seekrit squirrel
Finance => Shares => Topic started by: galumay on May 23, 2015, 03:39:33 PM
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Sometimes its helpful to record why i didnt buy companies and what the reason was as well as a prediction.
Pact Holdings, PGH, packaging company. A brief look at the financials looked ok, but debt is 200% of equity and interest coverage only 2.2. This seems like high catostrophic risk if interest rates rise. For this reason alone I am striking this one off the watch list. Its $4.14 now, if it can radically reduce debt, or interest rates stay low I predict it will maintain that sort of price. If there is any increase in interest rates then I expect it will drop hard.
EDIT 4/16 Its SP is over $5:00 now so looks like i got it wrong! Still has horrible levels of debt.
EDIT 7/16 Its over $6:00. wronger!
1/9 still $6ish
27/1/18 $5.29
9/4/18 $5.60
3/19 $2.80 So it finally played out as I expected!
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VED, VEDA GROUP
I have looked at this company a couple of times, I just dont see the future value that others do, I decided not to buy at $2.00, looked again at about $2.15 still couldnt see where the growth was going to come from to sustain the price, now they have shot up to $2.70 based on a takeover offer for that amount. Still doesnt add up for me, but many i admire are holders.
EDIT 4/16 Taken over for $2:82 so I was very wrong again!
ICS
Another one that Tony Hansen held and sold, he got out at $1.25 and while its had a run up to $1.50 its back to $1.25 and has me looking at it again. I didnt buy because it did seem fully valued, but with the numbers from this FY $1.25 looks cheap to me.
EDIT 4/16 Ran up to $1:95 and now back around $1:50 - wrong again!!!
7/16 - $1:70 wronger!
1/9 $1.61
27/1/18 $1.38
9/4/18 $1.22
3/19 93c so maybe another it was good i didnt buy.
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SMX
Didnt buy on the 20/4/16 @ $1.67 see http://www.galumay.com.au/forum/index.php?topic=32.msg86#msg86
7/16 $1.65. but maybe...!
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!
1/9 $1.81
late 2017 SMX was taken over and shareholders received about $1.70 + a special 10c dividend.
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Another, CAT is a leading global sports analytics company that uses proprietary technology to provide elite sporting organisations and athletes with detailed, real time data and analytics to monitor and measure athletes' fitness and skill levels; responses to specific training techniques; tactical performance; and risk of injury and safety and to assist with rehabilitation.
I have had a look at them more than once and I think it is a business with huge potential, but as its still making losses and is very new I have not taken a position. They are trading around $4 post a CR and acquisition. I will reconsider when profitibility is realised or I decide to take a speculative punt with a small position.
1/9/16 $3.80
27/1/18 $1.98 looks like a good decision not to buy!
3/19 94c my decision looks even better!
9/4/18 $1.19 This one I got right, didnt meet my investment criteria, and i resisted the temptation to buy the narrative.
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not sure if these are going to be companies i didnt buy or just ones i havent bought yet!
TNE $5.70 I have been running my ruler across this one, the metrics are outstanding, 15 years of continuous growth in earnings, dividends, ROE, revenue, etc etc. Its a straight line growing at an average of 15%. Almost no debt, buckets of cash, well run, but...and this is the 'but' I struggle with - it seems to have all of that growth and some already built into the SP. I suspect thats because my default values for 5y and terminal growth are too conservative for such a strongly growing company.
Trouble is the conservative investor in me doesn't like adjusting those values because it feels like I am just making the data fit the price!
ADA $3.14 Not quite the same quality, a bit of a cyclical company, seems to be in a strong growth phase and has some good recurring business in its services sector now. No debt, strong financials, international business. Also looks to be pretty fully priced. Although once again my assumptions about growth may be too conservative.
SXE $0.54 Finally one for contrast, wouldn't normally be regarded as a 'quality' company, in the very unloved mining services sector (where I have plenty of exposure already!), but no debt, plenty of cash, well run, diversifying from reliance on mining, and looks really good with my conservative growth assumptions!
I have been researching these 3 companies as I look for somewhere to allocate accumulated capital from tax returns, dividends and some bonds i sold.
On reflection, SXE is the sort of company I look for normally, smallish, unloved, low debt, well run and positioned to take advantage of any change in sentiment. TNE and ADA tend to be the sort of companies I have dismissed in the past - while acknowledging their quality, my conservative approach to growth assumptions have made them look too expensive.
All of these 3 turned out to be "companies i havent bought YET!
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CWY Cleanaway, got a "hot tip" via a friend that they are due to fly as a result of some new contracts about to be awarded. I had a squiz, and they dont meet the minimum standards by my metrics for an investible company. I am not a trader and I have to shut out any temptation to behave like one without any of the experience, skills, knowledge or training of those that are. So one I didnt buy at about 85c
EDIT - 1/9/16 - shot up to $1.13 - based on turning PRP loss into a profit, made all the metrics look better, debt, interest covereage etc.
27/1/18 - $1.47
9/4/18 $1.45
3/19 $2.22 Shows I should have looked harder at that inflection point in 2016, would be a double bagger if I bought once it was investible on my metrics.
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SDI, should have documented my original thoughts about this one, dental tech company, good metrics but something about them put me off but now I cant remember what! A reminder to record all my analysis!
Ended up buying.
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VOC, fell 25% today. Looks like a classic over reaction by Mr Market, but rather than rush in and throw money into VOC, I downloaded the AR and crunched the numbers - i found that my calculated IV range was the same at as todays closing price - at the top end of the range. That was only achieved using the underlying rather than statutory reported numbers because it didn't get anywhere near current price on statutory numbers. EV/E was also poor as were a number of other metrics =- although the substantial changes in the underlying business this year make those sort of metrics unreliable guides to the value of the company.
Anyway, I have decided not to allocate any capital to VOC. It closed at $4.35 so lets see where it goes from here!
ended up buying - much to my regret. A dog. Sold for a loss.
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SP3 - 36c 27/1/18 see decision journal - not investible, not cash flow positive, no competitive advantage.
BWF - $1 27/1/18 see decision journal - saw it at fair value, with potential of extra growth I hadn't been able to quantify.
UPDATE: 9/4/18 SP3 30c, BWF 98c
3/19 SP3 12c BWF 84c Both look like good decisons not to buy!
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RDH one I came across reading this blog (which is full of great info and ideas BTW) https://hiddenvalue.blog/2017/08/25/weekly-wrap-250817/
At $2.40 I couldnt see they were anything but fully valued so gave this one a miss.
9/4/18 $2.72
3/19 $2.54 so they havent done much, probably a good call.
Also GCS one that Tony at EPG has taken a position in, again, at 85c they seem close to fully valued according to my data.
9/4/18 68c - might have another look.
Bought GCS at 68c now 72c so looks like a good call
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Had a look at a few businesses that came to my attention this week, firstly PSQ, a dental provider roll up that announced a downwards revision on their earnings for the FY, price fell 11% to $1.56 which seemed a huge over reaction. My full analysis suggested though that it was still well outside my range of IV which was only around 50c.
3/19 $1.16 good call to give it a miss.
Second one is PME a medical imaging business, this is an amazing busienss with a moat and great management holding very tightly, announcement of new contracts pushed them up 12% to $8.00 today, but as good as they look thats miles past my IV of under $2!
3/19 $14.80 obviously missed out there, would have been a great buy at $8 in hindsight!
Third was ONT which i looked at as a competitior to PSQ, its also a good business and fills the criteria i look for in most of its metrics, but again its priced for perfection, trading at $6.40 with my range of IV around $5
3/19 $6.15 so looks like i was right again.
So 3 to watch in a market fall!
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I have been looking at CUP for the last few weeks, I emailed a fellow investor about it,
I have been looking into a possible new investment recently and wondered if you had given it any attention? CountPlus, CUP, came to my attention in a blog post from the Hidden Value blog, https://hiddenvalue.blog/2018/08/01/low-multiple-of-depressed-earnings-with-multiple-ways-to-win/ which also linked to a post by Capital H Management, https://www.capitalhmanagement.com.au/2018/05/19/countplus-asxcup/
I have read through all their announcements and reports over the last couple of years and have formed the impression that at current prices its a suitably asymmetric opportunity with a number of ways the value can be significantly increased over the next few years, with very small downside risk of capital damaging outcomes.
I am finding it more difficult as time goes on to add new positions to my holdings! My inclination is to allocate more capital to the highest conviction positions I already hold and stay as concentrated as I am reasonably comfortable with, but I also realise its important to keep researching and looking for new businesses that present as compelling investments!
I would be interested to know if you had run your ruler over CUP and if so what your impressions about the business were.
His response was,
I met with these fellows a couple of months ago. It does look like it should be in for a good few years.
What put me off was I met with an investor in the fund who vended their business into the roll-up. They gave me the impression there are many more risks than apparent from the outside. In fact after his non-compete period finished, he had set up a shop & more than half his clients had moved already back to him.
The CEO does have a clear vision of what he wants to do & the insider I spoke with said he’ll do a good job but there’s too much risk to be involved. Reckons you’ll be waiting for an inevitable major issue, he was persuasive enough that I let it pass… If it wasn’t for that, it certainly looks tempting otherwise & you could very easily make good money if the issues don’t surface or are resolved without a major problem - Tony
On that basis I gave it a miss, it traded at 75c.
3/19 50c so missed another dog!
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AKG, an education business. 42c.
Already owning KME I wasnt convinced that AKG was a better business so didnt buy.
3/19 40c got this right too, KME has done really well in this time and i increased my position size!
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CUP & LBL two I have looked long and hard at. 70c & 17.5c repectively.
Bought into LBL and increased my position a couple of times.
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XRF is a business I have looked at a couple of times in the past, I have some 'circle of competence' in that we used their fusion machines and platinum ware in the Lab when I worked at the Gove Refinery.
XRF manufacture fusion machines for the mining and mineral processing industry, these machines make fusion beads for XRF (X-ray fluorescence ) analysers, these enable the companies to detirmine the chemical composition of samples. They also make the platinum ware which is used in the machines, this hardware depletes over time and is returned to XRF to be reformed and then reused. They also produce fluxes used in making the fusion beads.
I had it drawn to my attention again by a friend on twitter and we ended up having an extended exchange of ideas about the business, here is the bulk of that,
Hey Rick
Cheers for this, always tough as an investor looking from the outside into a technically difficult product/industry.
I’ve attached my notes from the chat with Vance the CEO and my rough P&L financials where I think they can report 2c EPS in FY19 (and grow strongly in FY20).
I guess my apprehension comes from a lack of knowledge around the product/industry. Vance said to me he thinks XRF has an 80% market share for fusion machines in Australia and maybe 20-30% globally (but admitted that is much harder to calculate). Does this sound right to you? If so do you think that it is a legacy dominance where XRF has been the benefactor of inaction from customers, or do they have a genuine edge over competitor products?
I agree with your point that flux/platinum labware are commodity products, and I didn’t think to ask the question about margins on the new customisable platinum products. I might chase that up further with Vance. Do you have any thoughts on the expansion into the non-mining customisable labware?
Obviously you are closer to the product/industry, but here is the brief outline of why it looks interesting to me:
Large investment into new products, acquisitions and expanded factories/offices over the past few years is beginning to normalise. Should see margins head back towards historical levels (confirmed by Vance).
Revenue growth has been accelerating in Capital Equipment, 3% in 1H18, 17% in 2H18 and 28% in 1H19 (all half on half). I may be wrong, but there should be a strong correlation between Capital Equipment sales and subsequent growth in Consumables and a portion of Precious Metals.
Multiple looks really depressed (could be 7-8x normalised FY19 earnings, maybe 5x FY20 if things go as I expect). Given previous reliance on mining (~95% at the peak) multiple may be capped at 10-12x earnings. If they can continue to reduce the mining reliance (58% 1H19) I think the market will pay up a little more, maybe 14-15x.
Also nice work with the LBL buying. I haven’t spoken to Wayne for a couple of months, but I follow him on LinkedIn and they have been postings stuff about new equipment and work. I reckon they are flying, hoping for guidance of $4.5m-$5m EBITDA for FY19 and then some guidance on FY20, particularly on Tech sales.
Hi Luke,
My mate says the 80% market share for Australia sounds about right, he is less sure that it would be as high as that globally. Edge is geographic, Australian mines and refiners bought XRF Scientific because of local support and supply. One fusion machine is much the same as another, I have used several different ones over the years, they are all good when they work well, they are pieces of shit when they play up! (Pouring molten ore and flux into the gas burners and blocking all the orifices is one favourite trick. The Lab trainee gets the job of cleaning them!)
He says Labs usually use platinum ware from same supplier, consumables more likely just from whatever bulk chemicals supplier they use, so could be anyone.
I dont know about the non-mining, customisable labware, I imagine its a tiny market, probably already serviced by someone, tough to break into I would have thought with not much growth potential. But thats just gut feeling. As an example I see they are doing a product for milk producers, well they will already be using someone else's labware at this point, its not stuff that wears out or breaks easily, so why would you buy from XRF?
My questions to your dot points would be,
The expansion, new products, new offices may well move margins upwards somewhat, but were they ever good enough to make it a great business?
I would be careful extrapolating growth in machine sales to platinum ware and consumables, any replacement of old machines wont have that effect. Is it just a short term growth in machine sales, given the life of them and how few new mines or refineries come on line, this could be an unsustainable spike in revenue.
I think the low multiple reflects a basket of stuff, lumpy earnings, not much growth over the years, unpopular sector, small, unnoticed business, I suspect it would have to be able to have more than just one good set of numbers to move the dial much!
Ok, so thats a really negative response to your summary, but I suspect thats what you are looking for.
On the other side of the coin, I have a really quick and dirty set of metrics that i put a company through before I do any sort of deeper research, I end up with a FCF that I then use to feed into a ROIC or (CROIC as some call it). On that basis it sneaks in with an assumed ROIC for the full year in the range of 6%. From there I need to convince myself its going to improve over time from that lowpoint, and that there are reasons to have a level of conviction about earnings growth. I reckon I could work up a case for investment at current prices based on those very rubbery numbers, but so far I actually think there are more productive homes for the capital by adding to positions I already hold.
I have found that is one of the hardest biases to overcome, the thrill of becoming a part owner of a new business as opposed to the boring thing of just adding to an existing part ownership!
Another way I try to think about investments is probabilistically, and XRF looks ok from that perspective, I dont see much downside from here, the market has very low expectations as it is, so its likely that even flat sales and earnings would see the price stay much the same. If they can put a couple of halves of solid growth in revenue and have that flow right through to the cash flow then its certainly not hard to see maybe 50-100% upside over a couple of years.
Thanks again for entertaining my amateur thoughts on XRF and investing in general, I feel I have so much to learn and its a bit awe inspiring sometimes being in discussions with seasoned professionals like yourself - but its great to get a chance to articulate my thoughts to a critical audience!
My very quick and dirty valuation predicts a range around 20c for the full financial year based on a guesstimate of FCF at about 1.5c. I also calculate a ROIC for the full year of about 5.5% (using FCF)
I dont feel they are cheap enough at 16c to justify buying now, but if the full year figures come in around my expectation I may reconsider.
Worked up a full analysis and research on XRF, and still cant see much more upside than 20c - if they execute to expectations, also some downside if they dont meet guidance. Well worth keeping on the watchlist, if they can finish the year strongly may be worth looking at taking a position.
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HSN is another company I have looked at in the past, thought they were over valued in 2015 at around $1.80 and bought DWS instead, looked at them again this week, very rough range of value around $2.60 currently $2.90.
The biggest issue is that they dont seem to be creating any organic growth, so totally reliant on roll ups to create growth. CROIC is quite high at 15% but you would expect that with a capital light software business.
A pass for me.
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GLB & HIT are 2 i had on watch list.
ended up buying both and doing well
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As at March 2019, 14 businesses I analysed and researched to the point of considering taking a position, and chose not to. Of them 3 would have made me money, 1 of which was taken over, only 2 would have made meaningful returns. 10 would have made a loss. 1 break even.
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SKT Sky NZ, $1.16. I think it is worth nearer $2.50 on current earnings and cash flow at a quick glance, but a fair bit of debt and consistently falling earnings put me off. A definite potential contrarian turn around play.
CROIC is not bad either, above 10%.
What would earnings have to drop to for $1 something to be fair value? My guess is under 10c EPS, thats a significant amount less than current earnings, in fact its half the guidance for 2019.
Its hard to see a near future where SKT isnt a viable business in NZ, they have 40% penatration and while the Netflixs of the world will eat away at their margins and revenue with a high quality and real NBN, as long as they have the rights for sports they will survive. So what are the odds of sport going to streaming? Well I dont think its happened on a national scale anywhere in the world so far, but it could happen.
The Rugby world cup should give them a bump in revenue for first half 2020, NZ is such a rugby mad country and the World cup is in Japan in October.
The market hated the impairment writedown last year, and I would imagine there are more of them to come, so that is a potential negative,
On the upside a price of $2.50 is not a stretch if they meet guidance, so probalistically, maybe a 10% chance of sport moving totally to streaming seeing a collapse of the business , 10% * 0 =0 plus a 20% chance they meet guidance & impair again, 20% * $1 = 20c plus a 60% chance they meet guidance, no impairment and market rerates - 60% * $2 = $1.20 and 10% chance they exceed and market rewards 10% * $2.50 = 25c for a total expectancy of $1.65
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Trouble is this sort of calculation is so wooly, I could easily modify, 10% * 0, 50% * $1.20 (no change) , 20% * $2, 10% * $2.50 for a total of $1.25 - about where it is now.
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EOS
Makes military hardware and also positioned for space expansion. Biggest negative was discovvering Fred Bart was Chairman, I saw his work at Audio Pixels and thats enough to put me off! Also huge gap between reported NPAT & FCF, book a profit, no sign of cash flow.
3/5/19 $3.30
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EAS an accounting services business that I had my attention drawn to by Matt Brazier, https://www.mattbrazierinvestmentdiary.com/2019/05/easton-investments-limited-asxeas.html#more and his linking to DX Capital report, https://www.dmxam.com.au/10_04_2019_easton_investments_limited_asx_eas_.html
Its currently trading at about 97c and in a quick look I couldn't see that it was at any discount to value even allowing for some pretty good growth, I can see them making about 6c EPS this full year, which would give them a value round 80c, even if they manage to double the EPS to 12c in the next couple of years I only see a value of around $1-60 so I couldn't get much enthusiasm for the business.
I also could only see single digit ROIC, which is a bit low for my liking.
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PNV, the spinoff from CSIRO with the burns and wound mesh platform, great product, just about breakeven, but with 600m shares on issue I reckon it would need NPAT of over $50m to be anywhere near fair value at the $1 something price it is now. Thats a big ask.
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VOR, KPG PPK & SIT all go on the list, PPK & SIT because i hold indirectly thru EPG fund and I dont want to be too corelated, VOR I just couldnt find conviction to buy & KPG has too much debt.
PPK $4.50 VOR 0.012c KPG $1.03 & SIT 0.069 oct 30 19
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VHT, following a write up from Owen on Rask Invest, https://invest.rask.com.au/2020/07/22/buy-volpara-health-technologies-asxvht/ i decided to have a look.
For me the article is filled with narrative, but no realistic outline of how the business would ever get to justifying its current price, let alone any higher. I just through in a reverse engineering on the DCF, assuming its scales up, becomes a mature business with steady slow growth potential after it reaches that sort of scale. That would require the business to generate FCF of around 8c per share, or getting close to $20m FCF, on a business that has revenue around $12m now, thats a huge ask, even if it managed to multiply that revenue by say 1000% to $120m, it would be a great business that had sufficient FCF margin to generate $20m FCF. As an example CSL generates 8x or 12% FCF yield.
It just seems to me to be a massive speculative bet in a sector that most bets fail.
I will watch from the sidelines, its $1.46 in July 2020
25/10/22 60c!
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SSG Shaver Group, had a good look at this one and thought about it at 75c. Just couldnt get enough conviction to open a posistion august 2020
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MYE, Mastermyne Group Limited, a mining services business, metrics looked really good, cheap, good ROE, ROIIC, FCF, EV/EBIDTA, low debt, revenue growth, dividend yield - everything i looked at was great! BUT, the killer is, its clients are nearly all in coal. When I ask myself, "what will this business look like in 10 years?" I cant help but think, maybe it doesnt even exist. 78c 16/2/21
Released their H1 results while i was writing this, big drop in revenue, profit & divvy. Market dumped it hard, down 12% to under 70c. If they get punished some more there is a point where its just too cheap to ignore, business will recover and its getting close to its NTA of 55c. Its priced like it made a loss rather than a drop in porfit.
This paper outlines a range of possible cases for met coal in the next 20 years,
https://s3.treasury.qld.gov.au/files/A-Study-of-Long-Term-Global-Coal-Demand.pdf
BHP's slide from their H1 2021 presso shows how badly coal is going for them as a producer,
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Passed again at 61c
25/10/22 now at 25c!
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AMO - this was one i discussed with Claude on twitter via DM, this was the conversation, (read from bottom up)
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This is one Claude nailed, FY 2021 results,
Divvy up to 3.1c - about 11% on current price!
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Just had a squiz at CLX, it seems to have had a very good couple of years, largely due to Covid, has worked the debt down a fair bit, has an undervalued property PF, reasonable cash flow, (after adjusting for rent shown as lease repayments thanks to AASB-16 madness.)
Founder has 25% of shares and all directors have decent skin in the game, small float on a tight registry - just like I like!
Question is what happens after Covid, does it just revert to historical numbers or has there been structural change in the business?
Probably a month late to this one, at current price its basically round my range of calculated value - $1.30. 21/08/2022
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Claude asked if I had looked at DUR. I hadnt.
My rolling commentary on twitter with Claude.
I have never looked at it! First glance, too new for me, too much debt. Interesting that 3 families hold exactly 11.04% each, assume they were the founding partners from 2010. Only 2 seem to be directors still. I like the business, its very unattractive boring work!!
Might go back and read the prospectus and earlier ARs from pre IPO to get more of a feel for why it went public and a bit of history.
Ok so 3 founders still involved, all with 11.04%, the IPO basically got them a $5.5m payday each! Nice work if you can get it.
The margins have been very compressed when you compare their FY 18, 19 & 20 numbers to the ones since listing. How much of that is Covid/supply/inflation/labour market and how much is structural?? Too hard basket.
42c 22/08/22
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Chris had previously talked to me about ATP, Atlas Pearls and I had dismissed them as unprofitable with significant debt. He mentioned they had now turned a profit and also just paid out the rest of the debt. So I thought I would run the ruler over it again, no question its cheap by any metric, a P/E of about 4x, a range of value based on FCF of 10c compared to a current price of 4c.
The problem for me is the risks inherent in a agri(aqua)culture/commodity play, they spend pages in the annual report detailing the complexity of the risks and their potential impacts on bottom line - oyster value/life/disease risk, FX risx, size of pearls, production rates, price of pearl, margins, etc. . Also a question mark over capital allocation now debt gone, divvies? buybacks? consolidation? Also all of the operations are based in Indonesia so there is also sovereign risk to consider.
I think its a potential position for someone with a higher appetite for risk than me, there is quite a lot of upside if they continue to execute and it re-rates to reflect the turnaround in the business. I just found the downside risks too hard to quantify and qualify, so I assume its somewhat symmetric. Probabilistically i think maybe 30% chance it stays around the current price in the medium term, 30% some of that risk comes home to roost and earnings revert such that price drops back to the 1c range, and a 40% chance it continues to grow, no problems with the oysters and pearls, and it rerates to round 10c - so price expectancy of 1.2c+0.3c +4c = 5.5c which is not enough upside for me.
Lets see where it is in 3 years!
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Ran my ruler over a few things today, I am laid up with Covid and have plenty of time to research! $COG is one I have looked at a couple of times, but the FCF has really taken a hammering and I just think I already own better businesses than this so better adding to existing positions. This is often the case as an investor, its taken me a while to learn the lesson, always compare a new opportunity to what I already hold, its much less exciting, but often the best course of action is just to apply neew capital to the best existing investment!
I also had a look at $ASH, but while I quite like it, its too expensive relative to my range of IV.
Looked at one I used to hold and got out of, $ADA, couldn't find enough conviction to consider it seriously again, it had a bad 2022 and should be a lot cheaper IMO, if it were round 50c I would consider it more seriously.
$MFB.NZ has some interesting metrics, but too new for my liking, also an obvious Covid beneficiary.
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Spent more time looking at $MFB today, went back thru all the Annual Reports back to 2017, the metrics for this business are outstanding, just hard to reconcile with a packaged food retailer operating in a tiny market (NZ).
Here is a grab from Uncle Stocks -
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The trouble is their most recent half yearly report, not only were sales, earnings and cash flow crushed as NZ came out of Covid, but there was an act of almost criminal capital management/allocation IMO, in that they continued to pay a dividend - despite having to take out an overdraft to cover it!
So the big question is what happened to all the cash from the IPO 2 years ago? The short answer is it all went on equity repurchase, debt reductions & IPO costs. The main purpose of the IPO actually seems to have been to provide majority holder, Waterman Fund an exit for its 66% holding at a very high premium!
At this point, despite the strength of the metrics from the previous years, the appalling capital allocation by management in funding the dividend with debt is a game stopper for me.
A friend on twitter sent me this -
https://fundamentalgoob.com/2021/10/19/nzxmfb-my-food-bag-bright-future-or-a-sinking-ship/
Confirmation.
24/1/23 35c
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Had a look at UNI, a mate Morepork Capital drew my attention to it,
Ok, I have looked back at the reports and updates available since IPO, latest trading update is irrelevant because it only talks about sales, no idea if they have been able to turn the slide in FCF around.
It looks like a decent business, that had a big boost thru covid like so many retailers, but FCF is now only 20c per share and when I reverse engineer the current price its implying an expectation of either a pretty high growth rate for a clothes shop, or a large step change in FCF (hard to do without that significant growth rate!
Some other good metrics, the operating cushion of 30% means they are producing 30c of OCF for each incremental $1 of sales.
I usually look at ROIIC, reinvestment rates and value compounding rate of business, but I look at it across 5 years of data that I pull into my spreadsheet, so I dont have any of that for $UNI.
I reckon its the sort of business I would be happy to hold if I owned it, but I wouldn't be paying $5.80 for it now!
Spoke to my 19yo son about it, he knew exactly what store I was talking about and said he and his mates are customers of the Darwin store when they want better clothes for going out. Mind you he is a bushie tradie with all his fashion sense inherited from his father so I am not investing on his glowing review! UNI would also have practically zero competition in that market in Darwin!!
He sent me a thesis he had written on UNI a while ago and I read that and replied,
Yep, that worked. Interesting, I should have mentioned I own $HLG, given their limited presence in Aus, and different demographic market I didn't compare them in looking at $UNI.
My valuation process is probably even more conservative than yours, and more focussed on FCF. I also try to think probabilistically about a range of outcomes and the impact on share price (as you did in talking about a 35% chance of a price over $6.75) and then end up with an expected value - which I can consider against my calculated range of value.
Given that I already own $GLB & $HLG, it would have to be very cheap or very compelling for me to consider - and it doesnt quite fall in either of those categories!
I would be comfortable if I held at the price you bought, as you say its a solid business, has been around a long time (always a plus in retail), and apparently is a better run business than most of its direct competitors.
Thanks again for sharing with me, always interesting to read the thoughts of more experienced and sophisticated investors. Cheers, RIck
ps. My son also commented about the look of the stores, lots of glass & light, he made the comment that it looks classy, like an Apple store. Looking at storefronts on an images search in my browser its immediately obvious what he meant.
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Had another look at VMT, signs that it might be becoming a decent business,
I think $VMT might be one I got wrong. Its actually showing signs of being quite a good business now. Should probably have a deeper dive.
$VMT has Interesting management, a bit underpromotional to be honest. Have just continued to perform under the radar. Huge derating in the multiple over the past year thats been offset by pretty mental earnings growth. Capital allocation is the big question.
Have been eyeing that one for a while as a value investor, just looks so unloved by the market for whatever reason despite continually solid fundamentals... such a flat chart & unfortunately sentiment/publicity matters so much in the market 😑
My investing strategy means I am agnostic to market love or otherwise, I am just looking for good businesses I can buy at a price that I believe is a discount to range of IV. Also never look at charts.
The aggressive growth in share count is a concern.
Dont like the large SBP which makes the FCF even less than it appears. Have to see whats going on with those loans to the related entities too.
Sadly, I agree. Got spooked by their India/Bird issues and the cost of their Italian JV partners. But underneath all that marketing hype, their could be a real business!
Growth runway way they have is enormous. Seems to be well managed, strong cashflow.
I am cautious to see how if they can get the money out of China and return it to shareholders though.
Low IR effort as no capital needs, which is a good thing. Hold v. small position
"Growth runway they have is enormous" is a 🚩for me!! FCF is pretty anaemic once you back out SBC.
Agreed the Cheena risk is something that would concern me.
I will keep having a scratch around, but its probably not for me.
Agreed, I sold out when huge compensation packages paid out to incoming Italian Stallions. Just noticed >4M performance shares given to management recently. Bottom line FCF and profit growth getting heavily diluted on a per share basis
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Chris had previously talked to me about ATP, Atlas Pearls and I had dismissed them as unprofitable with significant debt. He mentioned they had now turned a profit and also just paid out the rest of the debt. So I thought I would run the ruler over it again, no question its cheap by any metric, a P/E of about 4x, a range of value based on FCF of 10c compared to a current price of 4c.
The problem for me is the risks inherent in a agri(aqua)culture/commodity play, they spend pages in the annual report detailing the complexity of the risks and their potential impacts on bottom line - oyster value/life/disease risk, FX risx, size of pearls, production rates, price of pearl, margins, etc. . Also a question mark over capital allocation now debt gone, divvies? buybacks? consolidation? Also all of the operations are based in Indonesia so there is also sovereign risk to consider.
I think its a potential position for someone with a higher appetite for risk than me, there is quite a lot of upside if they continue to execute and it re-rates to reflect the turnaround in the business. I just found the downside risks too hard to quantify and qualify, so I assume its somewhat symmetric. Probabilistically i think maybe 30% chance it stays around the current price in the medium term, 30% some of that risk comes home to roost and earnings revert such that price drops back to the 1c range, and a 40% chance it continues to grow, no problems with the oysters and pearls, and it rerates to round 10c - so price expectancy of 1.2c+0.3c +4c = 5.5c which is not enough upside for me.
Lets see where it is in 3 years!
Well its only a bit over 12 month later, but I think I may have been quite wrong about this one! Its now 13c, paid a special divvy, and has done last years revenue in 5 months this year. Now looking thru the last 5 years at the ROIIC its looking quite compelling,
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Even after adjusting FCF for SBC & Depreciation on right of use assets, I still get a range of value around 20c
Two things are clear, it has had a very good 12-24 months as a result of Covid driven cost cutting - but even they acknowledge that is unsustainable and is part of the reason for a one off special dividend rather than a regular dividend policy, cost will revert to mean and impact profitability.
Secondly there is an ongoing issue with a drop in pearl quality, they claim to have stabilised this and think they are seeing a gradual recovery - but this is typical risk in a live animal based commodity business.
So I am somewhat conflicted, the business has matured, metrics that I look at are all very good, ROIIC, FCF yield, Reinvestment rate, gross and operating margins, operating cushion and its certainly not expensive. But the risks remain, commodity, live animals, market, sovereign, environmental, currency, economic, ... the list is long!
So thinking about it probabilistically, along the lines of how I saw it 12 months ago, i think maybe 30% chance it stays around the current price in the medium term, 30% some of that risk comes home to roost and earnings revert such that price drops back to the 4c range, and a 40% chance it continues to grow, no problems with the oysters and pearls, and it rerates to round 20c - so price expectancy of 4c+1.2c +8c = 13.2c which is near enough the current price..
The question is whether those probabilities should be reconsidered based on how well the business has operated in the last 12 months.