUGHTS
How will our lives be impacted if we buy it?
There will be some negative financial impact, offset by the opportunity to spend more time exploring the coastline further from home.
How will our lives be impacted if we dont buy it?
In reality, the impact will be minimal, or at least un-noticed, as we wont really know what we are missing and we are very happy with our lifestyle as it is
CONCLUSION
If we make a formal offer, I am thinking of going in at $70k with an upper limit of $75k
Interesting observation - in my past I would have looked at a new shiny thing and because i had very high disposable income, low fixed costs and easily available debt i could service, I would have bought it on implulse. I would have figured, "I can afford that because its only another $200 per month"(example) - but now that I have no debt and it has to be serviced out of real, hard, green money that we actually have, its psychologically a much harder decision. I really dont want to give all that money to someone else....for anything!
Its a good insight into why we become so easily indebted and how it snowballs because we dont really think about spending the actual amount, just whether we can afford the extra repayments.
UPDATE 15/6
Brad & Kim came over and talked about this boat, and boats in general for a couple of hours, they have an 865 Haines they bought last year that is quite a similar boat and their lengthy experience in charter and commercial boats is invaluable, Brad has worked a lot with Yamars and rates them very highly, once again thy were really unable to add any negative opinions about the boat. Brad offered to have a look over the boat from a mechanical perspective, so we went and did that. He couldnt fault the mechanical aspects but more impressively he was blown away by the boat in looking over it. He was amazed by the space and the quality of the build. He said it was actually much more like what he had in mind when he found and bought the Haines last year and admitted that had he not bought the Haines I would be competing with hi to purchase the boat! Hw felt that even at the asking price it is good buying.
His reaction was so positive that I put in our offer of $70k this afternoon. We will see how it goes!
UPDATE 19/6
Got back to Craig about our offer, turns out the other guy looking at the boat, a doctor from Yirrkala, has offered very close to the full price. He is away now for a couple of weeks in Bali so we have time to carefully consider our options. Talking at length to Craig its pretty clear it will basically take $85k to buy the boat. This is more than I had wanted to pay, but I guess it really focusses the decision! As my friend Chris pointed out, given that we have established the boat is definitely worth the asking price, the only questions that remains are do we really want to own a boat of that size at this time and are we comfortable spending that amount of our capital at this time.
UPDATE 23/11/21
Well as we know we bought the boat, for the $85k asking price and here we are now 4.5 years later and about to sell her as we have bought a much larger boat, a 46' 14m sailing catamaran!
Its fascinating to read my thoughts 4.5 years ago, I must say I am very proud of the process and how strong it was all that time ago!
So we spent about $20k on the boat over those 4.5y and I am guessing a fair bit more on fuel, maybe a total of $25k plus we will sell her for $80k so a small capital loss of $5k. That means a total cost of ownership of around $7k a year. The alternative we considered at the time of purchase - Spend $15,000 per year on a charter or fishing camp based holiday Is double that amount ( and in hind sight unrealistic as it would have been nearer twice that.
Interesting to see the original "best case scenario" - It turns out to be perfect for what we want to do and we get to explore much more of the coast and transition to retirement thru it. - Not too far off the mark!
The worst case scenario - We don't use it, we don't enjoy the lifestyle it offers as much as expected, we realise it was the wrong boat for the job. We have to sell it and lose a significant amount of capital. - turns out the lose of capital was insignificant - $5k!
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I am considering putting a fair amount of our SMSF funds into Tony Hansen's EPG fund. I have wanted to allocate some capital to his fund for some time and now have the opportunity to be one of the last intake of retail investors into the fund as it becomes a fully fledged fund. To do so I have to sell off some existing holdings, I am considering reducing the holdings in BRG & CCP to bring them back in line with position sizing in the fund and also some NVT. I would sell $10k BRG, $30k CCP & $10k NVT for an initial investment of $50k which would place about 10% of the SMSF with EPG.
My reasoning is that EPG's track record has been exemplary and the returns have far exceeded my own, the access he has to research and intimate knowledge of investible businesses gives him an edge I cant match.
The risks are that with the fund very cash heavy initially the returns will likely be much lower at first, of course that also creates significant opportunity if there is a significant market correction.
I dont see any catosrophic risk, the quality of his leadership and management is too great, also the fact that it is basically the vehicle for all his family wealth gives him a lot of skin in the game.
The most obvious risk is that the market keeps rising and the shares I sell keep rising while EPG is unable/unwilling to invest the free cash int he market so comparitive returns are sub-standard. Given the relatively long term focus of our SMSF this should not be an ongoing issue.
Also I keep a significant position in all the businesses I am selling down.
The other risk is protfolio concentration, I hold many companies that EPG are invested in, DDR & UOS being two that are also two of my biggest holdings, but as the fund invests the concentration in those businesses will be diluted.
My prediction if I choose this path is that in the short term (1-2 years) returns will be less than if I had held onto the shares, but after that as the fund becomes invested returns should outstrip the alternative.
Done, sold out of selected companies as described above and put $50k into EPG Capital
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We have a SPP offer to buy $10000 worth of NWH shares, as we hold in both the personal portfolio and the SMSF we can buy 2 parcels, the SPP will almost certainly be scaled back so for the personal portfolio we will use $10k of our personal funds to apply for the full allocation in the expectation of a scale back and after the event make a decision about what to sell to payback the $10k. Given that the SPP is at 68c and NWH are trading at $1.04 today, there is a likely profit of around 30% for doing nothing essentially.
We only have $3k available in cash for the SMSF so we would need to sell down a position in order to finance the SPP, one possibilty is to sell down NVT to a position size of $20k which would provide the funds required, another possibility is to sell a parcel of RCG which is also quite a large position now.
The NVT would be sold at a small loss, the RCG parcel would be taking profit "off the table". GIven the concerns around the retail sector with Amazon and some softness recently with RCG it may be prudent to take some of the profit.
Although the position size of NVT is bigger than my preference, the fact that I would be selling at a loss puts me off that option.
After the SPP is completed it would make sense to sell down NWH as the position size has become too large, this would free up significant capital for reinvestment. An option would be to sell NWH to buy NHW, but this may effect the size of the allocation so I am a little reluctant to do so.
I am thinking about how to apply inversion to this problem, maybe consider what would be the worst way to raise the 10k for the SMSF. Using cash from outside the SMSF because there is no way of getting it back. Selling down shares in positions I want to accumulate rather than reduce.
...this is why inversion is so good, if I sell down a position I want to accumulate into, then I can sell the NWH shares after they are issued, at a profit and buy more of the business I want to accumulate as well as rebuking the sold down position. The risk is if the allocation is much smaller than the sold parcel it becomes pretty ineffective.
Another bad way to raise the money would be to sell down a company that is below what I paid for it, and where I have a reasonable expectation of it recovering to be profitable.
After sleeping on this my conclusion is that given that I have no idea what size of parcel we will be allocated in the SPP, it makes best sense to sell down the RCG shares and then make a second decision about what to do after that once we see what the size of the SPP is.
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Ok, well as expected the SPP for NWH was massively oversubscribed. A pity management didnt show a bit more loyalty for the retail shareholders who stuck with them through the rough times, as usual they sucked up to the institutional investors at our expence. Anyway out of the $10000 we applied for in each portfolio we got about $2000 worth in the SMSF and $700 in the personal portfolio.
Firstly, in the personal portfolio we have another issue, a renouncable rights issue with SND - a company doing the right thing by retail shareholders, we get 66% of the capital raising. Again it will be fully subscribed, but may as well use the left over NWH funds to apply for as much as we can and then assess after the CR closes. At the end of the day the portfolio owes us $10K when everything is done.
In the SMSF I am considering using the excess funds from the NWH SPP to top up a few positions, specifically average down a bit more in AHZ, average down and increase the position in KPT, average down and increase the position in MYX. Also tinkering with the idea of buying into KME.
Given the size of the position in NWH in the SMSF I may sell down the 3000 shares we got in the SPP to increase the 'pot' for reinvestment.
Basically as above is what I did, sold the NWH parcel, added to AHZ, MYX and bought KME. Didnt add any KPT
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Going through my holdings in the personal portfolio and based on updating my spreadsheets post the end of year reports, I am considering selling SIG, MMS & keeping an eye of MOC to sell if it gets past $2.50 WPP is another one that may have little growth left in it.
In the SMSF it now looks like BRG are fully valued so time to sell, my IV is between $7 & $7.50 and as it is now trading at over $10.70 i think its time to sell.
I wonder about CCP as well, they are now priced close to my range of IV, $20-$25 at $19.48, but they do continue to show strong growth and another year of solid results will probably see the IV pushed up further.
MND shows the problem of paying too much for a company, I got in at $14.30 3 years ago, in the mean time it fell to $7 - and I should have averaged down all the way like I did with NWH, but I didnt, so even though they have recovered to $14.80 odd, that represents the valuation I give the business, so I am thinking of selling out and keeping on eye on MND to see if I get a chance to accumulate at a discount to value in the future, because it is a well run good business - I just paid too much!
MXI is another I need to look at exiting, its probably a bit below IV range at 72c, but there is not a lot more in it on current numbers, maybe 80c-$1 tops.
NVT is another company I paid too much for - and it has become worth less as the business has deteriorated, i paid more than my calculated range of IV, and that is for last financial year - this financial year will be worse because revenue and NPAT dropped, i havent bothered punching in the numbers because I can see it will only be a lower IV. I should have understood this sooner and got out earlier, I was emotionally attached to the business, bought it prior to developing my FCF model and then got anchored to my buy price. All rookie errors!
RCG is only slightly below its calculated IV range of 85c to $1.20 at 72c so will need to watch and look to sell once it gets past $1 unless other info comes to light to change that view.
27/9 sold SIG, MMS, BRG, NVT & MND
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Ok, confession time, poor decision made yesterday - notably a decision made without writing in the decision journal!
I decided to buy more shares in AHZ for both the portfolio & SMSF. Rationale was that share price was near historical lows, provided opportunity to average down parcel cost, and critically, FOMO - fear of missing out, with the 4C due out today I figured a strong result would see the price take off ...and honestly...I really didnt consider the impact of a poor result nor its liklihood!
So i bought more at 26c and then today they released the 4C, growth was less than predicted, revenue not growing as expected, sales flat, cash burning...blah, blah. So SP fell by up to 13% and closed down over 11%.
I never seem to get it right with this business! In the past I have bought after good news and a bump in the SP - only to see it drop back to a new low a few days later! This time I bought before the bad news and paid the price!
In hindsight I should have seen the FOMO bias and the blind spot it created to a potential cheaper entry post announcement.
Overall, its a small error, with a small cost. Its not like the business is in trouble - just not growing as fast as the market expected and had priced it for. As long as it becomes Cash Flow positive and profitable next year as predicted then it will do much better and we will still be in the black!
Still its an annoying rookie error and failure to use the journal.
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I am thinking about selling some of the poorer performing stocks in our personal portfolio at significant losses to reallocate the capital to a speculative play we already have in the SMSF - LPE.
The temptation is to offload TGA which has turned into an absolute dog of a company, or rather probably always was, and I should have got out of long ago, and also VOC which I bought against my better judgement about the sector, and in hindsight bought far too soon as they dropped a lot further after my entry.
The rationale is that LPE is likely to be a multibagger if it becomes profitable and has very little downside even if it doesnt do as well as expected. Therefore a double bagger result would just about cover the losses on TGA & VOC. While they may well eventually turn around and recover its also possible this may take many years or even fail to materialise. So the opportunity cost may be significant.
My concern is that if I sell them at a loss, and then LPE goes bad, then I am compounding my capital losses!
Thinking some more about it today and re-reading everything that I can about LPE, I think the downside is very low now, they will be at nearly 150GWh sales which makes them profitable into the future, they would have been cash flow positive last 4C except for one off expences to launch a new division which will start delivering profit on a 20% margin after December.
It may take a couple of years to see real appreciation as there is a fair bit of future growth already built into the SP, but it seems more likely than either TGA or VOC turning around in the same time frame.
Some of my reservations are that I sell 2 underperformers to buy another, and that there is some combination of anchoring bias and value bias in play - the idea that selling poorly performed shares and buying something that is as 'cheap" as LPE at 0.024c per share offers the chance to make lots of money quickly - because if a share priced at 0.024c moves even half a cent its a large % move.
Its worth noting that while 0.024c sounds cheap, the company is now valued at around $60m on potential earnings in the next 12 months of say $1m - so a PE of 60, which doesnt sound cheap at all!
Another risk is consolidation, wouldnt surprise to see LPE consolidate 10 for 1, so relist at say 23c, very often in these cases the SP then drops significantly - say to below 20c.
I think I have talked myself out of any extra allocation of capital to LPE, my consideration now is to instead direct the capital to KPT, I think the upside is greater and the downside less. The upside is incredible if the wharf gets approval as seems most likely, the downside is not so much even if the wharf is blocked, the value realised from the timber would still support a share price around current values. It also gels with the idea of concentrating the portfolio in the businesses with the best chance of sustained growth that can be compounded by reinvestment by the business.
There is an argument that it would be better to wait until KPT announce the success of the EIS into the wharf before committing more capital to the business, but there will be both opportunity cost and a real cost of waiting for that certainty. The SP should rise very strongly on that news. Secondly the extension of that argument is that waiting until the wharf is fully approved would further de-risk, as would waiting until the wharf was operational, as would waiting until KPT started exporting timber... if you wait long enough the business will have all the risk removed - and have a share price that is near to intrinsic value!
So the question for me becomes, is the risk of the business being worth less than the current share price in the medium term, minimal, even in the worst case scenario for KPT. In other words, can they make money by barging the timber product to ships offshore?
Ok, did some more research, emailing Tony Hansen & KPT directley about the questions I had. As a result I am more confident that even in the worst case scenario, with no wharf and barging the timber to ships, KPT would make enough profit to justify a share price in the range it is currently trading. (based on an EPS of around 20c.) It was pleasing that my query to KPT was answered by the Managing Director, John Seargent - one of the benefits of dealing with smaller businesses. He made the point that he is confident the wharf will be approved and that he has 55% of his personal wealth in KPT. The fact that Tony also has KPT as a significant position in EPG Capital gives me futher confidence to take a conviction position in KPT.
Its been a difficult decision to sell down TGA, VOC & WPP - TGA I should have sold much earlier, in fact should have put it into CCP instead, VOC was a investment that was not sufficiently well thought through and was against my better judgement in that I had resisted investing in the sector to that point because of the structural problems, WPP I should have taken the profit when it was there earlier in the year, it was always risky and pretty fully valued. The strength of my conviction about KPT is sufficient to believe it justifies selling all these positions at losses to put the capital into KPT, I dont expect the benefit to be obvious within 2 years but I couldnt see any of those businesses making a turnaround in that timeframe.
It has also consolidated my personal portfolio into less businesses which is preferable IMO.
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I have been thinking about averaging down in my holding in SDI, as i posted in the SDI thread,
SDI have really struggled to translate their plans for transitioning the business into reality, the latest check came with a very significant profit downgrade this month for H1 2018. Essentially it was a profit downgrade for 50% from circa $2m to circa $1m. I see an opportunity to increase my position at a much lower cost as the SP has fallen below 50c from my average cost of 75c.
While I am tempted to pick up some more it might be better to wait until the EOFY to see what happens for the full year results.
I was listening to the Farnham Street interview with Ray Dalio and his ideas about deision making and looking for second level consequences ( slightly different to 2nd level thinking), and somehow my mind drifted to this decision.
This is the great thing about slow thinking, as long as you consider the opportunity cost, slow thinking allows all sorts ot thoughts and ideas to permanate your decision and potentially substantially change what you think about something.
One thing that occurs to me is that a second level consequence of buying more SDI would mean NOT buying more of something else, or NOT taking a new position in another business. So one of the procedural checks in the process of deciding to invest is to consider whether that is the very best opportunity you can find for the allocation of that capital - and because of the availability bias its very easy to think of buying one thing and completly ignoring the fact that there may be better homes for the capital.
So off the top of my head there is the possibility of adding to my high conviction postition in KPT, averaging down into poor performing holdings like RFG or RCG, adding to high priced high conviction businesses like DDR or entering something new like BWF.
I have run my ruler over BWF and while it looks to be trading at around fair valuation at $1, my spreadsheet doesnt really allow for the sort of growth this business looks to be generating. I will have a bit more of a look into it.
LPE is one of my high conviction stocks in the SMSF and I think one of the options is to increase the holding there by about 30% and also put some capital into LPE in the personal portfolio. I believe the share price will get a strong rerate when the next 4C is released and the business is confirmed to be cash flow positive.
I dont have enough confidence in the future of either RCG or RFG to put more capital into those businesses, my inclination is probably more to sell than to add to them.
The more I consider it the more I think that I am confident SDI is definitely undervalued at current prices, the question really only remains whether its better to buy now or wait and see if they fall more on the results.
LPE is more compelling to add to in the immediate timeframe because they are on the cusp of profitability and will almost certainly see a rerate.
LOL! Well there is the issue with patiently using a disciplined process to reach decisions about investments - SDI spiked 15% up today on no news!
I added LPE to my private portfolio and increased the position size in the SMSF both at 0.23c.
Still tossing up BWF.
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Today I once again confirmed that I still make impulsive decisions without really working thru a process - like using this decision journal.
LPE released their latest 4C and announced the business had cracked the positive cash flow threshold. I saw the price had barely moved and decided to add another $10k into the business in the SMSF. The heuristic of FOMO was the most obvious one at play here, I should have balanced that by inverting the assumption that the share price hadnt risen much because the market hadnt yet priced the good result in - and questioning why the market didnt place much value on the achievement.
Had I taken even a couple of hours to work through a decision process I would have most likely picked up the shares for 5% lower price - while still arriving at the same decision! Regardless, i need to work on the self discipline and reduce the impulsive decisions.
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Looked at a little company called Spectur,
"Spectur Limited designs, develops, and manufactures monitoring systems. The Company offers camera-based security systems with remote solar powered and cloud recording features for construction, remote and non-powered, and agricultural sites."
I saw a comment about them by Dean Morel on twitter and it piqued my interest,
I didnt get very far before I realised I wasnt interested at the moment,
This is my analysis,
I already have as much exposure as I am comfortable with to small, speculative, loss making businesses with good narratives!
In thinking about the business itself, I can see a big risk of margin squeeze as its hardly a particularly innovative or unique product and could easily have a competitor squeeze them. This is more of a risk given SP3's small size - there are lots of very big players in the security cam market.
I dont even consider the other products in the R&D pipeline because the business already runs at a loss with its existing products and there are too many unknowns with products not even brought to market yet.
I will keep SP3 in my watchlist, if it can transition to profit successfully then I will run my ruler over it again.
My prediction is that if they can become cash flow positive this year, they will see a significant re-rate, but there is so much uncertainty that its not investible at the moment. So the probability is too low of significant capital gain, and the probability of capital loss too great.
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I have been starting to think about expanding my company to prepare for the inevitable drop in business activity as the NBN project in Nhulunbuy nears completion. Have been doing some kite flying about business ideas with Putty and some of the ideas are,
* Expand coffee business.
pros - existing business unit
known model
scaleable
high margin
low hours
cons - really requires a dedicated business place in industrial area to scale up.
* Depot for trucking transport
pros - partnership with Putty
existing business
low hours
Cons - requires a suitable site in Industrial with room for semis and big sheds
* Equipment hire (JLG/skid steer/scissor lift/dingo etc)
pros - low hours
high returns
Cons - requires a commercial site to operate.
licencing, insurance, capital
* Flat bed tilt tray truck
pros - work available
cons - long hours, 'buying a job'
* Buy commercial property for rental income
Pros - good income, low hours, could use a small part of it myself for coffee etc.
Con - high capital
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I am considering selling some or all of my Apple shares and taking a position in another US company called Support.com (SPRT).
We put $15kAUD into Apple and it is now worth nearly $32K, so we have done very well.
The thesis behind SPRT is not my own at all, the analysis is here, https://hiddenvalue.blog/2018/02/15/heads-i-win-tails-i-dont-lose-much and in brief the implied opportunity is a doubling in share price with little risk of a significant drawdown.
So the question to work through is in the first instance is SPRT a better home for our capital than Apple? My primary concern is the downside risk, and the consequences therof. So while the liklihood of SPRT going lower is low given the situation, there is a risk that the share price will drift lower over years as the cash is slowly eaten up and the business detiorates over time. AAPL is not free of downside risk either, given the very strong run up of tech stocks in the US its not hard to see a future where AAPL has a significant and sustained drop in share price. The difference is that its very hard to imagine a future where AAPL is not a profitable business, even if its in SP decline for an extended period so there is not much catostrophic risk IMO.
On the upside its not easy to see a scenario where APPL is worth twice its current price, but on the other hand it has doubled since I bought in, so it can happen!
The upside for SPRT is high in potential, but it will require a change in market sentiment, its not enough just for the business to justify a higher share price - that just makes the stock undervalued and it can take longer than I have for the market to rerate and currectly value the business. So the potential for an increase in share price, although likely, is by no means certain.
Of course on an emotional level the attraction is simply the lure of quick profits, the chance to buy something and double my money in short time, "get rich quick" syndrome.
Also the decision to sell AAPL should also be considered in isolation of the possibility of purchasing something else, and needs to be considered in the light of tax implications too.
Ok, a bit more time to think this through and do some more analysis, looked into AAPL valuation again and decided its still comfortably at or below intrinsic value. I still see SPRT as a great opportunity so will probably move some funds sitting in cash into it.
Ended up buying $10K USD of SPRT at $2.83 ps. Continuing to hold AAPL
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I am considering buying some more ITD at current prices, either adding to the personal portfolio or putting some in the SMSF, my detailed thoughts about the business are here, click here to view (http://www.galumay.com.au/forum/index.php?topic=66.msg235#msg235)
I think this is one to wait and see, I cant see the SP rallying in any hurry. That was a pretty dismal HY report and essentially the business has sold off the only currently profitable part of its business - which strengthened the balance sheet but no profit is no profit!
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So RFG released a horrendous half yearly report, the only positive being an increased revenue on PRP, but given the issues around their franchisees in the last few months I suspect that is only temporary. Massive writedowns and hundreds of store closures along with incredibly restrictive covenants on their debt leaves RFG in a very precarious position with a dubious future.
The decision I need to make is whether to sell them at any price, and take whatever loss is offered, or do I wait and see if they can turn the business around?
The risk in holding is that the business cant recover and all capital is lost, assuming it could be sold out for $1 that means the choice is between retaining $5k capital and losing the last $5k. How llkely is it that the business will fold? I think its probably something less than 40%.
If it doesnt fold what price might it recover to? I would assume survival would include a CR which will dilute shareholders, profit will drop hugely, assuming EPS dropped from around 37c to 15c (allowing for dilution included), then I can see an IV range around the $2 mark. That would indicate a 60% chance of an upside the same as the downside - $5k.
So to expected value, lets say a 20% chance the business will fail, so (20%*0)=0c + 20% chance it will survive with a value of around $1 (20%*$1)=5c and a 60% chance it will end up around $2 after a CR & recovery, so (60%*$2)=$1.20 giving me an expected value of $1.25 The implication here is that I should probably sell if the SP is over $1.25 or buy more if I have a high conviction of the business surviving, at below $1.25. It would probably make sense to add a high margin of safety to either of those decisions!
I know those figures are completely rubbery, but I am trying to get a rough feel to help with the decison.
Another thought is to invert the question and ask "under what conditions would I buy shares in RFG?". The answer would be, only when the debt was reduced to a controllable level. So the conclusion is that there is no way I would buy them at any price, therefore conventional wisdom is if one is not prepared to buy, then one should sell. Trouble is I have never been convinced the decision is as binary as that, given that the additional factor is that one already owns a position in the business.
Still thinking...!
I am still trying to form a final decision about RFG, I think it really comes down to what the value of the business might be going forward,is it more or less than the current SP? I really have to do some more number crunching. ...
Ok so given the current shares on issue, FCF would have to drop to 30% of current amount and EPS to 14% of current amount to give it an IV range around where its trading. So thats a pretty dire outlook to see the long term value as $1. The big question is the debt, its about $250m which is 2.5 times current EBITDA, and $50m more than capitalisation with an interest cover ratio of 10 on current earnings, but probably less than 5 going forward. Its the debt that makes it a hospital case, without that its just a smaller business that can recover, with it I am not sure its not terminal.
Just looking at the financials further, intangible assets are valued at nearly $700m - i suspect there are massive writedowns coming, this will hugely negatively impact on equity and make all the metrics so much worse. Time to sell, this may never recover. I think that the odds ar so heavily against recovery here, much worse than i first thought. I would put the liklihood of failure at 50% now, so (30%*0)=0c + 50% chance it will survive with a value of around $2 (50%*$1)=50c and a 20% chance it can rebulid and grow to a $2 business (20%*$2)=0.40c giving me an expected value of $0.90
Sold for $1.065, a loss of nearly $20k. Sobering. Next to reflect where I went wrong!
Bought for $24755 sold for $5341 for a loss of $19414 or 78%, dividends of $5788 so overall a loss of 55% on invested capital or a return of -16% per year
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AX1 shares have had a strong run since the positive ½ year results, the price has run well ahead of my range of calculated intrinsic value which is 70c-$1 based on the last full year results. Even allowing for a strong full FY2018, I think the price is 'frothy' and I am considering selling out.
I have some lingering concerns about the retail sector as a whole and the current price of $1.25 implies some pretty heady growth in earnings over the next few years. I calculate that cash flow would need to increase by around 30% from last year to support that sort of share price and that seems a tall ask. I think its very prone to a rerating if the figures are not really good for the full year. Some of the 'froth' is probably generated because the PRP was pretty poor so it made the current numbers look bettter, (case in point, online sales up 170%).
If i am wrong it may well make new highs over the $1.60 mark, but if I am right it could fall pretty hard - its been as 76c this year.
I have let this sit for a couple of days, I come back with the desire to hold in case they run back up to the $1.90 range (anchoring of previous high and FOMO, 2 classic biases!), but my head says stick to the strategy, SP price significantly exceeds IV range with no compelling reason - SELL!
In trying to think of reasons not to sell, the only one that really sticks is that the next scheduled reporting will be the full year results, and that is several months for the SP to run further up. The risk with that thinking is an unexpected trading update with negative implications - the reaction would be likely fast and hard given the calculated over valuation. So I have talked myself out of that one too!
Thinking about expected value, maybe a 20% chance of dropping back to 80c, = 16c and a 60% chance of trading around $1.25 = 75c and a 20% chance of making new highs at $1.90 = 38c so a total expected value of $1.29, on that basis a sell looks pretty well the right decision at this time.
Sold,26/3/18 at $1.265 invested capital, $25249, proceeds $46683 profit of $21434 or 85% plus dividends of $9806 so total return on capital invested not adjusted for holding periods and sale timing, $31240 or 124% over 3.5 years so 35% per year26/3/18
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Without documenting the process, I bought another parcel of ADA, the price is well below my range of IV, the business has no debt, a good flow of contracts and a comptetive advantage. I increased the position by $10k.I believe the price was depressed by the combination of a soft market and the news that ADA missed out on the NASA contract, once the next FY report is in I expect there will be a re rate of the business.
I am also considering putting another $50K into the EPGCVF fund, I would prefer to have the funds invested rather than sitting in cash, and unless I can find a compelling investment opportunity I am probably better paying a small fee for EGP's expertise and time in finding opportunity.
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Still equivicating about putting more money into EPG, in one way I feel like its an admission of failure to follow my strategy through, its accepting that even after fees EPG is likely to make a higher return than I can. Of course that may not be an admission of failure so much as a simple fact!
I did increase my holding in KME, i only bought a small parcel originally and the business has performed in line with my expectations and I think its looking like a good decision to invest in it so it makes sense to increase what was a very small opening position. I realise its not something I have done often enough, and it should be part of my strategy, averaging up as a business improves and consolidates and the market starts to recognise the unlocked value.
I also increased our stake in LPE, although its already quite sizable, EPG bought 3m shares off market this week from the 2 founders of the business, that is a large vote of confidence in a business that is just starting to show profitibility and I felt the opportunity to increase our position and average down a little was not to be missed.
My belief is that both KME and LPE will continue to show growth in the businesses and for different reasons both should see a reflection in share price with a market rerating as the long term earning potentials continue to be realised.
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Had another look at GCS, a construction business that EPG have a significant holding in, they got in at below 50c and when I looked at them last it was trading at around 85c which was towards the top of my calculated range of IV. Now they have slid back to 68c despite a very healthy HY report in Feb.
My IV range is around 70c-$1.00.
Bought in for 67c. 10/4/18
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Added to my position in LPE in our personal portfolio, I had built quite a large position in the SMSF and the more i look at it the stonger my conviction becomes. As mentioned previously EPG increasing their stake was a big confidence booster. For a fund to invest significantly in a business not yet paying a dividend seemed pretty compelling and strong endorsement. This will average down the cost in the personal portfolio and make the position a meaningful size.
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Owen Raszkiewicz from RaskFinance recently sent me an email with his "Better Half Checklist" - a series of questions his wife asks him prior to him taking a position in a company. I think its worth trying to add a version to my decision journal,
What does the company do?
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How does it make money?
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Why will it go wrong?
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Who are the competitors?
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Why is now the time to buy?
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In the spirit of the above, and in retrospect, I shall apply this to my decision to increase my holding in LPE yesterday,
What does the company do?
- installs a single electricity meter on the front of multi dwelling complexes and through its purchasing power is able to offer discount electricity to tenants and residents
How does it make money?
LPE makes about 20% margin on sales of electricity.
Why will it go wrong?
Biggest risk is probably new competitors or power companies trying to squeeze margins
Who are the competitors?
None I could find
Why is now the time to buy?
EPGCVF have just bought a significant extra position, off market from the founding directors, so increased institutional attention (albeit small end of town) recent market softness has pushed shares under 2c, has just become cash flow positive and secured finance (rather than picking shareholder's pockets, always a sign of a maturing business.)
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REH have made an offer to acquire MORSCO a similar business based in the US, so plumbing supplies, waterworks and HVAC (heating and cooling equip). The offer is nearly $2b and as a result REH are doing a capital raising to retail and institutional investors as well as raising debt of about $1b.
We will be able to buy 1 share for every 11 we already hold with a chance to increase that by about 40% to maintain holding size after dilution. The issue price will be $9.30 which is a discount of about 13% to last close.
For me there are 2 main questions, do we want to continue to hold REH post acquisition and do we want to take up the offer at $9.30.
Reasons not to continue to hold include the belief that not many ASX companies pull off large acquisitions in the US, the potential that the market will have reservations and the share price may drop and remain depressed for a significant period of time, and finally the acquisition may detract from REH existing business and damage the stellar results over the previous years - and given the high prices REH has commanded due to its record any sort of reduction in growth could cause a serious re-rate.
Reasons not to take up the issue even at the discount are that the market may present an opportunity to buy at less than $9.30 as concerns about the acquitsition may cause the SP to drop below $9.30 anyway, also if the decision is to sell our position then it makes no sense to buy more at a higher price than our original entry of $9.
Alternatively, if REH can make the acquisition work then it will likely drive further growth on a bgger scale and the share price could rise strongly over the next 2-5 years, in this case the ability to buy further shares at a discount of such size should not be missed.
It really comes down to a question of my confidence in REH being able to make the acquisition work as per their narrative.
Other concerns, MORSCO have been owned by private equity for about the last 5 years, PE wants its pound of flesh for their dirty work, thats a serious concern. Multiple of 15 X EBITDA is an expensive acquisiton by any terms, debt stretches the balance sheet in what has been a very carefully managed business.
Obviously the market and institutional investors dont share my concerns! Price has shot up to $12 and the instiutional placement was strongly supported, and in fact the size of the offering was increased. Aso the price ended up being $10.30 - a fair indication of how strong the support was. These factors seem to indicate participating in the SPP makes sense, even if we sell out post issue.
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...and today AHZ have announced another Capital Raising - after promising shareholders it wouldn't be necessary. It leaves me deeply conflicted, I have held such confidence in the long term prospects of this business, but this feels like the straw to break the camels back, further dilution, more lies from management, maybe its time to re-assess whether its not better to cut the losses and find a better home for the capital.
Having a quick scan, every time I have taken part in an AHZ issue, within 6 months I could have bought the shares cheaper on market. Something to keep in mind. They have had some form of CR EVERY single one of the 5 years I have held.
I will wait until the details emerge and give it proper consideration.
In no great surprise to me, the AHZ share price has fallen hard from around 38c back to just under 30c - meaning you could buy on market for less than the SPP (30c). I will be sitting this SPP out, I have lost my strength of conviction about this business, and particularly lost faith in management's ability.
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As much as I see the value in a deision journal, and I really think its helped me make better decisions, I realised today that there are times where its imperative to make quick decisions where time is of the essence and an opportunity may be lost if the process is too drawnout.
Obviously the hope is that some of the lessons learnt from writing a journal such as this will flow into quick decisions as well, inversion, baysian probability, expectancy etc.
Todays example was that I saw a hilux ute for sale at $3750, we have saved nearly $3000 towards a replacement car for Sal as her old hilux ute has a pretty serious death rattle in the engine and needs quite a bit of work done on it. The problem was that when I rang the guy selling the car, he already had someone who was coming to look at it and had received a lot of calls from interested people.
I went and took it for a test drive, and took it to our mechanic to have him look over it for anything that really jumped out. He said everything looked good with it and that it drove well. I knew I had got in for a test drive before the first person who had rung about it, but obviously he would get first refusal at the asking price. I decided on the spot that we should buy it, cars like this in this condition dont come up often and the price was more than fair. (on checking the cheapest similar car I could find in australia was $5000 and most were nearer $9-10K.) I figured we would likely sell Sals old ute for what we paid for it, $1500, so we would get into the new one for under $2500.
Having decided I wanted the car, I then made another decision, I knew that if the other party offered the asking price, they would get it on the basis of first in, best dressed. So I made the decision to offer $4000 or $250 over the asking price. I figured $250 was nothing really to secure the car if I really wanted it and I suspected that such a strong offer, with a '4' in front instead of a '3' would make it very likely the owner would sell to me despite me being 2nd in line and I thought it unlikely the other party would want to offer more.
It proved to be correct and we got the car. Had I taken time to deliberate, and write down a case for and against the decision we would certainly have missed out.
What I could have done better was apply some of the models that I have practicised in the decision journal into the 'on the run' decision.
So, invert, "What happens if we dont buy this car". Well, we have our budgeted cash still to buy something else. We might not need to bbuy anything else as the old car might have kept running for another how ever many years.
So, probability, The car has already lasted 3 years without dying, probability is likely better than 50% it would go another 3 years. But it does need a new exhaust and the brakes are sounding like they need money spent on them too. The probability of the motor dying may only be less than 50%, but the consequence would be that there was no residual value, so say 50% * $1000 for a sale later = $500 plus 50%*$0 if it dies, =$500 + $0 = $500. That implies if we can sell it for anymore than $500 we are better to sell it now.
Also probability of finding another car for round our budget if the current one dies down the track is quite low. I reckon maybe 6 or so a year come up, so in any given month only a 50% chance. I think we could say a 50% chance of buying something at $4000 =$2000 plus the 50% chance we would have to pay more like $10K which is the next sort of price bracket for utes = $5000, so an expectancy of $7000. This implies buying at $4k now and still having a saleable car for $1K+ is the better option.
What could go wrong, we could sell the old car and then the new one could have some unexpected mechanical fault that turned out to be expensive. We could find we cant get any decent offers for the old one, something much better could come along for a similar price. None of these seem to be worse consequneces that the possibility of the old one dying, being worth nothing and no cheap replacements available.
Update - we sold the old ute for $1600, which is $100 more than we paid for it 3 years ago! Mind you if running costs were included it would be a different story, none the less its no mean feat to sell a car for more than you paid for it and now we have done that twice in a row. The result is that it only cost us $2400 to move into the new Hilux, which is a satisfactory outcome in my view.
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TNE released their first half results and promptly dropped nearly 10%, I think that the business is priced to perfection so any concerns in announcements lead to a pretty harsh rerating, in saying that I couldnt see much at a first glance, UK a bit soft and high receivables are a bit of a concern. Thinking about averaging down with some cash.
What can go wrong? If they miss the profit guidance of +10-15%
I think I paid too much for them originally at $5.45, the question is are they cheap at $4.46?
Even averaging down it only drops the average price to $5.29 so i suspect there are better homes for the capital.
Waiting for the full year results is probably the best course of action
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Its time again to reinvest some dividends, we have about $5k in cash and first of all, it will go into adding to an existing position - in the past I was always keen to find a new position to put money into, I am now trying to consolidate and concentrate the portfolios so I try very hard to resist any temeptation to add new positions!
I think ADA is the most obvious home for some extra capital, it continues to be an undervalued compared to my range of IV, and I have high conviction that the business will grow. They have recently confirmed guidance for EBT to increase about 35% for the FY.
The competing homes for the capital were other businesses we hold that are apparently undervalued, such as SDI and SRV, but I have less conviction about their recovery and they are already larger postitions. The other idea would be to add to profitable postions where we saw potential for further growth despite solid gains, so KME, GCS, and SXE. It will be interesting to revist in the future and see which strategy would have been better, as smaller positions SXE and KME would have made the most sense, I probably would have opted for KME given it has had less SP growth to date.
Bought $5k ADA at $1.85
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I was considering selling AAPL, they have hit $190 and we have made nearly 100% return on them. I considered some articles suggesting AAPL had an IV of around $150 and that got me thinking that they were starting to run a fair way ahead of fair value. On reflection I realised I havent actually run a valuation on APPL so it seems a bit rash just to use someone elses valuation.
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once again considering any future investments, thoughts about buying another property again, if we bought a house in Wuyal and used all our offset plus a bit say $450k, then we rent to gov for $1000pw, pays off in under 10 years. If we had to move out of here, we cant move into IP because we wold lose tax benefit of offseting interest costs, if we lease to gov for 10 years we cant move into wuyal rd.
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Considering opening a position in LBL - Laser Bond Limited.
LBL is a very small business based in SA who specialise in hardened surfaces for high wear applications. They service agriculture, oil & gas, mining, drilling, boring, - basically any 'tool' or machinery part subject to high wear from errosion, corrosion or impact. They have a strong R&D program tied in with a university as well as larger clients. Its a profitable little business, very tightly held registry with about 70% held by founder family & director interests so its quite illiquid.
The growth potential with the business is their growing international sales and more especially a new technology services division. In this sector of the business they sell a Laser Bond facility to a foreign customer, they build, install & train then there is a 5 year service agreement for revnue based recurring income. This has potential to be a significant source of income for the business if they can successfully build on the first few clients in the division.
Management seem very focussed and 'no nonsense", typical of founder/owners IMO, the reports and announcements are refreshingly frank and with few of the bullshit bingo words and motherhood statements common in ARs.
Based on my calculation of range of IV i have them at around 30c fair value, based on the 2017 Annual report, they currently trade at 17c - after a run up from 13-14c caused by the announcement of another Technology licencing contract and a positive update on revenue for the full FY.
It should be noted that profit was significantly impacted by the first Tech services contract - it added about $1.4m to revenue and this will not appear in the 17/18 FY, but as the update of revenue for the FY noted, growth in revenue in the other divisions have more than offset this. Also the announcement of the new contract means that revenue will again be increased by this division in 2018/19 FY
The business has little debt, 25 year history of profitable operation other than a blip in 2013 when they made a loss as a result of closing their unsuccessful Qld operation, and a niche market with strong IP.
The downside is that its a very small business, with illiquid registry and the value I see may remain locked up and not apparent in the price for a long time. The risk appears assymetric to me, its quite possible that continued expansion into the international business and growth of the licensing model would see increased profits, dividends and eventually share price. On the other hand if they dont get any real traction with the international push, and the licensing model flops, then the business should be valued on its 2017 numbers anyway - which still makes the current price look cheap.
In terms of catostrophic risk, the consevative nature of the business, low debt and strength of underlying business even without growth, makes it hard to foresee an event that would cause the business to fail.
Its an easy to understand business, it has some competitive advantage with IP and niche marketing. Margins should be fairly easy to maintain as incremental price changes in the product will be easily absorbed by customers and outweighed by the overall cost benefit of the proprietry process of protection for wear surfaces.
Competitors in the industry are Hardchrome Engineering, Laser Cladding Services Australia, and Dura Metal,part of Axalta group a large USA based international coatings specialist. The first couple are small private businesses, I suspect they would only service within their own state. Dura Metal is part of a much bigger international business, but I dont really see them as a direct competitor, they are more selling complete laser cladding machines for manufacturers who want to clad in house. (although that is a potential market for LBL as well>0
Now is the time to take a position, because LBL will release results for this year in August and I expect there will be a further positive reaction.
6/9/18 I have taken a small initial position at 16.5c. I will accumulate any softness.
5/12/18 Well, a lesson in anchoring, I hesitated and didnt buy more because the price kept going up, they were quickly over 20c and having bought at less than 20c I couldnt bring myself to buy more over 20c, today they announced new sales to USA and price jumped 39% in one day - my position is up 93% in 3 months!
I have been fighting my anchoring and trying to find a way to build my position in LBL, finally they fell nearly 15% today and I was able to get an order filled, at 30c, so down from 35c last week. This parcel took our average price to 20c so still up 50% overall.
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Looking closely at another business, Joyce Corporation Ltd. A business that has been around for 132 years and readers my age will remember they sold foam mattresses etc in the past. It is now basically an investment company with a majority holding in Lloyds Auctions, owning Bedshed and Kitchen Connection as well. The business is tightly held with the top 20 shareholders owning 70% of issued shares and the CEO holding 40% on his own.
The business is profitable and pays a healthy dividend yielding about 8% and growing, its a cash cow generating relatively large free cash flow. There is some debt but its quite manageable. The business owns property that is valued conservatively on the books for about $9m. The business has about $6m cash on hand. All on a capitalisation of only $43m.
By my calculations the range of IV is somewhere around $4 and it currently trades for around $1.60.
Basically I think its just an unloved business, not understood and slipping under the radar.
Thinking about what could go wrong, the car auction business is susceptible to competition, barriers to entry are low as are switching costs. Revenues would presumably fall in a recession, but its unlikely such a conservatively geared company would suffer too much from economic head winds. A housing crash might see the Kitchen renovation business become less profitable, although its entirely possible the effect would be positive as people chose to renovate instead of selling. The bed business is not threatened by online growth, people want to 'road test' a bed before buying, but again in a severe recession it could suffer. Basically all the business units are vulnerable to negative consumer sentiment given the products they sell, so share price and dividends could suffer in a protracted downturn, but the business should be resilient enough to come out the other side of the cycle.
I cant see any catostrophic risk with such a conservative business, people are going to still buy cars at auction, sleep in beds ad cook breakfast in a kitchen!
Buying now makes sense only because the discount to value is so great, and given the trajectory of revenue, earnings, profit, cashflow and dividends, its unlikely it will continue to trade at such a discount indefinitely.
Considering selling a small parcel of NWH to fund an entry position in JYC, it is now my 2nd biggest position and selling this parcel would represent returning the original invested capital and leave the rest as pure profit.
A mixture of quick & slow thinking! I have put in an order to sell down NWH, buy some JCY but also add to my holding in KME after it fell 8% yesterday when the founder owner notified he was selling down his holding by 15% over the next 4 years. IMO that is an over reaction because its actually positive that it increases liquidity a little in a very tightly held business - he is selling 500k shares over 4 years and that only reduces his holding by 15%! bought more at 65c which is more than 5% below recent prices.
UPDATE - more fast decisions, bought more today at 62c nearly 10% below recent prices!! I won't throw any more at it, although I think it may drop some more in the short term.
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We have 3 months of power cuts coming up while the power network is being upgraded, decided to get a proper switch and outlet added so we can run a genset to keep the house powered up. Can buy a cheap genset for $1100 but will probably get the more expensive yamaha at $1700 because of better resale value.
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Guys of Gove.
Cons- cant find someone to manage business, then 1 of us have to run. (at any time)
- Opportunity cost, if we do this we cant do much else.
- Create debt
- catostrophic risk - one of us dies, town closes, cyclone.
- more work/involvement/stress
- Negative impact on family
- Working with staff
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Pros - Potential passive income stream
- High return on invested capital
- Possibility of active engagement in both the business & community.
- Providing employment opportunity
- Leverages the line of credit in our IO loan while its still IO.
Alternatives - Do nothing
- Buy more property
- buy commercial property
- potential investment with Putty
- do nothing now, something later
- Buy Phil's business
- Start a similar business from scratch after they leave.
- Invest similar amount in share market.
OTHER THINGS,
- Follow up lease
- Talk to Jess
- Decide on a structure
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I am starting to come to the view that one of the biggest errors in my investing history has been failing to sell my positions in businesses that have failed to execute in the way I had hoped. My strength has probably been not selling the positions in businesses that have executed as well or better than I hoped.
As part of this thought process I am looking at my personal portfolio and considering how to adjust for this error. In alphabetical order,
AHZ - Should have sold when I realised management interests were not aligned with the business or shareholders. I actually specifically identified this point in time and failed to act. I cant sell now as they are suspended.
CDA - best performer in the portfolio, a multibagger. Should have put more into the position as management executed the turnaround, I did average down a little, but should also have averaged up.
ICU - a stupid exercise in trying to short term trade, something I since came to accept was outside my circle of competence. SELL
KPT - although price has dropped, management executing as planned and remains a long term high conviction postition. HOLD
LPE - ditto, next 4C very important for conviction on postion HOLD
MOC - I have held because of the yield and more recently because of the belief that the financial services sector may be a growth area for the business. SELL
NWH - My big mistake was not averaging down when NWH went to 20c, as I did in the SMSF. Still a strong HOLD
SND - Should have sold when the business failed to execute, still possible its able to turn around and need to look at H1 report when it comes out.
VRS - bought too early, position size is so small its probably not even worth exiting.
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Thinking I should sell ADA, they released a profit guidance for the FY with a projected drop in profit of around 25%, management are abjectly failing to execute and in the past I have held businesses like this waiting for them to turn around. This time I think its time to sell, can always buy back in later if they do manage to start running the business profitably. The adjusted IV based on drop in EPS would be at or below current price.
Well missed out on the sell, tryed to get out at $1.45 this morning but the bottom dropped out of the market, they are now under $1. Now my inclination has flipped to thinking they may be worth averaging down at below $1. $1 would be around the IV if EPS drops by 30% this year. The choice is between selling and losing $15k now, or averaging down with another $5k which would leave me with a $32k investment worth $15k, or holding at an average of $2.25
Averaging down doesnt make sense, doesnt reduce the average price much and just commits more capital. So its sell or hold!
Well the price keeps dropping and the averaging down is starting to become a consideration, on a value point of view, if I assume a drop in EPS of 35% this year, i get an EPS based IV of around 90c, given that its trading at under 80c now, that is a further 10% margin of safety.
In terms of averaging down, it brings the average price down to $1.78
Can now average down at 68c and bring the price to $1.65. That means they would still have to more than double for it to be profitable.
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Looking at starting to build a position in a new business, Global International (GLB). It is an Australian company, that is a global producer and distributor specializing in purpose-built apparel, footwear and skateboard hardgoods (decks, wheels, trucks, etc.) for the boardsports, street fashion and workwear markets with products sold in more than 100 countries worldwide. Founded in 1985 by three Australian brothers, Globe International’s core business is divided between proprietary brands, licensed brands and distributed brands.
It meets many of my investing criteria, it has a superior ROE, strong free cash flow, no debt, owner run and managed with the 3 brothers holding about 70% and the top 20 holding 90%, growing revenue and earnings, stable share count with no issues since float, an executive management scheme based on cash payments which i prefer to issuing shares, or even worse options. (the brothers took no salary at all for many years after floating in 2001) Its also cheap by any metric, trading around $1.75 i have a range of intrinsic value between $2.70 and $2.90. Its on a p/e of 8.5 and E/EV of 12.75. NTA is over $1 ROE is around 20%.
Its an easy business to understand, and while fashion is not a popular industry these days, good businesses with good management can prosper in this space.
So why is it so cheap? The long standing chairman passed away suddenly, he had been with the company for 14 years and as a older and very experienced businessman, was a contrast to the young entrepreneurial founders of the business, but that event didnt seem to impact the price much. Also his replacement would appear to be equally qualified, experienced and competent. The main drop in the last 12 months was after the ½ yearly report which showed growth in earnings and revenue, but extrapolating those results would see less top line growth for the full year after a stellar 2017-18. So maybe its cheap because the market doubts its ability to continue to grow at the historical rate of the last 5 years. The illiquid nature of the company also means its more volatile and this would explain the sharp fall on the HY1 results.
No doubt operating in the retail clothing sector also makes it out of favour in the current climate, add youth fashion as a sector and there is probably even more (deserved) nervousness about the business.
So what can go wrong? The biggest risk seems to me to be simply the capricious nature of youth fashion, they could quickly find themselves just as uncool as they have been cool historically. Also a severe economic downturn probably effects this end of the clothing market more as its more discretionary than basic clothing. Poor capital allocation or management missteps is another risk, but both look unlikely based on the track record and amount of skin in the game. There is also some FX risks and exposure to economic circumstances in their global markets - but equally there are not insignificant opportunities from the same.
One thing to look at was what has gone wrong in the past, 2013-14 were tough years with losses recorded, looking back it was a less diversified business and there were substantial costs with growing the business and some heavy impairment charges that made marginal earnings report as significant losses. Its worth noting that even though profit was marginal and revenue base was 33% less than today, the share price was still over $1.35.
An interesting insight out of researching the old reports, in 2014 management had 2 strikes in voting on renumeration, management as holders of over 70% of the votes couldnt vote in the second renumeration vote and subsequent spill motion! So a tiny minority of shareholders were able to force a spill of the board! Of course the subsequent vote where management were able to exercise their votes, they were basically unanimously re-elected. Only 6 shareholders voted against it. It seems that Solomon Lew might have been the activist fiddler! He held about 6% It does highlight an issue I had never considered with companies where the directors hold most of the shares - activist shareholders have the potential to cause significant annoyance!
That leads to a probalitic consideration, it seems not unreasonable to assume the downside for the share price would be at worst the previous lows when it was a smaller business making a loss - around $1-35, which represents a drop of around 25% from current price. On the other hand a move towards the range of IV i have for the business sees an upside of at least 50% - and thats without any meaninful growth in revenue, profits or cash flow. So whats the liklihood we might assign to things going tits up? In such a well run business with no debt and hands on, skin in the game management I would have thought maybe 30% chance, so 30% * $1.35 = 0.41c + the chance that the business will at least tick along as is and no bad news seeing a close on the IV, I would think that is a 60% chance, so 60% * $2.80 = $1.68 and maybe a 10% chance of a strong increase in metrics and the IV being exceeded, so 10% * $3.00 = 0.30c for a price expectancy of $2.40 which makes $1.75 look reasonably cheap.
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My decision making slipped in standard today, back to old impatient habits! Saw that Pushpay had released their annual report early this morning, pre open. I had a very quick breeze thru the headlines and thought it was a very good result, saw there had been no move in the price on open so bought some more at $3.56, it ended up closing at $3.45 and the market assessed the report as being less than optimum. Had I spent more time considering the report and comparing it to ealier guidance I would have realised that revenue was at the lower end of guidance and cash flow conversion not as good as hoped. Also growth seems to have slowed a little. Must learn to be be less impulsive! I do generally have it under control but weakened today, no doubt!
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I keep mentally revisiting a thesis to sell the deeply underperforming capital and re-employ it elsewhere. Underlying this thought is the idea of recovering the lost ground in another position as psychologically it seems more likely. Of course this is nonsense and its entirely possible that whatever I swapped the capital into would fall also, and compound the loss of capital. So clearly this is the wrong way to think about it.
The consideration should be only whether the remaining capital allocated in a losing position, can with any certainty, be better employed elsewhere, or whether its just impatience at play and the thesis can still play out successfully.
So lets look at the individual businesses, ADA, trading at 64c. At the EOFY on my metrics it was well undervalued and were it not for the management issues I would see it as a good business to buy at this price, but there are some dangerous signs, cash is very low, the business is now cash flow negative and management have left the business recently. The risk of waiting until the end of this financial year is that further poor performance could see its share price collapse further.
MXI is another where it raises the question of when is the thesis broken as opposed to it just taking a lot longer to play out than expected, I think that underlies all of the poorly performing businessses and why I find them so hard to sell, being right can look like being wrong for a very long time! While there are signs of a turnaround in the business, the debt is now a huge red flag. It would not be a buy for me regardless, due to the amount of debt its carrying so for that reason alone I should sell.
MYX - A turnaround play, that turned around, and then turned back again! Had the chance to get out at a small profit, now down 50%+. Its had a big fund buying up recently and maybe the turnaround is in. I always think about what a strong conviction buy this was for an online friend ROE, he rarely got em wrong!
SRV has also fallen from grace, but they have cash and no debt, skin in the game management...
WPL is the last one on my list to consider selling, now only about 10% down on my entry some years ago, its the only 'blue chip' and the only resources business I hold, it seems silly to sell this just to buy something else, a rise in oil will see it re-rate, its steady growth and well executed core businesses make it a steady and safe investment.
So really when I go through the underperforming businesses I cant find much conviction to sell! Which is annoying because I would like to reduce the portfolio size and I would like to invest in other opportunities as well as building postions in good businesses I already hold!
Revisting this 20/6 - I am revisiting because I have uncovered another business I wish to invest in and don't have funds on hand to do so.
Back to the dilemma - if I sell the poorly performing businesses to buy the new one, no gaurantee the new business will not fall in price compounding the losses.
But...if I dont sell the poorly performing businesses they may continue to drop - and the new business I didnt buy may go up! Opportunity cost!
Overall the portfolio is performing well, so ignoring the anchoring bias of considering the purchase price of the poorly perfoming businesses, is there a better home for the capital in another business? Without the aid of a crystal ball thats hard to say!
My inclination is that i want to sell WPL, but I am not sure the reason is simply that its much nearer its purchase price! Thats a dumb reason to sell, its definitely the best business of the ones I am considering selling.
I am also trying to think about the whole portfolio as a value point rather than looking at individual prices, so we are well up overall, made nearly 20% last FY on a TWIRR basis, up 50% TWIRR over 5 years, 90% in absolute terms including savings contributions, so anything I sell has no impact on the existing performance and if the resultant capital can be put to work somewhere better then I should sell - but that comes back to making sure I have high conviction of any postions I switch into.
Inverting that thought though, is the fact that I already hold these businesses and just because they have fallen so hard, probably means they will revert to mean at some point and again, I can consider the base price as not what I paid, but where the overall portfolio sits today. COmplicated.
I am trying to get the feel for how to look at this, one way is that given the positive overall performance of the SMSF, its reasonable to regard the underperforming businesses as costing whatever they are currently trading for today - so the decision is simply is company A the best home for that capital (regardless of price), or is there a higher conviction home elsewhere for it - either in increasing existing positions or taking new ones. This way of thinking helps remove the anchoring inherent in considering the price paid. So the question becomes is ADA a better position at 43c than say PAR at $1.50 or AER at 13c, or more @SFC at $13.80?
The best way to try to think about it is in fact remove the sell consideration for the moment, if ADA represents $5k, where is the best home for that $5k - ADA or one of the others?
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Paradigm (PAR.ASX) is the business I have been researching and considering freeing up some capital to take a position. Essentially PAR have adapted the use of an existing oral drug, that is used for urinary tract conditions, to an injectable drug that treats OA (osteoarthritis), it is made from the timber of the beech tree and the base drug is manufactured by just 1 private company in Germany. Its a gerneric drug, out of patent, but due to the difficulty of manufacture no one has successfully made the gerneric in the 10 years since the patent expired. PAR has a huge potential market with OA as well as a varitey of other related conditions like Ross River Virus that can be treated with the drug. It has plenty of working capital with about $78m in the market with cash burn of about $10m per year.
The real grunt work of research has been done by Fifty One Capital and can be read here,
http://www.fiftyonecapital.com/paradigm-201806/2018/7/16/paradigm-biopharmaceuticals-ltd-research
http://www.fiftyonecapital.com/par-201811/2018/11/24/paradigm-biopharmaceuticals-ltd
and
http://www.fiftyonecapital.com/paradigm-201903/2019/3/8/paradigm-biopharmaceuticals-ltd
I have been burnt by bio-techs previously (AHZ), but this seems to be a case where the hype and promise would seem justified and the realisation of tangible profits seems likely within 12 months.
The liklihood of a valuable partnership with a large pharma or even a total buyout is farily strong as well.
It does look to be a strongly asymmetric investment opportunity with enormous upside and small likelihood of downside. The main thing that tempers my enthusiasm is that while its asymmetric, the downside is total loss of capital - if this doesnt come off the company has nothing and will go broke in all liklihood. EDIT - funny I raised the concern about the impact of the downside and then the next morning read this article - http://tuvalu.santafe.edu/~ole/Peters2009.pdf
For this reason I think its sensible to limit the size of any initial postion to $5k and wait to see if they can actually get to market.
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So back to whether or not to sell out of some positions! Looking deeping into WPL, my back of the envelope modelling tells me it's fully valued and then some at current prices so unless there is an explosion in the price of oil or some other external factor, probably little growth to be had there. I think there are better opportunities to invest in other holdings that have more growth likely. So I am going to sell WPL and spread across some of the other positions.
Would I buy ADA & MXI at current prices, no, too many redflags even at current prices, so I will sell them also
MYX I will hold because I would be a buyer at current prices, as I would with SRV.
I am going to open a small position in PAR as discussed elsewhere and maybe also AER, also increase PPH & SFC holding
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Looked at KPG which is basically an accounting roll up, the numbers all look good, good FCF, healthy ROIC, a pathway of growth etc. My interest was piqued by a write up by a fellow #fintwit investor, https://www.notion.so/Kelly-Partners-Group-4743627e07e14940bd8461c75c568aab
As good as the business looks and as compelling as the linked narrative is, the company is operating with significant debt, above a level I would be comfortable with so its a hard no in this case.
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I sold about 66% of my DDR holdings last month after the share price hit $7.30, i believe this is so far beyond any value I can asign the business that it would be irresponsible to continue to hold such a large position in my portfolio. I still retain about 8000 shares so its still a reasonable position.
I have mainly distributed the realised capital into existing holdings in AER, SFC, SRG, PPH, KME & JYC.
My thinking was to increase the holding in AER to a more meaningful size as the execution appears to be on track, in the case of SRG it appeared to be the most undervalued of current positions, KME & JYC i had identified as accumulate targets following strong execution identified in the AR's, JYC i waited for a dip after it ran up, but KME I paid up for as I think the probability of it growing strongly is above 50% with only a 20% liklihood of underperformance.
SFC remains a very strong conviction and hence I increased postion size on some price weakness.
I also put a significant amount of capital into OMN which is a pure arbitrage play, the business is being wound up after the founder became very ill, and it is that rare circumstance of a net-net where the assets significantly outweigh the capitalisation. Shareholders should see a return in the order of 15% over 6 months. This is one of those rare situations where the upside is as near to 100% as possible and the downside is close to 0%.
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So the world has changed, probably half our net worth has disappeared in the 2020 share market crash on the back of concerns about corona virus colliding with a vast bubble in world equity markets and basically zero fixed interest markets.
I have always considered our offset account as being our dry powder for such a drawdown, but its a damn difficult decision to implement, as I discussed with Tony recently,
Agree with your thoughts on using debt, I have been trying to think about what could go wrong with that strategy, first risk is CV outcome has maximum impact and this follows thru to falling dividends such that interest is not covered, and capital gains fail to materialise within the remaining 4 year term of the IO loan. So potentially we are left having to make interest and capital repayments on the loan going forward. By then I will be over 60 and if I had to come out of my lazy semi-retirement to get a job to manage those payments it may be difficult to get work. Also if things had played out in that way our super would still be significantly less than planned. So I think the worst case scenario is that we would be putting ourselves under financial stress right at the time of our lives when we would want it least of all!
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Spent a lot of time considering buying the storage sheds at 3A Miller Close, was going to offer $300k which was the valuation i reverse engineered from needing a total return within 10 years due to catostrophic risk. Was going to use the IP line of credit. Decided in the end too risky even at 300k.
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Made the decision to sell down some underperforming shares with no dividend stream and no real prospects of ever returning to break even. sold AVH, ICU & KPT
AVR 640 for $4.05
ICU 47866 for 0.04055
KPT 8952 for 0.84
Total was about $12000 added 180 cash and bought 22090 NTD for 0.55 on the 19/8/20
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Bought some FFI shares, the rational for the decision is in the individual thread on the business in the Shares forum.
I am also looking at entering a position in KOV, my only reservation being that we hold some in EGP CVF, but I think its a very small position. I am also thinking about exiting some more poor positions, TGR is my lowest conviction profitable business and I would be happier with the capital elsewhere, SRV I am trapped by having paid far too much for the business and I think it will be an extremely long wait to see it come good.
LPE is a total dog that I should have sold ages ago, its just hard to realise the massive losses because of my stupidity in adding more as it fell.
SXE I dont really see the point in holding, its gone pretty much nowhere and really having NWH in the portfolio is a much better services business anyway.
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Took a position in KOV. Still holding LPE and SXE.
Revisiting this decision in the light of thinking about taking a position in KIN (see company thread).
SXE is much better than I suggested in my previous post, its debt free, strong cash flow yield, and trading on low multiples with over 6% dividend yield, if anything should consider adding to position.
I am trying to move out of the speculative positions in the SMSF, on that basis I will probably consider seeing AER, CXZ & LPE - they should probably have been bought in the personal portfolio, if at all.
Also thought about selling BCT, a funny little business i bought on the NSX, again buying someone elses conviction, the same culprit and he was wrong again! Paid a bit over $2, they are now $1 and hardly ever trade. The thing is it pays 5% yield on the original purchase price, so it doesnt make much sense to see.
That raises the elephant in the room - should i get out or EGP CVF? The funds performance has been sub par, and well below my own performance, ever since i invested back in Dec 2017. It has returned 4.26% CAGR while my returns over the same period are double that. (and that includes the drag on overall performance from the fund, eg my returns would be even higher if I was not invested in the fund.)
I am concious of the large number of businesses in the SMSF, a total of 26 currently, I would be much more comfortable at 15 or so.
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Our SMSF has reached $1m in the value of the investments, which are 100% equities. Its funny how numbers can trigger us, having reached $1m I am now nervous about leaving 100% in equities and thinking I should realise some capital and reinvest in a less risky asset class so we have an alternative source of income if the market crashed and we had retired - which given i am 59 soon, is not a distant event.
The hard thing is to know what asset class to invest in as an alternative, cash and cash like assets are basically returning zero for the forseeable future so that is no good, property has at least as much risk as equities, which probably leaves some sort of business as an investment vehicle, but it would be a challenge finding something we could run from such a remote location and I dont want to tie too much capital up in Gove and we already have an IP here.
Gold would be one thing others might suggest, but I see it as high risk with no intrinsic value.
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Considering taking a position in DSK, Dusk. This is a company that IPO's this year and the business sells Home Fragrance Products, offering a range of dusk branded premium products at competitive prices from its physical stores and online store. dusk's products include candles, ultrasonic diffusers, reed diffusers, essential oils and fragrance related homewares.
The business has grown strongly since listing earlier this year and while an obvious beneficiary of Covid, it still looks cheap on first glance. I estimate its H1 2021 earnings will be close to 30c which at the current SP of $2.28 would be a P/E of 8. It has no debt, positive free cash flow, a strong cash balance of around 25% of capitalisation. EV/EBITDA will also be very low, probably under 5 now.
The risk to the business is probably consumer discretion, if a new brand comes along, better marketed, better pricing, and steals market engagement then the business will be easily damaged. The narrow, niche focus leaves it very exposed - if it loses the home fragrance market it really has nothing else.
Just read the reviews on productreviews.com.au, feedback is very negative, poor products, made in china, over priced.
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Looking at AFL, its a recent listing (2 years), of a dedicated Family Law Practice, they have quickly grown to have offices in all capital cities and have grown organically rather than by buying existing family law practices and rolling them up. Its been a totally fragmented sector of the Legal industry with small practices specialising in Family Law round the country. AFL appears to have been successful in unlocking the potential of a national presence and the advantages that brings with marketing and attracting practitioners. The founder applied his expertise in SEO to optimise promotion of the business via the web.
Its had very strong growth since listing and my expectation is EPS will be somewhere round 1.2c for the first half FY21, and as mush as 3c for the full year. FCF conversion is very strong, currently running about 2x EPS. EV is about $29m, I expect EBITDA to be round $4m for FY21 so it would be trading on a forward looking EV/EBITDA of 7.25.
31/1/24, One i got totally wrong, EPS for H1 2021 was only 0.4c and the full year was a loss of 0.7c and it just got worse from there. Basically expences just ran out of control scaling up much faster than the (fast) revenue growth. Should have sold out as soon as the H1 results were released and absolutely after the FY results in 2021. Totally dropped the ball on this one.
The current price is outside of my normal comfort zone because if I value it looking back at its metrics to date, it looks quite expensive, but I think its fast growth and the early stage of the business means to value it realistically I have to have more focus on what the near term metrics will look like and how that would inform a valuation. For that reason I am considering the extrapolated EPS, FCF & Revenue from the profit guidance notifications that have been released this year.
On that basis I think the business is probably worth somewhere round 60-70c which means the current price of 50c offers a fair margin of safety. But it is definitely a more speculative position than I would normally consider. FOr this reason I dont think its a fit for the SMSF and rather I am considering lightening the position in our personal portfolio of CDA and allocating that capital to a position in AFL.
I thought another exercise as part of the decision journal that sort of expands on looking at what could go wrong is to use a pre-mortem to consider the reasons that things could go wrong. So assume the worst and then brainstorm to explain it.
I consider 3 scenarios,
a.) Company fails to maintain growth in revenue, earnings flatline.
b.) Company goes backwards, revenue drops, earnings fall
c.) Company has catostrophic failure, total loss of capital.
Potential causes -
a.) Business reaches saturation in a niche market quicker than expected, a larger listed legal firm aggressively rolls up Family Law practices and takes market share, a high profile client has a malpractice suit succeed against AFL and negative publicity impacts business, changes in the Family Law act mean many less cases available, management makes poor capital allocation choices, moving to an expensive roll up model, borrowing heavily to fund faster expansion, CR diluting existing holders, attraction & retention of quality practitioners becomes an issue.
b.) A combination of more than one of the above.
c.) A combination of many of the above and/or fraudulent and deceptive accounting by management.
Finally assessing these probalistically,
a.) 20% b.) 10% c.) 5%
d.) company grows at similar to current indicated rate. 50% e.) Company grows faster than current rate 15%
So 50c * 20%= 10c + 25c*10% = 5c + 0c + 65c*50% = 32c + 80c *15% = 12c giving a price expectancy of 60c
Not sure of how much weight is appropriate to these sort of musings re probability because its so subjective, but I think the mental exercise of trying to assign probability to events is sensible because hopefully it will highlight if there is significant catastrophic risk.
I am also aware of the shadow SGH casts over this sector, burnt a massive amount of capital in that horror show and that makes me a little gun shy.
The other consideration is to sell CDA down and just buy more JAN - is Jan a better buy than AFL at current prices??
Decided JAN wasn't at better buy than AFL at the moment
Sold AVR, Anteris - one of the worst businesses I ever bought a part of! Also sold a parcel of CDA (598 @ $12.21 to rebalance a little and bought AFL 20000 @ 50c
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Sold out of my holding in EGP-CVF, a small, underperforming fund. In the end it was not the underperformance of the fund that triggeredd the sell, although it was becoming concerning after 3 years as it represented a real loss of capital for me. Rather it was the behaviour of the fund manager, he had become increasingly irrational in his monthly updates and also his behaviour on social media. When I saw his online attacks on another investor I respect, that was the final straw. On top of being a extreme libertarian, Covidiot and apparent Trump apologist it sealed the decision for me and I sold out.
As a result I have about $100k that I have to think about allocating. There are a few options,
* Leave it in cash (returns wouldn't be all that much worse than the fund!) - Bank account - pros - optionality, liquidity. cons - v low returns,
Premortem - Inflation took off and caused significant erosion of capital. One of the other options not taken returned significantly superior returns.
* Invest in a new position - KSL DSK are 2 i have looked at recently - Pros - ability to add new positions in significant size Cons - decrease concentration, number of positions more than i am comfortable with. Reduces optionality
Premortem - New position, management failed to execute as expected, SP dropped significantly. Market fell significantly, no cash to take advantage.
* Invest across best ideas/value in existing holdings - PBT, NTD, SKE Pros - builds on existing research and analysis, leverages on conviction, maintains concentration, keeps position number within comfort zone. Cons Miss alternative investment that may be superior to existing holdings. Reduces optionality
Premortem Market fell significantly, no cash to take advantage, my thesis was incorrect and company SP collapses.
* Invest in a different asset class. -commodities, crypto, property, small business, bonds -Pros Diversification of asset classes, some optionality,
Cons No yield & extreme volatility from commodities & crypto, crypto may not actually exist, way outside my wheel house. Property & small bus, illiquid and not viable with $100k, bonds -low yield, no growth potential.
Premortem commodities - price falls significantly & no yield (worse than cash) crypto - price crashes to 0 total loss of invested capital, property - n/a bonds - yield remains near 0/goes negative.
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$NWH released a pretty poor H1 2021 result, and the share price dropped 20% over the next 2 days, although I already hold a very large position I decided to buy some more. My thinking around this was that my cost base was only 25c and with the shares down 20% to $2.25 I worked out that adding another $20k would only take my cost base up to 40c. I also did a quick & dirty valuation based on the H1 results and it was around the $2.20 mark. My feeling is that the drop in profit resulted in an over reaction from the market, a lot of the decrease was explained by the impact of Covid on employee & contractor cost & materials. P&E was also up because of extra machinery required for their expanding operations.
I think its likely a one off and the full year results will see a return to normalised profit for the business.
Premortem Poor perfomance continued into 2021 with ongoing impacts of Covid despite the start of vaccinations, having recovered slightly the price dropped below $2 on the EOFY results.
Perfomance got worse continuing into 2021 and the business was forced to make impairments and made a loss for the FY, share price collapsed to $1 as a result.
EOFY results were stronger than expected, new acquisitions adding increased value and margin, a number of big contract wins and revenue, NPAT & FCF all increased. Share price returned to above $3.
Realistically none of these scenarios would be too hard to live with, given the very low cost base. My guess would be the probabilities of thes are 30%, 10% and 60%, 60c + 10c +$1.80 = $2.50 as a price expectancy.
Bought $20k more on 20/2
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Looking at taking a position in a new company, CPT Global, CGO.
CPT Global Limited is a specialist IT consulting services firm. They claim to operate in 3 divisions,
transformation - leveraging technology for business success.
assurance - assured, reliable delivery & operations
optimisation - faster, more efficient technology
From their website,
"CPT Global Limited is a highly regarded, specialist IT consulting services firm with a reputation built over successful engagements across the globe. CPT has been engaged by 80% of the world’s largest banks. We have delivered outcomes and engagements for clients across 35 countries.
CPT is an established business with a high-profile customer base, including a number of Fortune 500 companies. In our home market of Australia, CPT has a strong and stable position in the professional services segment of the Australian information technology market. CPT has experience working for federal and state government in Australia as well as banking, finance, insurance, telecommunications, retail and manufacturing sectors both in Australia, as well as globally. We partner with world leading technology organisations to bring unique value to our clients."
see full analysis here - click here to view (https://www.galumay.com.au/forum/index.php?topic=145.0)
My back of the envelope numbers are the business should be able to make around $4m NPAT $2.8m FCF for the full year. Market cap at 50c is around $20m, and EV about $17m. So on that basis its trading at around 5x earnings and 7x FCF which looks remarkably cheap. EV/EDITDA is around 3 based on annualised EBITDA from H1. Its also paying a dividend that equates to about 6% on the current share price.
FCF is about 4.3c for the half so if we assume 8c for the full year then my quick and dirty range of valuation is over $1
Inversely, for a price of 50c to be fair value by my calculation FCF would have to drop to 3c for the full year. Fairly unlikely given its already made over 4c for the half!
Premortem
The business lost a number of large contracts as the world raced out of Covid, a competitor XYX Tech became the preferred provider of these sorts of IT services, an attempt was made to enter the South & Central American market, but cash spend was high with little or no results, share holders were diluted by a series of CR's and the price plummeted back to around 15c
The entire Tech sector across the world led the drawdown in the 2022 crash of world stockmarkets, share prices were wiped out in the space of a couple of months. Due to CGO having no debt and long term contracts they continued to be profitable and pay a healthy dividend but it was years before the SP recovered.
H1 2021 turned out to be a one off and subsequently by 2022 earnings reverted to 2020 levels, resulting in EPS of around 2.5c and FCF of 3.5c (implying a range of value somewhere round 40-50c
H1 2021 turned out to be a one off and subsequently 2022 earnings reverted to 2019 levels, resulting in FCF of around 1c and a range of value around 20c.
H1 2021 turned out to be the peak of growth and consequently earnings stabilised at around 8c per share, implying a value of somewhere round $1
H1 2021 turned out to be just the start of growth and as the business scaled up, cash gushed down to the bottom line, and unfortunately the business was taken over by a Constellation and although the offer price of $2 provided a great return, we are no longer part owners of this wonderful business.
I think the probabilities are simpler than usual here, the liklihood of the price remaining so depressed in relation to value is very unlikely, most outcomes expressed above would still lead to some closing of value & price IMO. This seems to be one of those rare opportunities where the margin of safety is so great that we should bet big on this an invest a significant position in the company.
5%*15c+5%*20c+25%*50c+5%*20c+50%*$1+10%*$2= 0.75+1+12.5+1+50+20 =85c price expectancy.
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We are considering making an offer on a new, larger boat. I have had the idea for some time now to have a larger boat that had longer range to allow us to cruise further afield and carry more stores and fuel for the tinny. This would open up more of the coastline for us to explore as we have more time available. Also it means that we could have other friends, particularly Dave, come with us because there would be extra sleeping inside the cabin. (In our current big boat there is only one double inside the cabin.
In light of this I occasionally look at what boats are for sale and see if there are any suitable ones, although the idea was to not purchase anything at least for a couple of years, when Dave & I were closer to retirement. Of course what happened is I found what looks like the perfect boat, a 48' steel boat with a Gardner engine. Its in Newcastle & for sale at $175,000.
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Having talked with Sal about it, she is less enthusiastic than me, mainly I think because she doesnt have the same desire to do long trips and also some reservation because she knows my love of actually living on boats and I believe she is worried I might do so again if I had a boat like this. She has suggested that if we do buy a bigger boat it might be better to wait 12 months until she has long service leave and then we could bring something back together from the East Coast.
My belief is that even at $175k the boat is likely a very good buy I have looked at every boat for sale in australia between $120K and $220k and there is nothing else as good as this for our needs in the price range. I am also a bit conflicted though, not sure I am quite ready to take on all the change and effort a bigger boat, moored in the bay would involve. My gut feeling is that if I could pick it up for $150k it is very compelling though, it would be very cheap for what it is at that price, and i would be reasonably comfortable that we could get at least half of that for our current big boat.
To try to test my confirmation bias around the boat I asked Brad, a mate who is a professional marine engineer & skipper to have a look at the boat and tell me what he saw as the issues with it that might make it unsuitable. That idea backfired after he spent 2 hours with me discussing it and came up with no negatives and just positives that I had missed!
So I am close to the point of making a decision about whether to make an offer for the boat of $150k conditional on confirming the condition and inventory is as described in the ad and a sea trial by myself.
The alternatives are to not make an offer and wait until next year and then see if we can find a suitable boat when Sal has her LSL.
Or not to make an offer and work harder to use the big boat we have more and find ways to increase the range.
Or to first sell the current big boat before looking for a bigger boat.
The reasons to not buy a bigger boat is the need to have it moored in the bay and therefore not have the convenience of having the boat in the driveway at home, having to keep it clean from dust, dirt, bird shit etc, having to at least beach it every 6 months to scrub its bum and every 2 years to anti foul. It will undoubtably have some added expenses to run - eg $900 every 2 years for anti fouling.
The reasons to buy one is more optionality with taking friends on trips, boat will be ready to go in the bay so only have to launch the tinny and go, it will be a very comfortable and pleasant 'waterfront apartment' available for us to spend weekends on and/or host friends. It would have the range and fuel economy to cruise much more of the coast line without worrying about fuel for the big boat or tinny. We would get more usable time with the boat moored as we wouldn't be dependent on the tide as we are now to launch the big boat.
It would take about 13 days sea time to drive the boat back, plus how ever many days stopping on the way.
Also showed the boat to Bruce Davey, owner of the charter boat, Wildcard. He was even more enthusiastic than Brad and said it would be a perfect boat for us. Kim Brad's wife, came over with a computer for me to fix and said she had looked at it too and thought it was a fantastic boat.
In the face of such enthusiasm from a range of professional sea farers I emailed an offer of 150k to the broker.
16/4 - Found out our offer was unsuccessful.
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Spent a lot of time considering buying the storage sheds at 3A Miller Close, was going to offer $300k which was the valuation i reverse engineered from needing a total return within 10 years due to catostrophic risk. Was going to use the IP line of credit. Decided in the end too risky even at 300k.
Revisiting this decision, we actually did make an offer at $300k but it was not accepted.
I have been looking at this investment using the SMSF as the vehicle. The broad thinking is that I have essentially seen the value of the SMSF rise by the about $300k this year, so enough to cover most of the purchase price of the property, it would diversify the SMSF out of 100% equities, and realise some of the gains. I have got comfortable with the catastrophic risk, as long as most of the capital is protected (by the returns in the interim), my assessment of the likelihood of the risk has greatly reduced, but still exists. The risk i have focussed on more this time is trying to understand what the investment would look like post the mine closing.
If the town has little impact then the investment looks very good, at 80% occupancy the returns would approach $40k net in the retirement phase (0 tax)
or just over $30 in the accumulation phase. (11%-13% return)
If we assume a moderate negative impact, either rental income dropping or higher vacancy rate then returns might drop to around $30k (assume 0 tax)
and a return of around 10%. (assumes we take over management to reduce costs and spend less on maint.) (7 units at $500)
If we assume a serious impact, lower rent AND lower occupancy, we could see returns drop to $7500 and a 2.5% return. (5 units at $250)
The cutoff point for basically no return would be the rent halved and only 3 units rented with all costs minimised.
Thinking about expectancy for this, and not including catostrophic risk, little impact = 20%, moderate impact = 50% serious impact=20, 0 return = 10%
40*20%+30*50%+7.5*20% + $0= 8+15+1.5=24.5 or around an 8.2% return expectancy.
Obviously one question is how confident I am that I could achieve similar returns by leaving the money in equities, as its a lot easier to own parts of businesses rather than running them! My CAGR has been at about 8% the last few years, but that is in a runaway bull market so that could change significantly.
I have been thinking about this some more, and I feel like putting that amount of capital into one asset, with catastrophic risk and market risk as well as all the worry and concern with running the 'business' - for a return expectancy that is less than my long term absolute benchmark for investing just feels wrong.
I would rather the passive business ownership that the fractional ownership that shares in public companies offers, I get less of the profit than an active bsuiness owner, but none of the time cost or stress, or capital requirements. I also realised that the idea of a share portfolio being passive business ownership explains why I am always wary of the tech disrupter businesses that are so popular with speculators these days. I just cant develop any conviction that these businesses will still be around in 10 years. When I look at many of the businesses I passively own in the SMSF, I have conviction most of them will be round in 10 years and still profitable in their core business. Sure some will stuff up with poor management and bad capital allocation, some may be hit by black swan events, but most will just steadily and boringly keep doing what they do and paying me a share of the FCF that generates.
They nearly all do something that is really simple to understand, and people will still need in 10 years time.
I am really not at all sure Gove will need 14 small industrial units in 10 years.
Just today I noticed new shipping containers out the back of Mafia Motors and a big graded pad, maybe they are going to put a heap of containers there for long term storage - and there goes part of the business case for the Miller close units.
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I have found another boat that we think may be suitable for what we are looking for, its a 14.7m converted fishing boat, fibreglass hull with a Gardner engine.
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1994 G Stewart Design 14.70m Boat (Sleeps 9)
MACHINERY: Moulded GRP construction with Gardner 6LXB six cylinder naturally aspirated 120HP diesel fueled engine solid mounted to heavy engine bearer frames. Close coupled Nigata 3:1 hydraulic gearbox carrying 75mm stainless steel propeller shaft through conventional stern gland arrangement. Fixed four bladed NFM propeller. Coated steel diesel fuel tanks contained within separate compartment forward of engine room and connected to main engine via RACOR type primary filter system. Desalination Plant.
ELECTRICS: Open auxiliary generator unit comprised of Perkins three cylinder diesel fueled engine connected to Stamford 22 Kva alternator unit. Circuit breaker protection in main AC distribution board sited at aft end galley area. 12 vDC alternator off main engine to battery charging for main start batteries.
ENGINE ROOM: 1 x Bank 24vDC – engine starting, 1 x Bank 12vDC – Domestic Batteries
WHEELHOUSE: 1 x Bank (4x6) domestic house batteries with solar and wind generator charging system.
Victron Phoenix 24/3000 DC/AC inverter unit for 240vAC supply to domestic supply. Circuit breaker protection to electric system. 4 x Solar panels with Plasmatronics regulated controller unit.
GALLERY: Sited along starboard cabin side and across forward cabin area. Equipped with: 1 x Euromaid SC205 electric stove/oven, 1 x Samsung microwave oven, 1 x Single bowl Stainless steel sink with pressurized fresh water supply. Gallery utensil and crockery stowages under and adjacent.
HEAD: Located portside aft end of main cabin house in separate enclosed compartment. Equipped with domestic pan and cistern ceramic toilet unit with direct discharge to holding tank. Small plastic vanity unit with fresh water supply. Electric hot water shower unit.
INTERNAL CONFIGURATION: Anchor locker space right forward. Collision bulkhead. Forward cabin area with three hull side bunks, stowages under and adjacent. Steps up to main deck area. Freezer room contained within paved bulkheads and accessed via deck hatch within main saloon. Main saloon area with port side sliding door access. Curved bench arrangement across forward section with gallery sink and benches down starboard side. Main saloon table and chairs landed on deck which is above engine room space. Steps down starboard side to aft cabin fitted with three single bunks, storage under and adjacent. Stainless steel companionway ladder up forward to bridge deck with main cabin equipped with double bed arrangement. Main helm position at forward end.
DECK EQUIPMENT: Cleats, leads and bitts as would normally be associated with vessel of this type and size. Raised GRP/timber bulwarks extend around the vessel.
NAVIGATION EQUIPMENT: 1 x AP 5 autopilot system, 1 x Furuno Radar, 1 x Furuno Sounder, 1 x Furuno GPS WAAS Navigator unit, 1 x Raytheon Wind unit, 1 x Lorenz Starlight Pro GPS unit, 1 x GME GX 600 VHF Transceiver, 1 x Uniden UH089SX UHF Transceiver, 1 x Pioneer AM/FM CD unit, 1 x Saura Keiki Magnetic Compass.
SAFETY EQUIPMENT: 1 x MT 400 type EPIRB – no registration label, 1 x Set pyrotechnics for inshore usage, 1 x Manual bilge pump – external, 1 x Mechanical bilge pump to manifold bilge suction system, 1 x 24vDC Electric bilge pump with float switch – engine room, 1 x 24vDC bilge pump beneath stern gland, 2 x Lifebuoys, 18 x Lifejackets.
MOORING GEAR: 1 x 130lb CQR anchor shackled to 130m of 16mm galvanized chain carried over hydraulic driven anchor winch system, 1 x Danforth type sand anchor with 6m of 12mm chain bent onto length synthetic mooring line, Sundry mooring line and fenders.
STEERING GEAR: Wheel steering at main helm position connected by hydraulics to single ram arrangement. Square head on rubber stock for emergency steering. Conventional semi balanced plate rudder carried on upper internal bearing arrangement with shoe plate.
I asked some questions about the boat and this is the replies,
* What do you know of the history of the boat before you bought it? Where was she built, and do you know anything about the designer, G Stewart?
It was built in Eden, NSW by G Stewart, it's his own design fishing boat built for the Bass Strait fishing and has a full fibreglass hull but has lines scribed into it. To make it look like it has been planked.
* What trips has your Dad done in the boat and how would he describe her sea handling?
In my opinion you won't find a better sea boat, it also has 5 metre trawler stabilisers.
* What is her beam and draught?
Length 14.7m x Beam 5m x Draft 2m
* Has the boat had any form of survey in recent times?
Yes approximately 2 years ago it was slipped and anti fouled
* Do you have any idea what her displacement is, I am guessing at least 30 tonnes?
40 tonnes
* How many hours has the Gardner done and what if any work has been done to it?
I've had the injector pump and injectors rebuilt it uses a little oil but will run forever because its 6LXB
* What size are the fuel tanks?
4500 litres divided into 4 tanks
* What size is the water tank?
Approx. 1000 litres
* Does the toilet use salt water to flush?
Yes salt water to flush and has a holding tank with a macerator pump.
* What is the cruising and top speed?
8 to 10 knots depending on tide.
* What is the fuel consumption per nautical mile at cruise?
Approx. 10 Litres per hour @ 1300 revs.
* When was she last slipped and anti fouled?
Approx. 2 Years ago.
* What sort of fridge does she have in the galley?
Household Fridge/Freezer, a Tuckerbox Deep Freezer for bait and electric stove just like inside a house.
* Roughly what are the dimensions of the freezer room? I guess the genset would need to be running for the freezer to operate? (too big for the solar battery system?)
Freezer room is 5m x 4m, it's a Blast Freezer (I never used it as a freezer, only used as a storage area).
* Does all the electronics, radar, sounder, GPS etc, all work well with no faults or failing LCD screens?
Yes all works well except for Pilot which is new but has a wire problem but I don't trust Pilots I prefer to steer myself.
* What size is the tinny you have on the davits on the transom?
4.3m Clark with 60hp Merk.
I am still trying to find out what trips the owner has done on the boat and I have asked again about how many hours the engine has done, he doesnt know so that it a bit of an unknown, although less important with a Gardner than other motors.
Remaining things to check are what the condition of the coolant is like, it would need anti fouling and survey.
I am close to booking flights to go down and look at it, my concern is spending the money to go down and look at it and not having first refusal to purchase it. I have in mind that if it is all it seems then if I could get it for $100k, and pay for slipping, antifoul & survey and make the sale subject to the survey I would be comfortable.
Some more pics here,
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Ok, i have found the first problem, after enquiring about the "little bit of oil" it uses, I found out its about 2L for 18h running, that seems a little excessive, googlefu to check it out.
Looked into the oil consumption, no doubt its too high, final confirmation came when I emailed Gardner Marine in the UK and they replied,
Oil usage completely depends on the worn state of the engine and of course on how hard, or easy, the engine is being run. It is therefore impossible to get an exact reading from hours alone.
We measure oil usage as a percentage of fuel burn always. It normally burns oil at a rate of 0.25 – 0.5 % of fuel burn. Note that the high value of 0.5% can be due to a worn engine, OR a new engine (until it beds in) or an old but not worn but glazed engine.
Anyhow, as an example:
Cruising speed of 1250RPM would be in the region of 10L fuel burn per hour (it could be far more or less depending on the hull, trawling etc, but lets go with this).
In 18 hours, that is 180L of fuel.
Worse case oil burn at that fuel burn would be 180 x 0.005 = 0.9L
So, although a guess, I would suggest that 2L is on the high side, but it does need to be considered alongside the facts given above. You will need to confirm if it is burning it or leaking it. A good give away is the breather gas – if the engine is worn, there will be a direct correlation between that and high crankcase breathing.
That was the end of the research for me, the reason to purchase a boat with a Gardner is the extremely long life with no maintenance required, to buy one that had issues that needed fixing made no sense at all.
None the less I spoke with Brad & Kim as well as Dan from Iron Lady and Arthur to get their views, consensus was that the engine oil consuption made it a no. Brad & Kim also raised the additions to the top cabin, did the boat have a stability test after it was added? (almost certainly no.), what timber was used, is it appropriate for the tropics? How hot would it be with it being unlined? What if you took a big wave over the bow that hit the added cabin?
In the end it was too many uncertainties and with the oil issue it lost any conviction for me. Again, more learnt by going thru the due diligence and an even better idea of what we really want.
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Resulting is a really important thing to look for in assessing decisions,
Resulting is using the outcome quality to directly derive decision quality.
So if share A goes up a lot, its because we made a good decision.
If share B goes down a lot, its because we made a bad decision.
We need to access 2nd level thinking and assess the outcome and its correlation to the decision.
So why did share A go up? Was it because the market rose as a whole, causing multiple expansion and growth in SP that had no relationship to our original thesis, therefore it didnt go up because we made a good decision.
Alternatively, why did share B go down, if it went down because we were incorrect about our view of the future in terms of revenue growth, earnings, and return on invested capital, then it WAS because we made a bad decision.
Humans tend to use resulting asymmetrically - things that went well we attribute to good decision making (resulting), and things that go badly we tend to say were bad luck. (not resulting). Of course if we are assessing what happened to others its the opposite!
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Made a snap decision on Friday afternoon to add a large topup to our position in LBL, this was based on a late announcement to market that they had secured another technology service agreement,
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I spent a short of amount of time looking at my average cost price and considering the implications for the bottom line on the business, I noticed there had been no reaction in the share price to the news, so I assumed very few had noticed the news late on a Friday afternoon. I considered this to be one of those cases where it was better to make a snap decision rather than spending too long analysing it, (and writing a decision analysis here).
In hindsight it was probably a mistake, the share price has risen over 20% in the last couple of weeks on no news, partly I believe due to a pumping campaign by serial pumpers, Motley Fool, but looking back maybe a fair bit of it was anticipation of this deal closing. I may well have ended up still deciding to buy more, but it would have been a more informed decision.
It makes LBL our biggest position other than AAPL, the average cost is only 45c so the last parcel at 81c still looks like a reasonable decision, just not sensible to avoid the written decision analysis unless the situation is totally compelling.
Next day & its up 2.5% from my purchase price y'day. Didnt pop until after lunch so I had time to do better due diligence.
3 days later and its up 10% to 90c, perhaps this somewhat vindicates the fast and definitive decision making?
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Made a snap decision today to increase our position in Paradigm, (PAR), it announced that the FDA had replied to the answers they gave to the 6 supplementary questions the FDA had asked prior to approving Phase 3 trials. The FDA were still not happy with one of the 6 questions and wanted further details and changes. None of this seemed onerous to my reading, nor could I see it impacting on the timeline to completion of Phase 3 trials to any significant amount. Yet the market obviously had enough waiting and lost interest, or read it much more negatively than me as it was down over 8% when i picked up another parcel. It finished the day down over 10% so perhaps I moved too early, but happy to build the position at that price as I believe its now a de-risked speculation from our initial entry at $1.50 so at $2 I was happy to add.
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My perusal of the recent season of 4C's has left me with only 2 businesses that might be investible, RLG and ACU.
RLG, RooLife Group Limited, together with its subsidiaries, provides integrated digital marketing and customer acquisition services with a focus on driving online sales of products and services for its clients in Australia and China. Its online e-Commerce marketplaces assist businesses to sell directly to Chinese consumers and accept payment through the WeChat and Alipay mobile payments platforms. The company also offers e-commerce and cross-border, digital marketing, export, B2B distribution, travel and tourism, Daigou networks, and research and strategy services.
FCF+ve, priced at $0.03 could do 0.04c FCF per share over the next 12 months, would give a valuation of round $0.05 so say upside of 80%. Risk is the FCF dries up and it goes back to loss making. Could be worth a punt leading into FY results.
Discovered those numbers are wrong, they have issued heaps more shares diluting everything by nearly 50% so not investible IMO
ACU, Acumentis Group Limited provides valuation, research, and advisory services in relation to property and businesses in Australia. The company offers residential property valuation, government, commercial property valuation, insurance valuation, rural and agribusiness, property advisory, quantity surveying, buyers agency, illicit substance screening, projects division, self-managed super funds property assessment, stamp duty assessment, family law and litigation, and homebuilder grant valuation services. It serves the private owner and investor, professional/SME, corporate, government, banking, finance, REIT, and development industries.
ACU was the subject of a significant cyber attack in 2019 that had a negative impact on the business, and I imagine its reputation with investors. I believe that is behind the business now, systems have been improved to prevent a repeat and the primary actor was arrested, (they were someone with internal access to the business systems.) The business is now generating strong FCF and has done for several quarters now, delivering full FY FCF. FCF yield is over 10% based on this year, and my quick & dirty IV is around 20c. The FY21 results have been released while I have been thinking about this business, and as expected the company reported a loss due to the impairments around a loss of a significant government contract. I am yet to quantify the impact on future cash flows of this loss of contract. The contract continued with extensions to the EOFY so there was no impact on FY21, ACU are just saying that revenue will increase overall in 2022 so no impact there. (of course there is an impact, revenue would have been even higher for 22 is they still had the contract.)
Its impossible to draw any conclusions at this stage about ROIIC as returns have been so lumpy with so many impairments, it could probably be normalised to give some sense, but given that FCF has also been lumpy its probably not going to add any conviction for me.
In conclusion it looks like a reasonable turnaround opportunity, its trading at a significant discount to my range of value, 12c v 20c, it doesnt look like its a business that is likely to have significant growth, and given its history there may be more stumbles along the way, but it could also see a consistent improvement, single digit growth and a rerate if it maintains FCF and can translate that into earnings.
PreMortem
There was a further cyberattack in 2022 and more big customers were lost causing further impairments and continued negative reported earnings. Price falls back to 8c
The business recovers but Management make a series of poor capital allocation decisions and FCF is reduced and earnings still negative price falls back to 8c
The business recovers, growth is very slow to negative due to a property crash in the Aus market, share price still around 12c
The business recovers, no more miss steps, single digit growth, EPS grows to around 2c per share as does FCF, share price 25c
Prie expectancy - 8c* 10% + 8c*10% + 12c*40% + 25c*40% = 16.4c
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KPG - Kelly Partners Group Holdings Limited provides chartered accounting and other professional services to private businesses and clients, owners, families, and high net worth individuals in Australia.
KPG is a business I have looked at a couple of times, the main stumbling block for me has been the debt - especially when considered as a proportion of equity - its basically 1:1 and that is way higher than I have ever considered in a business I am looking to invest in. Because I really like the metrics of the business otherwise and the culture of the business as expressed in the KPG "Owner's Manual" is as good as I have seen in any business, I have kept coming back to look at it. It also has a unique model for rollups, using debt not equity, and the acquired businesses retain 49% ownership so they retain skin in the game. I have finally got past the debt issue by talking with a friend online, Tristan Waine, I said,
"Hey Tristan,
I am doing some more work on KPG to see if I can find enough conviction to take a position. After your comment to me the other day I downloaded the owners manual and went thu the pages on debt, but I really struggle to understand it.
In my mind, its all debt that ultimately the parent company is potentially responsible for - hence its on the balance sheet, it massively exceeds my hard limit for debt to equity, but I remember you said I shouldn't use that metric for services businesses, it still looks like a lot of debt to me, and I really don't want to own businesses with anything but very minimal gearing!
I may have a blind spot on this, so thats why I am asking you to see if there is something I can learn here not just for KPG but also other companies I may research. Cheers, RIck"
Yeah no worries.
So first thing is that comment about 'ultinately the parent is responsible for' is just flat out wrong.
Partners have a 49% stake in their own partnerships and the vast majority of the debt they are responsible for. Not the parent
And the second thing is that you're viewing gearing on a debt/equity basis, this is a business that doesn't need much equity so it's just a flawed way of viewing gearing
Ultimately leverage is lower risk the easier it is to repay. And in this case, the parent attributable debt can be paid with a year of cash flows. Interest and principle
The interest coverage is some 20-30x
On my other metrics I really like the business, it has a fantastic ROIIC - mainly because its such a capital light business, the FCF yield is pretty decent at 7% despite the business being fully priced at around $4. I think its one of those businesses that I will never get an entry point if I wait for it to be cheap, its probably good enough that you just have to pay up a bit more and wait for the power of compounding to work its magic.
Premortem
KPG partner businesses lose a couple of their founders to Covid and the families want out of the businesses, KPG suffers significant write downs and cash expenses which both impact growth and profitability. The share price falls back to $2.50
Interest rates have risen sharply as inflation takes off, Covid continues to cause the collapse of many SME's, the interest costs impact profits and cash flows as does the loss in business revenue across the accounting sector. The share price falls back to around $2.50
KPG has grown revenue steadily in line with guidance, no significant additional acquisitions though so growth is on the lower end of expectations, share price has remained in the range of $4
KPG has grown revenue strongly, beating guidance, a number of new acquisitions were announced during the previous couple of years and share price has continued to grow to around $5.50 with FCF increasing to over 40c
So price expectation, $2.50*10% + $2.50*10% + $4 * 50% + $5.50*30% = $4.15 so only a slightly positive expectancy which reflects the fully valued nature of the current price.
9/08/21 I bought KPG today at $3.65 - over 8% down from its last close after releasing its 2021 results.
I think I made a mistake, what I failed to understand is that the ASX entity, KPG has to distribute half its profit/FCF to the partner businesses it owns 51% of, so in reality its only delivering half the return to shareholders. This makes all my calculations wrong and after spending most of today trying to understand how this all fits together I have to admit I dont have the slightest idea, the terms and metrics used by the company change all the time and its impossible to really distill out what value accrues to shareholders in the business.
At the moment my inclination is to sell straight away and escape from a position I should never have taken.
11/8/21 Sold at $3.50, I got this one wrong, the sudden drop in price on Monday led to an impetuous decision to take a position before I had finished my analysis. It was reading the Annual report after I had bought that made me aware of how I had completely missed the opaque nature of the financials, the effect of all the partners only being held as 51% interests, and I started to notice how promotional the founder was and in particular what grated with me was the claim of being Buffett like in his thinking and then seeing him use Owners Earnings in a way quite different to how Buffett uses it, and also seeing his claims for CAGR to shareholders - using the share price as a metric! The most un-Buffett like thing imaginable, nearly all of the "gains" are from multiple expansion - so its not Mr Kelly, but Mr Market who has given the return to shareholders!
Anyway, out at a small cost, a position that I would have had no conviction in and would have worried about - something I dont like doing!
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This is a post script to a decision to take a position in AMO, Ambertech Limitied,
Ambertech Limited, together with its subsidiaries, provides various technologies for the professional and consumer audio/visual markets in Australia and New Zealand. It operates through Professional, Lifestyle Entertainment, and New Zealand segments. The company distributes high technology equipment to professional broadcast, film, recording, and sound reinforcement industries; home theatre products to dealers; projection and display products for business and domestic applications; and custom installation components for home theatre, and commercial installations to dealers and consumers. Its home entertainment products include home cinema and theatre systems, Hi-Fi, and personal audio solutions; speakers, sound bars, and headphones; remote controls and antennas; and connectors, cables, and accessories. The company's professional performance equipment comprise live sound and video production solutions, music equipment, recording equipment and microphones, and video editing and post production systems. It also offers content creation, acquisition, deliver, processing, and asset management for broadcast and media in the areas of production systems, data management, video delivery, infrastructure hardware, cloud and IP video, post, remote operations, and workflow management. In addition, the company offers acoustic panels, amplifiers, audio preamps and matrix controllers, cameras, cases, guitars, hearing augmentation products, microphones, networking products, projectors, receivers, screens, sound level meters, speakers, speech transfer and tour guide systems, vocal and instrument processors, racks, studio and stage products, and audio video content players and recorders; and commercial and residential installation services. It operates through a network of dealers. The company was founded in 1987 and is based in Warriewood, Australia.
In essense they provide high end AV hardware & solutions to businesses like TV stations, Government and others needing such solutions. They also distribute AV hardware to companies like JB HiFi and Hardly Normal for retail customers. They also distribute a range of music related products thru their own dealers.
Historically its been a horrible business, I suspect too many parts and not enough focus on business management has led to very lumpy revenue & earnings, never really getting to the point where it looked like an investible business. For that reason when I first had a high level glance at it after Claude asked me my opinion, I dismissed it out of hand. The link below has the details of the conversation.
Previous commentary (https://www.galumay.com.au/forum/index.php?topic=36.msg501#msg501)
This is a case where I learnt to change my mind when there was disconfirming evidence, so the FY 2021 annual report for AMO was released this week and the result was very strong, it implied a business trading at a PE of about 4, a divvy yield of over 11% and FCF yield of 20%. When I looked at the ROIIC for this last year it was over 100%. This made me go back thru all the announcements for the past few years and check whether there was an actual transformation of the business or whether it was just a one of Covid type impact.
It soon became obvious that there was a clear plan from management to improve the business, and a cornerstone of this was the acquisition of Hills AV business in late 2019, this was the turning point really and although it took longer than expected to translate into results in the financials due to external impacts including covid, it was clear they had a vision and were executing it. From 2019 they were guiding for revenue of $70m in 2020, which they missed because of the external factors, and $43m in H1 2021, which they only just missed coming in at $39m and showing good profit, FCF and an increased dividend.
This is what I missed when I dismissed it after a high level look originally - because it was really only one half year that had shown any sign of promise in the last 10 years of trading!
So now for the full year of 2021, they hit $80m revenue,
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On putting all this together I realised the business was still very cheap, even if they only achieved very low growth from here, the 11% dividend alone would put pressure on for a significant rerating, on the morning of the announcement they were up about 9% and I bought a parcel at 30.5c.
So what can go wrong, well the most obvious is that the business returns to its historical band of revenue, in the $50-60m range and therefore they go back to being borderline profitable and the yield becomes low to zero again. This seems unlikely to me as it was an unprecedented increase in business activity to take itt up to $80m revenue and I cant see any special circumstances - eg covid driven activity.
If the business did just have a one off boost from the addition of the Hills business and growth is flat from here, its will still be likely paying a dividend yield that is higher than average and that will provide a floor for the price in the medium term.
If its truly a transformative change and some steady growth continues, then there should be a strong multiple expansion as well as increasing dividends over time.
Probabilistically i can see if the first instance plays out the price droping back to 15c, I would rate that a 20% chance, in the second instance I would see the price maybe settling out at 35c and about a 50% chance, in the best case i think it could run to around 60c - 20% chance. I think there is a chance it
could perform so poorly that the price drops back to 5c, I would rate this a 10% chance, so price expectancy is, 3c + 17.5c + 12c + 0.5c = 33c
Thats only about 10% above my buy price, but its based on a pretty conservative outlook probabilistically.
My thesis is that at worst revenue will be maintained in the band around $80m, EPS of 6c & dividend will continue to be around 3c and that the share price will rerate to a price more in line with market valuations, my quick & dirty DCF gives a range of value around 80c and an implied return at purchase price of over 20%.
It will be a case of watching the financials very closely going forward to make sure the execution continues to add value for shareholders.
Here is the commentary on twitter after I bought the parcel, read from bottom up,
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I am considering selling our PPH Pushpay holdings, the business recently announced a significant acquisition of a video production company, RESI Media, a private US company servicing the church industry. They have agreed to pay $150m for the business, but have published no info at all about the actual value of Resi, no earnings, no cash flow, not even EBITDA, so its impossible to tell whether this is a good allocation of capital or not. I emailed PPH investor relations asking for more information on the financials of Resi, but they have responded by linking me to the existing info - which doesnt mention valuation or financials for Resi!
I think there are genuine questions about the motive for this takeover, the new CEO making a name for themselves? Pressure from bigger investors? With the CFO on the way out the door its not a great look. (thanks to @Larryjamieson on twitter for raising some of these questions.)
The continued sell down by founders is also a concern.
Current thought is not to sell as then we have cash to allocate, wait and if a better opportunity comes along move into that, otherwise it remains a low conviction hold & watch.
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Decided to sell my lowest conviction position, TNE, its mainly a valuation decision, while the ROIIC remained very strong ( a function of the very capital light model & some pretty aggressive accounting practices), the FCF yield is only 2.73% and I feel like thats inaccurate on the high side due to accounting practices. My quick & dirty DCF range is around $4.50 and the implied growth rate in the current price is around 8%!
I bought first in 2016 and my average price was $5.77, sold for average of $13.37 so a bit over 100% return over the 5 years holding so a CAGR of over 18% which is more than satisfactory and excludes dividends.
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Looking at taking a position in HLG:NZX, Hallenstein Glasson Holdings Limited, through its subsidiaries, retails men's and women's clothing in New Zealand and Australia. The company operates 114 stores, including 43 stores in New Zealand and 4 stores in Australia under the Hallenstein Brothers name; and 36 stores in New Zealand and 32 stores in Australia under the Glassons name. It also sells its products through its e-commerce platform. In addition, the company leases various retail outlets under operating lease agreements. Hallenstein Glasson Holdings Limited was founded in 1873 and is headquartered in Auckland, New Zealand.
At a bit over $7 its not super cheap, but its certainly a high quality business, the Lindy effect comes into play with a business that has been around since the 1870's! It has a reputation for both customer focus and very frugal operations. There are various stories on the history of the business, here is one - CLICK (http://www.stuff.co.nz/business/3820730/How-goldfields-supply-spawned-an-empire)
My back of the envelope valuation in north of $12, but I am mindful that is based on very strong FCF coming out of Covid. Applying a normalised FCF from the last few years would see a value nearer $5, I feel that on balance the current price is fair value with a little optimism about the outlook. A continuation of the dividend of recent years would see a yield of 4-5%. ROIIC is very strong, around 60% ROE & ROC are both around 30% on 10y median returns.
So its an easy business to like, well managed, profitable, slow but steady growth, no debt, share count same for last 10 years, enduring, founding family hold over 20%, and directors have skin in the game, but what are the risks?
I think the biggest risk is the business growth that looks apparent through Covid is temporary in nature and revenue, profits, FCF & yield return to historical levels. In this case $7 would look pretty pricey but yield would still be satisfactory.
It would take a more severe disruption to the business to make it a bad investment decision, something like a misstep in capital allocation, an attempt to accelerate exansion into Australia or US? Or a poor acquisition/merger.
One potential red flag maybe the company's decision not to repay the wages subsidy many of its employees received through Covid, there is no requirement to repay, the money went to the employees, not the company, and they broke no rules or guidelines - but there is a moral argument the equivilent money might have been returned. article link (https://www.newshub.co.nz/home/money/2020/11/finance-minister-grant-robertson-was-warned-removing-wage-subsidy-cap-risked-waste-fraud.html) and and HERE (https://www.stuff.co.nz/business/industries/122889993/hallenstein-glasson-profit-falls-4-to-27m-no-plans-to-repay-wage-subsidies)
The other issue I have is the lack of trasparency about performance payments for executives, although the Annual Reports reference the Renumration policy on their website, there is no policy on the website, just a statement that they have on. The only thing I can say is that the share count has been static for years so they are not issuing themselves shares!
Why wil this business be round in 10 years, as mentioned Lindy effect - its already been around 150 years, also retail clothing is one of the most online resistant retail sectors, people want to see, feel and try on clothes before buying. Also NZ based is a small barrier to entry of itself. What would it take to mean the business was not around in 10 years - really would take some sort of black swan event, unforseeable disruption, fraudulent management, total collapse of NZ economy...
I dont expect to see much growth or multiple expansion with HLG, its the type of business I would like to hold for a very long time, it generates significant cash, reinvests what it can (which is only around 25%) and pays out the rest as dividends. While management allocate capital with the conservative approach they have done so far, I will happily accumulate dips and build a larger position.
Bought 2886 at $7.08 NZD 23/11/21
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I wrote a lengthy post about the process we followed in finding our new boat, something went wrong with an attachment and I lost the whole post! I had to walk away for a couple of days, but I will have another crack at it!
We have been looking for a bigger boat for about 12 months, it grew out of a desire of mine and our friend Dave, to cruise the NT coast from Gove to Darwin, exploring all the rivers, bays, islands, reefs etc and developed into a realisation that the 3 of us wanted a bigger boat not just for this trip but to spend more time cruising our coastline over more of the year. This meant a boat big enough to do more thru the windier dry season and initially our thinking was a 12-15m monohull motor boat with an economical motor like a Gardner or John Deere. We slowly developed a set of essential criteria in terms of fuel economy, range, galley location, seperate accomodation spaces, outdoor living spaces, and so on.
We built a process of searching for boats that seemed to suit most of our criteria, and then creating lists of everything we could find wrong with each one and in particular any issues that breeched our initial criteria. This was dont to avoid the likelihood of talking ourselves into buying something because we liked a lot about it, while missing something critical that would have been a problem once we owned it. It also helped prevent FOMO and impulsive purchasing in what is a red hot sellers market.
What we discovered as we looked at boat after boat, is they all had quite a long list of things that we found problematic or in outright contradiction with our criteria. Then one day, only a month or so ago, i somehow came across a sailing catamaran for sale in Darwin, and it got me thinking about how well a sailing cat met our criteria and after a while I built up enough nerve to ask sal to hear me out and after explaining my thinking, asked her if there was anyway she would consider a sailing cat. She was like, sure, "looks great, as long as it doesnt lean over I am fine with it" so then I had the same discussion with Dave and he was "Oh yes, well I have always thought a cat would be great up here".
So we pivoted and started looking at sailing cats and one thing became really obvious quickly, our list of negatives and things we couldn't live with became very, very short - for every cat we looked at!
In the end we settled on a Foutaine Pajot Bahia 46, a 46' or 14m French built cat. She is built in 1997 and has been owned by an Aussie couple who bought her in the Caribbean and lived on her for 8 years before ending up back in Australia. I flew down to Brisbane and did a quick sea trial, and the deal was done. I feel we got her at a reasonable price in a very hot market, $310,000. Its a lot of boat for the money and one of the things that influenced our decision was that Lumiel is a production boat which does help with resale - not just value but liquidity.
Also buying in a seller's market meant we were selling our old boat in the same market, i very much doubt we would get nearly as good a price and in fact may have had great trrouble selling it in a soft or buyers market so it evens out to some extent.
So thinking about what could go wrong with this decision, the obvious one is that my belief that having a yacht will add a whole new dimension to our boating and allow us much more flexibility, may prove to be wrong if Sal and or Dave end up really hating the sailing side of it. The potential offset to that is we could just not use the sails and still have an effective motor boat.
Secondly we could find that the boat is simply too uncomfortable in dry season conditions to take on the sort of trips we plan at that time of year, I think this is unlikely but possible. The question then is would any type of boat in our price range be suitable?
Thirdly we may find the amount of work and stress of keeping a boat on a mooring in the bay in a a cyclone zone may be too much for us as we get older. There is probably a cross over on this, currently I have the time & energy, Dave has the energy, Sal not too much of either at the moment. At some point as we move past our mid 60's this may become more of an issue.
We could end up having to spend a lot more money to maintain her than we expect, this is somewhat offset by the price we paid, nearly everything else we looked at was in the high $300k's so even if we had to replace the rig, sails, an engine & sail drive we would only be at about the same cost as the more expensive boats we looked at.
Anyway, here are some pics of Lumiel, she is currently on a jetty in Birkdale Qld, Sth of Brisbane and we are looking at sailing here home in March April next year.
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Also a couple of videos,
https://vimeo.com/645059927 (https://vimeo.com/645059927)
https://vimeo.com/640619097 (https://vimeo.com/640619097)
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Thinking about buying some more $CDA, its fallen from around $18 to $7 over the last few months. I am trying to work out what the thesis is for selling the business at $7, in other words, what am i missing that others see?
The recent H1 report for 2022 did offer some concern as operating cash flow was actually negative for the first time in over 10 years, it didn't even go negative when the company was in dire straits in 2013 and I bought in under $1. The company explanation for the -'ve OCF is -
• Increased debtors driven by higher Communications sales in November and December 2021
• Investment in inventory, reduced freight costs and mitigate supply chain risks
• Payables high at June 2021 due to prepayments from customers to secure supply
They claim,
• As working capital normalises over the second half the cashflows will follow
The $65m extra working capital and hence -'ve OCF is my biggest concern along with the $48m debt but I actually doubt either of these are the reason for the steep drop in price. Few investors get as far down as the cash flow statement so hard to see that being a big impact, and most wouldn't care about a debt ratio that low so its also unlikely to be that.
So the question remains, what am I missing that others see?
Are they just panicked sellers that bought in around $18 and can no longer bear the losses? Possible, but I am unconvinced.
I just feel like I am missing something!
My guess is a combination of fears, a potential collapse in the detector sales due to recession, loss of markets in countries like russia for all products, weak gold prices and a general sell off in the market.
Its now fallen to $6 and the temptation to buy some more is strong. After the FY2022 results came out FCF for the year was 25c, largely because of the negative cash flow in the first half. The last time the FCF was this low in 2018 the share price was around $3.50, but the big difference here is that it looks more like a one off and the normalised FCF going forward is probably going to be much higher given the impact of H1.
So FY OCF was around $52m, but H1 was -$13m so 2nd half was about $65m, H2 typically higher, so maybe normalised FCF was around $90-100m so lets say around 50c per share. That gives me a range of value around the $7 mark.
The question remains, is it the perceived fall in FCF that is driving the price or am I missing something else? Debt and departing CEO probably part of the story. Debt is hardly stressful, its well under my conservative debt to equity ratio and is at about 2% interest.
When I reverse engineer my DCF for CDA I get an implied FCF of 45c - while that is nearly double the number for 2022, I think its very unlikely it will be that low in 2023. It also implies growth of 6% - which seems high, but if the FCF for 2022 of 25c is the outlier I think it is, then that number will quickly shrink. Finally the implied MoS is only a bit over 7% - again a function of the FCF of 25c, but that is the point of reverse engineering the numbers. Could I live with paying a price that only gave me a MoS of 7%?
Really the whole question comes down to the probability that 2022 was an outlier and the business will return to something like normal state over the next 5 years or so. Was 2022 a structural shift in the long term financials of the business or was it an aberration borne of all the usual suspects, Covid, frieght, supply issues, inflation, etc How much is temporary and how much permanent?
Given that I am a long term investor I am fairly confident that the business will continue to do well enough over the next 5-10 years, even if there is further short term pain to come. At sub $6 I think there is enough MoS and I think the mid term downside is very low. My pre mortem is that the H1 results showed continued +'ve FCF, a soft recovery in growth and a moderate re-rate of the business by the market while maintaining the divvy yield. A worse outcome than this, black swan, -'ve FCF, falling revenue and a further drop in SP is about a 20% I think, i see a business like it was in 2018 - maybe a 10c divvy. A better than expected outcome with a return to strong growth and an improvement in all financials is probably about a 20% chance. Somewhere in between the 2 about a 60% chance.
Obviously the yield is important as a long term holder, probably more so than the share price, so I am probably comfortable if it drops back to around 20c per share, but much lower than that for an extended period would be sub optimal.
Bought more in personal pf at $5.68 and took a position in the SMSF at $5.68 26/09/2022
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The recent drawdown in stock markets around the world has seriously impacted the potential, unrealised capital gains from our portfolios. I haven't quantified the impact as its purely theoretical, but it would be significant were we to sell out of our fractional ownership of businesses.
Its the first real drawdown that we have seen since starting serious investing so its a good check on my emotional response - its easy to say that as a long term investor, short term volatility doesnt worry me, but until you live thru a significant drawdown/crash, that is just an assumption.
I am pleased to confirm that there has been no sense of alarm or rush to action on my part. My initial instinct was to consider investing cash on hand into the best businesses we hold already, that were cheapest after the drawdown, but I have not acted on that instinct. Part of the reason for not acting is that having a significant cash buffer makes it easier to not worry about the drawdown at all, we will continue to grow the cash holdings with dividends going forward and as I am now over 60 I can access the cash balance in the SMSF anytime I need to for living expenses etc.
If I became fully invested again, then needed any extra cash, I would have to sell something to release cash, which might be uncomfortable if the market stays depressed for the medium term.
I would like to think that my whole investing strategy and philiosophy has been developed to deal with just such a situation as we appear to be facing now, falling markets, inflation rising, recession looming, negativity and bearish commentary all about.
The strategy of buying fractional ownership in businesses that if we had sufficient capital, we would seek to own outright, should, if I do a reasonable job of picking the businesses, in the long term deliver sufficient absolute returns.
Based on my assessment of the quality of the business, lack of debt, healthy balance sheet, profitable, high FCF generation, long term dividend payment, generating superior ROIIC, lengthy operating history, founder involvement, I would certainly hope to whether the storms of economic cycles. As someone who believes the future is unknowable, especially in terms of both micro and macro economics, I fall back on trying to construct resilient portfolios that can weather the storms that may come and go in our investing journey.
We will end up with our best year ever in terms of real, cash return on our investments, the only really measurable benchmark. Our gross dividends will end up over 8.5% on invested capital (Original capital, plus contributions, plus dividends), and prior to the markets tanking was 5% on unrealised market value. If the negative trend in markets continues thru to end of financial year, this will obviously become a higher number as the dividends are already all paid, its just the unrealised market value that will change now.
So my response to date has been to do nothing! I am neither a buyer or a seller, there is some possibility this inactivity is a bit of rabbit in the headlights - scared to invest in case things get much worse, but I dont thin thats the case, after all cash is only less than 10% of our capital anyway. I guess I could use the line of credit on our house to go all in and try to make big returns, but that is not my style. I am happy with the amount of capital we have invested and the returns we should see from those businesses over the long term. Of course it would always be nice to make lots more money, but I am very grateful for the luck that got us from our starting point about 7 years ago to where we are now and I dont expect to see that growth again in the next 7 years.
I wont be surprised if cash returns deteriorate next FY if economic conditions do worsen, but thats the swings and round abouts of investing, no doubt we have enjoyed excess earnings in the very odd Covid world, as always its the long term absolute performance that matters, not the year on year volatility.
nb Here is a much better written post from Chris Mayer of Woodluck House that really resonated with my poorly articulated thoughts above. CLICK HERE (https://www.woodlockhousefamilycapital.com/post/make-haste-slowly)
Interesting, I finally realised my recent mood and background 'heaviness', anxiety and concern was a manifestation of all the negativity - inflation/bear market/recession/rising interest rates etc. My re-focus was simply asking myself, am I do what I really want to (yes), so at 60, does it really matter if we run out of capital a bit sooner? No, so stop worrying, choose to be happy and get on with it!
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trying to decide whether to go with 2 new fixed props on the boat or just replace the missing folding prop, cost of a new folding gori is probably over $3k and 2 fixed props is $1500 so half the cost.
disadvantage of fixed props is the noise when free wheeling and the loss of sailing speed due to drag.
disadvantage of folding is cost, maintenance and loss of performance under power.
the noise is worse as speed increases, but can be mitigated by putting in gear, but then drag is increased. Question is whether extra drag matters once you are sailing that fast. Drag is increased maybe as much as 3x when locked in gear, but on its own that is meaningless, without knowing how much drag reduces potential speed we dont know if 3x more is significant or not. Anectdotal evidence is locked 3 blade props would cost about 0.5k at normal sailing speed.
loss of speed and sailing performance will be most noticable at low wind speeds, probably particularly when it is below 10k.
On the other hand the disadvantages of the folding props, cost is significant, if the fixed would do the job without too much noise or performance hit then saving over $1500 is significant. The potential loss of motoring performance is probably similar to the sailing one for fixed - maybe 1/2k less at cruising speed. Could be significant in terms of motoring against tidal streams and heavy seas?
If we go with the cheaper fixed props and they work out then we have saved a lot of money, they may also prove to be better overall for our usage and conditions. If they are worse than i expect and we find the speed penalty and noise untenable, then we can still go back to folding by spending the $3k and getting one more folding prop.
If we go with replacing the missing folding prop, it will cost us double the amount, and we will never know whether we might have been better off with the fixed props.
Another factor is that if we go with a second folding prop and another one gets damaged or lost, its another $3k compared to under $1000
I spoke with Jaques who owns a Bahia and asked him about the noise and impact on sailing,
"When you refer to « noise » I am not sure of what you are talking about , under sail or under engine power , should not be any noise that I can think off under sail as long as you engage reverse on the control which will stop them free spinning !
Mine has two three blades fixed prop fitted at the factory , I have had feathering props on my previous FP , a Lavezzi and sailed in convoy with another Lavezzi which had the original 2 blades fixed props , if I recall correctly , over a 24 hours sail passage I travelled 9.2 nm more than he did , so NO I cannot justify the investment on speed gain , further more while berthing stern in the feathering props were pretty useless when it came to torque
The folding props require regular maintenance, early this year while cruising Tasmania we met a couple on another Bahia high was equipped with feathering props , we wearable o compare speed under engine while motoring up the Dentrecastaux Chanel , @ 1500 rpm Kitten was giving me 7.2 knots SOG , his 6.4 knots ! and once we hit the tidal current getting into Barnes bay he lost another 05. Knot .
So instead of buying 2 x $3,295.00 feathering props when I purchased Kitten I spent the money on an asymétrique spinnaker in a sock which gives me great boat speed 👍👌👏 under mild win speed conditions."
so my decision is to go with the 2 new fixed props, my gut feeling is the sailing performance wont be impacted to the point that we regret the decision, the motoring performance will be better and the noise will be controllable.
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The downturn in the markets has kept me sitting in the sidelines this year, I have naturally become more inactive as time passes anyway but I suspect there has been some trepidation on my part to allocate capital in the current climate. Its difficult to know whether that is the case or not. There is also a train of thought I have had that I want a cash buffer so if I need capital for any reason its accessible without forced selling. This is informed by my having retired for superannuation purposes, so I can drawdown on the fund at any time now. With interest rates rising and carrying a bit of debt from buying the boat, I think I have made a move to being slightly more conservative.
I think that writing the annual report for the SMSF this week made me think about the fact that maybe I was losing touch a bit with the investing process due to my inactivity. That has at least prompted me to briefly look at a couple of ideas that popped up in my universe (they went no where!), and also consider which business would be best to increase position size in within our portfolio.
SXE and AMO are the two most obvious candidates, they have the best metrics, are well below my calculated range of intrinsic value and are both smaller positions in the SMSF. At this stage that's the extent of my decision making - I am the "if I was going to allocate some capital, it would be to one of those 2 businesses."
*I realised I was leaning towards AMO because its a smaller position, that is not very clever! The capital should be allocated to the best opportunity regardless of size.
** Again the benefit of decision journals and slowing the 'doing' down, thinking about it today, both SXE & AMO are about the same price as I paid for the existing parcels, they 'feel' cheap because they have then gone up quite a lot and now fallen quite a lot!
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I am thinking about taking a position in JB Hifi, this is not a particularly cheap business normally, but there has been considerable negative sentiment this year and the price looks pretty reasonable to me. Its trading on a PE of about 10, i calculate a range of intrinsic value of around $60 on last years results. The results released this week show a small improvement in metrics,
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ROIIC is not able to be calculated because the debt reduction has meant there has been negative capital employed. ROIC & ROE are both very high, FCF is strong, yield is over 5%.
I am not sure why the market is discounting the price to this extent, I guess the concern must be that inflation or recession will cause a downturn in the business and impact profits and yield?
My intuition is that its not often the opportunity to buy a business as good as JB Hifi at a real discount to value comes along.
In terms of alternatives I think the nearest is to instead take a position in CDA for the SMSF, but its not quite the same discount or margin of safety. SXE is another possibility, its discount and MoS is even greater so perhaps a more attractive option? On checking AMO has the greatest so that is probably where any extra capital should be directed. Now I notice JYC is way out there, I already own a lot, but its the cheapest by most metrics.
So really the only reason to add JBH is if I think overall its more likely to be a better business in the long term than any of the alternative homes for the capital. Off the cuff, i suspect its a better business than AMO with more growth prospects, not sure its any better than CDA, SXE or JYC though.
I went for a walk on the beach and thought about it, which gave me another approach, was JBH worth buying just for the high yield, given that we really have sufficient capital so the yield becomes very important. But on checking the yield on NTD is currently higher than the JBH yield - that may change, JBH might increase, or more likely NTD drops, but its not a persuasive reason to sell one to buy the other. (given that NTD is now my lowest conviction holding).
Given that I think my decision is to do nothing, JBH was $44.15 today for a 6.6% yield, NTD was 93c for a 8.6%yield others mentioned - CDA $8.70, AMO 36c, JYC $2.51, SXE 72c
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I have been thinking about taking an initial position in Beacon Lighting, BLX. It meets the criteria I look for in a business, its got a strong ROIIC of over 40%, a re investment rate of over 35% and FCF yield of nearly 10%. Divvy yield is 4.5% I dont think its particularly expensive, at around $1.97 it is trading at a discount to my range of value of around $2.40. Reverse engineering it implies growth of only 0.4% or 16c per share FCF compared to the current 19c.
My friend Chris VanAanholt knows the management team and speaks very highly of them and their integrity and motivation.
The biggest threat to the business is probably a downturn in the housing and construction sector, something that is certainly possible in the next couple of years. With such strong metrics BLX should be able to weather any negative economic cycle in the housing sector, of course it may become considerably cheaper if that eventuates.
a further risk is that the recent strong FCF and profit metrics are a one off result of Covid and are not indicative of a structural change in the business. Contrary indicators for this thesis is fairly stable revenue growth over the last 8 years, averaging 9%, the outlier was 2021 at 14.5% and 2022 looks to be a return to baseline with 5.5% sales growth and 8% EPS growth. The two covid outliers were definitely 2020 2021. The interesting thing is they have been able to grow gross & net margins thru 2020-2022. This means they were nimble enough to adjust the business for all of the issues, covid, supply chain, inflation etc. In saying all of that, the risk is that the roll off of the beneficial effects of covid on the business have not yet flowed thru, so we dont see them in the 2022 results, but 2023 reverts to mean and we could see EPS halve along with FCF. This would see a range of value around $1.50 by my calculations.
Another potential threat to the business is management losing their direction and starting to make poor capital allocation decisions, or embark on ambitious M&A activities. This seems possible but improbable given the high % of founder ownership of the business - the Robinson family hold 55% of the business. (top 20 hold 85%)
SO thinking about it probalistically, if the worst combination hits, housing spending roll off and post covid revert to mean, 10% chance $1, just one of these 10% $1.50, neither of them but business stagnates, 25% $2.00, business continues growth trajectory due to structural change and capital allocation, 35% $2.50, this and it gets run up by new investors on the back of these results, 20% $3.50 = 10c + 15c + 50c + 87.5c + 70c = $2.32 I give a stronger weight to the more positive outcomes just because of the history of revenue and earnings growth, the ROIIC and reinvestment rates and the management team.
Also the business has been operating since 1967, so over 50 years, the Lindy effect implies its likely to keep going!
The balance sheet is strong, only a small amount of debt and cash on hand is 2x debt.
BLX also dabbles in property management, from the AR -
During FY2022, through the Large Format Property Fund, Beacon Lighting acquired a 50% interest in large format retail properties in Modbury (SA), Bathurst (NSW) and Mildura (VIC). This property portfolio complements the other four large format retail properties which were acquired in FY2021. Currently, four of the properties are fully tenanted while the other three properties require further development.
Just realised the FCF is totally distorted by AASB 16 accounting, when the lease expenses are added back into operating expences where they belong, FCF is more than halved. This totally distorts my valuation for the business and I no longer consider it to have any margin of safety at current prices, in fact its grossly over priced relative to my re-calsulated FCF.
I am revisiting this decision because I really like this business so I am going to do some more thinking about it.
Current price implies FCF growth of 6%, which seems high for a retailer, but they have managed to grow EPS at just under 20% for the last 8 years, and revenue at nearly 9.5% (that alone is very telling, growing earnings faster than revenue is very unusual.)
FCF 2020 - 6.5c
2021 - 14c
2022 - 9.5c
8 years ago it was 2c so FCF has grown at over 20% also
So is the growth sustainable or is it some distortion of Covid etc? 2020 & 2021 certainly look like outliers, EPS growth of 37% & 67%, but that doesnt tell the whole story, as revenue in those 2 years only grew by 2.4% & 14.5% respectively. Somehow they grew gross margins by about 5% from 64% to 69% which was a big contributer to the increased EPS.
The company explanation was,
"The gross profit was improved by everyday pricing, improved procurement negotiations and favorable foreign currency movements."
Update 8/1/23 Ironically while I was slowly trying to talk myself into paying up a bit more for a position in BLX, the price has risen over 15%! So now I just sit and watch.
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Thinking about selling NTD and buying more KSL, I should have sold NTD when I first saw red flags about management's capital allocation. I held on rather than taking a small loss, now I will be taking a much bigger loss. The rationale is 2 stage, following the H1 report for NTD I am really confronted by my failure to sell and hanging on in the hope they can recover and I wont realise a loss is silly and makes me a victim of biases like anchoring and loss aversion that I should know better than. Also the removal of the dividend means its even less attractive and there are further losses other than just the capital loss.
The second stage is re-investing the remaining capital in KSL, and the rationale is that its currently the most attractive position in the portfolio to increase, its trading on a deep discount to my range of valuation and pays an incredible dividend of over 13% - with 8% being paid next month which is a helpful start of turning around the negative impact of NTD.
So there are two seperate decisions, do I sell NTD, and I think the answer is yes, and I should have done it 12 months ago. Is KSL the best value proposition in the PF currently, and therefore should I buy more? I think the answer is also yes.
Sold all NTD at 0.561632
Bought 33762 more KSL at 0.80c 28/02/2023
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I am considering selling a small parcel of our largest holding, $AAPL, it is no doubt trading at a premium to value by my calculation, at ATHs at the same time as the AUD is historically weak, so that maximises the return. The reasoning is that we will have about $20k AUD tax losses we can offset against the capital gains from selling AAPL, and it would boost our advance cash levels for retirement funding. My thinking has changed a little as we close in on both being retired, I was always happy to be basically fully invested, but I think a cash buffer makes more sense once we need an income stream from the SMSF. I suspect the increased liklihood of a recession with a hard landing also informs my emotional reaction, as much as I eschew ignoring macro, it does make sense to have a cash buffer to reduce stress and increase resiliance.
Sold 9o AAPL at $159.10 24/03/23
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Looking at buying a car to replace either or both of our existing cars. I have been thinking for a while about purchasing a car to replace the troopy & or hilux in the future as we move into retirement for both of us. I think we need a 4wd for towing and occasional off road work, but not something with the capability of the troopy. The Troopy is 37 years old and needs quite a lot of upkeep to keep it on the road. Its hard for Sal to drive so not an ideal only car, the hilux is 20 years old, quite rusty in parts and not 4wd so not suitable as our only car.
We dont need something yet, but I have been researching what would be suitable and settled on a twin cab, Volkswagen Amarok 4WD with the 2.0L engine. I actually found a good cheap ($25,000 for 2005 model) one in Darwin, in White, which i want for the tropics, but we decided we didn't need it yet and by the time we did it would be a couple of years older so we decided not to buy it. Then a very well specced one came up in Gove, for about $25k as well, but it was in dark blue and a 2014 model, after talking with Sal we decided once again to give it a miss, mainly because it was a dark colour.
I am now down in Melbourne seeing mum and I thought I should see what is available here, and came across a private sale of a 2019 model, in white, no bull bar and standard tyres, with 171k km. Its a lot of k's for a 4 year old car, but they are all highway miles, from daily drive geelong to melbourne. So not really an issue and we will add very few miles. If I can get it for $25k or under its a very cheap car - price range is $28k to $32k. It also has an alloy tray which is probably a detractor from value but I actually prefer. I think if I could get it for under $25 and ship it to darwin it would be a very good buy, $2k to get it to darwin and then bring it home when I go over in August.
Really the only question is, is it worth buying sooner than we need it? The reasons to say yes are, I am actually already here to look at them, so it saves a fare to inspect a car at a later date, I already have to come to darwin in August and dont have to pay the airfare so could drive it home then, i doubt we would ever find a 4 year old car like this for $25k again, its white, has a tray and under 200k kms.
The reasons to say no are, the two cars we still have are both operational still, so wait until we actually need a new car, maybe an even better deal will come up, maybe a white one will come up at home.
I am going to have a look at it tomorrow.
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Ended up buying this Amarok, it checked out with a full service record from VW, it was a one owner car, he bought it new in June 2019 on finance thru VW, no write off history and looked in very good conition as expected given the history. I was able to buy it for $24k inc GST, so the real cost was about $21800. Cost me $2750 to get it to Darwin, and as I said we are flying over in August at no cost to us, so I will drive it home then. In the end I found the price to overweigh any concerns I had about buying it now, I really doubt I would find one that was better value in the future.
The decision we now have to make is whether to sell the troopy or Sal's ute, but we will wait until we have the Amarok here to make that decision.
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Something I have battle with for a while is trying to displace decisions with habits. The idea is that decisions are 'expensive' in terms of mental energy, time, decision quality and distraction from other tasks, so if you can replace as many decisions as possible with habits then you can make better decisions and limit them to important issues really requiring decisions. Steve Jobs making a habit of always wearing the same type of clothes is a very basic example.
My battle is interesting, I find it relatively easy to turn decisions into habits with positive things, so I have made a habit of cleaning the group head every time I pull a coffee, and keeping the workspace around the coffee machine clean, these were fairly easy and are now embedded in my habitual behaviour. Its the negative habits that are harder to make stick for me, so NOT eating between meals is my current battle, I have many times told myself I am going to make it a habit and failed many times! I have considered 2 strategies, one is to invert the negative decisions, so try to make it a habit to only eat at meal times! The second is this - write about it. 2 days ago I just posted my thoughts about negative versus positive habits (maybe better phrased as doing or not doing habits), and I have had more success with not snacking between meals than ever in the past! Its well known that making commitments in writing makes them much easier to uphold so it may be as simple as this, I figure doubling down here can only help!
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Something I have battle with for a while is trying to displace decisions with habits. The idea is that decisions are 'expensive' in terms of mental energy, time, decision quality and distraction from other tasks, so if you can replace as many decisions as possible with habits then you can make better decisions and limit them to important issues really requiring decisions. Steve Jobs making a habit of always wearing the same type of clothes is a very basic example.
My battle is interesting, I find it relatively easy to turn decisions into habits with positive things, so I have made a habit of cleaning the group head every time I pull a coffee, and keeping the workspace around the coffee machine clean, these were fairly easy and are now embedded in my habitual behaviour. Its the negative habits that are harder to make stick for me, so NOT eating between meals is my current battle, I have many times told myself I am going to make it a habit and failed many times! I have considered 2 strategies, one is to invert the negative decisions, so try to make it a habit to only eat at meal times! The second is this - write about it. 2 days ago I just posted my thoughts about negative versus positive habits (maybe better phrased as doing or not doing habits), and I have had more success with not snacking between meals than ever in the past! Its well known that making commitments in writing makes them much easier to uphold so it may be as simple as this, I figure doubling down here can only help!
Hi! You have some very interesting thoughts here. I decided to dwell a bit on your forum.
I too struggle with the habit of eating between meals because it causes a spike in blood sugar.
Why do you do it?
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LOL! It's so rare for anyone to post here that I didn't see your reply, my apologies! I have done quite a bit more reading and thinking about this subject so I will post about that soon. Just working my way through reporting season for the share market at the moment! Welcome aboard, CiriColet
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$IRI, Integrated Research Limited is a business I have been keeping an eye on for a while, it designs, develops, implements, and sells systems and applications management computer software for business-critical computing, and unified communication and payment networks. The company offers Prognosis, an integrated suite of monitoring and management software designed to give an organization's management and technical personnel operational insight into the HP NonStop platform, distributed system servers, unified communications, payment environments, and the business applications. It also provides testing, maintenance, and professional services, as well as software as a service solution. The company offers its products in approximately 60 countries through direct sales offices in the United States, the United Kingdom, Germany, Singapore, and Australia, as well as through channel-driven distribution networks internationally. It serves stock exchanges, banks, credit card companies, telecommunications carriers, service providers, and manufacturers. The company was incorporated in 1988 and is based in North Sydney, Australia.
Basically it went from a market darling to a dud, falling from highs of around $4 to 50c. I think there is a reasonable business in there so keep an eye on it, just released its FY 2023 results and so here is my quick and dirty analysis,
Well the FY2023 result is out for IRI and the FCF has definitely improved. The earnings are written off by an impairment of $31m, mostly for legacy software that has been superseded by the SaaS offerings, but the opportunity was taken to write down all sorts of assets when you look through the financials.
So how should we look at IRI? Is it a turn around opportunity? Could it have a rerate going forward? My initial high level take is it's far too expensive still. Normalised earnings were probably 1-1.5c per share, yes FCF has turned around, but as @finicky has pointed out it's nearly entirely due to more discipline around receivables, is that sustainable? Hard to tell, its the lowest its been for 7 years, but then revenue has fallen over that period so very hard to know what normalised working capital looks like.
My takeaway is that I can't really value on current year FCF, without a large margin of safety. I would probably assume a FCF of nearer the normalised earnings, maybe 2c per share. A back of the envelope range for that is around 50-60c which is pretty much what its been priced at recently.
In the end I think its in the too hard basket for me, it doesn't look really cheap, there are a lot of moving parts and no clarity of a path to growth and profit at this stage. In its favour it does have cash & no debt and there are signs of a turn around. I just don't think it's compelling enough for me to find sufficient conviction. So it either has to get a lot cheaper, or a lot better before I would be seriously interested!
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I have been thinking about taking a position in Adairs, $ADH. Adairs Limited operates as a specialty retailer of home decoration and furnishing products in Australia and New Zealand. It operates through three segments: Adairs, Mocka and Focus. The company offers bedroom products, such as bedlinen, bedding, and bedroom furniture and accessories; bathroom products, consisting of towels, bath mats, bathrobes and slippers, bathroom accessories, and laundry and home care products; furniture products, such as bedroom, office, living room, and kids furniture; homewares comprising home styling, home care and gifting, pets, and kitchen products; kid's products, including kids bedlinen, bedding, décor, bathroom, furniture, toys, and nursery; as well as gifting products.
It was founded in 1918.
The price fell during 2023 as it became obvious it was a difficult year for Adairs, outlooks were updated downwards a couple of times and there was no final dividend. I suspect there was negative sentiment around traditional retailers with the concerns about an inflationary environment. The trading update released in November showed sales were down 10% for the first part of H1, while this doesnt include the xmas period, its a further negative for sentiment.
I think the H1 2024 report is going to be pretty nasty, given the drop in sales of 10% in the face of compressed margins due to costs rising strongly, NPAT will be well down IMO. I would expect the business to get cheaper after the results are released. Given that a rise in sales of 10% last year, delivered a fall in NPAT of 22%, a drop of 10% in sales this half might well drop NPAT a lot further. I wouldnt be surprised to see the interim dividend cancelled or at least reduced.
Taking a step back, the long term metrics are mainly very good, Revenue has risen for 10 years straight, NPAT has been positive for the 10 years, dividends every year, a bit lumpy but not surprising with a retailer, ROE & ROIC both good and ROIIC is over 10% so good without being special.
FCF has been surprisingly strong and consistent, even when adjusting for distortions of AASB 16, which halves it due to the high lease expences.
The operating margin is also good with every $1 of sales providing 24c of OCF.
The worst metric is the debt, this is about 50% of equity and higher than I would normally allow. Interest rate is fairly good, BBSR +2.05% & 2.15% - so about 6.5% currently. Interest cover is about 10x
My range of value, very conservatively calculated due to the debt is around $2.80
My thesis is that the business is currently undervalued and will likely see a rerate in the next 1 - 2 years. It will also likely pay full dividends again.
I dont think its going to provide large capital gains, its probably always going to be an out of favour sector - bricks and mortar retail in a commodity sector, but if it can continue to run the business as it has for the last 10 years it will do ok.
Things that could go wrong with the thesis, sales could flatline or fall due to economic headwinds or a new competitor taking market share, dividends might be further reduced, management could make poor capital allocation choices, merger/acquisition or increase debt to furnish dividends. What would a seller be thinking at this price? Perhaps they would be selling before the H1 results fearing further bad news after the trading update.
If I am to take a position, it will be after the H1 results and then I will sell down my worst idea and replace it with ADH. Candidates would be CCP or GLB.
*another good reminder of the value of writing down the decision process, I had been looking at all the info on Adairs for the last week, but it wasnt until I was writing this today that I realised I had missed the trading update highlighting the 10% drop in sales from last November. This was critical in moving the possibility of buying from before the H1 results to after them.
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So I have quite a few businesses on my watch list, ADH, PRO, ABV, EVZ being the main ones. As above, ADH is subject to seeing H1 results to even be seriously considered, ABV I would probably be happy to add to the SMSF, EVZ is probably a fit for the SMSF also, PRO is more speculative & pre profit so better in the personal PF.
On the sell side, to free up capital, I will get out of AFL if there is not a real turn around in H1 numbers, same with JAN, and VRS so that frees up some capital in the Personal PF.
In the SMSF I have reached the end of my tether with AER, but its such a small position I am not sure its worth liquidating, the other one I have thought of selling is CCP, its not the sort of business I would normally own, also dividend is very small, it has been a good holding in terms of capital growth but its quite volatile. I could add to the KSL position with some of the capital if I went that way. Other possible low conviction businesses are EGN and there are a few I could reduce position size in to free up capital.
Alternatively i could do nothing!
Thinking about it, my inactivity and tendency to do nothing, works well with the businesses that are performing well (as businesses, not necessarily share price), but I think I carry that over into failing to deal with businesses where my thesis has proven to be broken, and where I really should sell and move on.
The loss aversion plays a part, tempting me to hold and wait for it to get back nearer what I paid! I think I should probably be more decisive with these cases.
AER, AFL & JAN definitely fall in that category.
On that basis I should sell them all and move on.
I should have sold AFL when the thesis was broken in late 2021
I should have sold JAN in late 2021 when I realised the thesis was broken
I wrote about both of these in the specific shares thread so there is really no excuse.
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Ok, so good decisions are hard, to wit my comments about JAN above, since then this is what happened, (from the JAN specific thread)
Well that went well, finally decided to sell out and take my losses, sold late last week for 26c, today they announced a new contract and went up 47%.
So it took my 3 years to make the right decision and then having already had all that opportunity cost, I then left 47% on the table - if I had just taken 4 days longer to make the decision!! Hindsight is a wonderful thing. I need to put it behind me, its not a 50% better company today than it was yesterday - the real error is hanging on so long, not selling 4 days too soon.
I need to not be gun shy as a result, in fact I need to be more decisive in selling off businesses which dont fit our investment strategy.
The interesting thing from a decision making point of view is that there is a significant internal desire to be active and try to make some new decisions to offset the loss from this one. In this case made more risky by my having conincidentally spent a lot of time working up analysis and research on a number of businesses, KYP that I initiated a small position in, EVZ that i bought with the proceeds of the JAN sale, ABV, PRO and EZZ that I am considering taking a position in.
The impulse to activity as a response to the pain of loss realised was very strong and I was considering taking action well outside my strategy and process, such as using funds that were set aside for movement out of SMSF into lump sum, selling SDI straight away (instead of waiting for H1 results), basically impulsively thinking about how could I take positions in all of the new options I had uncovered!
So once again the decision journal serves as a process to slow me down and temper impulsion.
I think its a timely reminder that our approach should be to think of our PF as a company and look at its absolute performance in that context, If we are happy with the performance of that 'company' then we should be resisting the impulse to do something different. The NAV has grown to around $2.50 which is up nearly 16% this year and a 10 year CAGR of nearly 10%. The dividend yield was 5.5% last year, the earnings yield 6.5% and FCF Yield 6.6%.
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I have been trying to decide how to take positions in a few businesses that I was interested to own. They really fall into the slightly more speculative category so more suited to the personal portfolio. Although I may be interested in one or two of them in the SMSF, but they would have to replace something as I dont want more total positions in the SMSF. On that basis I have decided to wait for H1 results for SDI and EGN being the two I would most likely consider selling.
In the personal PF its not so easy as I have nothing obvious to sell, but I think the best option might be to trim CDA & NWH to smaller positions. NWH I am probably happy to do now as it released its H1 results and while they are steady there was nothing compelling in terms of growth for 2024. So I may do that and wait for CDA's H1 results before deciding on it.
I have already sold JAN & AFL as discussed in here and their individual company threads, this capital was reinvested in PRO & EVZ.
Sold some NWH to trim and reinvested in EZZ.
In essence this is the most active I have been with the personal portfolio in years, this has been driven by my increased effort at uncovering potential early stage investments, based on an increased confidence in my ability to analysis businesses. This is also partly due to completing Aswath Damodaran's online course in Accounting for Finance & Investing. In hindsight I think i let this PF drift for much longer than I should have. I always used it for more speculative positions which necessitate a higher rate of turnover/shorter holding periods. I think because my inactivity and low turnover has been so successful in the SMSF, i was afraid to be more aggressive in the personal PF. Time will tell whether I can execute both strategies!
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I have significantly reset the strategy for our SMSF and retirement funds now that Sal has retired. My first desire was to have a couple of years living expenses in cash, in case the market fell significantly. This cash buffer would help avoid forced selling into a depressed market. I also wanted to have sufficient cash on hand for the rest of this financial year.
Given the recent strength of the market, and in particular the very good reports from many of our businesses for H1 2024, it seemed prudent to sell down some of our bigger positions to provide the cash buffers as above.
As I did this I realised that we could in fact sell down to the point where the balance of our SMSF was about $1m and then maintain that balance with rebalancing as required. Of course if the market fell and provided compelling opportunities then funds could be reinvested to rebalance in the other direction.
So this has left us with about $1m in SMSF, $210,000 cash buffer (2 years expenses at minimum, if I still run the business, it will last longer), $40,000 to fund the rest of this financial year. (only requires $15,000), so we are actually funded thru to November 24.