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Thoughts and Ideas / valuation
« Last post by galumay on February 17, 2020, 09:19:59 PM »
When we buy a stock, we always think in terms of buying the whole enterprise because it enables us to think as businessmen rather than stock speculators. So let's just take a company that has marvelous prospects, that paying you nothing now where you buy it at a valuation of$500 billion...For example, let's assume that there's only going to be a one- year delay before the business starts paying out to you and you want to get a 10% return. Ifyou paid $500 billion, then $55 billion in cash is the amount that it's going to have to be able to disgorge to you year after year after year. To do that, it has to make perhaps $80 billion, or close to it, pretax. Look around at the universe of businesses in this world and see how many are earning $80 billion pretax - or $70 billion or $60 or $50 or $40 or even $30 billion. You won't find any.
Whether a business sells nails or telecom equipment, if more money is going out than coming in, on a present value basis, it is worthless. As Warren Buffett says, "Value is destroyed, not created, by any business that loses money over its lifetime, no matter how high its interim valuation may get."
He continues:
There's plenty of magic in short term in rising PIE multiples and the games people play with accounting and so on. But in the end, you can't get more out ofa business berween now and its extinction than the business makes. And actually you'll make something less depending on who your business managers are, how often there's turnover in the security and how much you pay the investment manager and so on.
Shares / PTB
« Last post by galumay on February 07, 2020, 10:13:02 AM »
I took a small position in PTB this week at 88c. It is a business that operates in 4 segments,

Pacific Turbines Brisbane & US - both provides repair, maintenance and overall services for specific turboprop aircraft engines. They also sells engines and parts.

Pacific Turbine Leasing - leases aircraft and engines.

International Air Parts - focused on selling engines parts but also airframes.

The turbo prop engines they sell and service account for about 90% of turbo props in use.

I was initially put off by the level of debt in the business, but a small fund manager with deeper knowledge told me that PBT were selling land worth significantly more than the debt, paying down the debt and then leasing back at less than existing interest costs.

PBT also announced a significant CR and subsequent acquisition last week, Prime Turbines, a US business.

"Prime Turbines is well known to PTB and more than doubles the current workshop capacity before productivity gains

Is expected to provide positive impact to PTB’s earnings with expected EPS accretion of [8.0%] on a full year basis pre-synergies, increasing to 23.7% on a full year basis including additional margin capture from redirecting outsourced MRO services to Prime Turbines"

By my calculations the underlying business, prior to acquisition was around $1, if they can achieve the predicted EPS accretion of 8% even, then the value should be significantly higher.

The downside risk is that the acquisition is a failure, and results in significant impairment to the business, on a much larger register, they dont sell the land and the debt remains. This seems low risk given the experience of operating in this niche, the high level of founder operation and ownership and their history of sensible capital allocation. None the less, the risk is real and for this reason my initial position is fairly small. Because a lot of shares were issued to existing holders at 69c there is a chance of opportunity to accumulate if they sell off, this may creat ongoing softness in the share price in the medium term.

I will sell if execution of the acquisition is not apparent in the next 12 months, and accumulate if it is.

I had looked at this business a few times and the debt as well as the sense that there was limited growth and a pretty capital intensive business put me off. It was only the stregth of conviction by a fellow investor and the large amount of supporting material and research he sent me, as well as the inside knowledge on the takeover and debt that made me change my mind and take a position.

Shares / EGN
« Last post by galumay on January 13, 2020, 06:57:51 PM »
Looking at taking a position in EGN, Engenco, Engenco Limited, together with its subsidiaries, It operates through Drivetrain, Centre for Excellence in Rail Training (CERT), Convair Engineering (Convair), Total Momentum, and Gemco Rail segments. The Drivetrain segment offers engine and powertrain maintenance, repair, and overhaul; power generation design and construction; and technical support, professional engineering, and training services, as well as fluid connectors, new components, and parts. The CERT segment provides rail training, rail incident investigation training, security (transit guard) training, first aid training, and company induction and course design services; issues certificates of competency; and manages apprenticeship and trainee schemes for various infrastructure and rail clients. The Convair segment manufactures pneumatic road tankers and mobile silos for the carriage and storage of construction materials, grains, and other dry bulk materials; and offers maintenance, repair, and overhaul services, as well as sells ancillary equipment and spare parts. The Total Momentum segment provides personnel and project management services, such as professional recruitment; and training and workforce solutions comprising track construction and maintenance projects to freight rail and mining rail infrastructure managers. The Gemco Rail segment engages in the remanufacture and repair of locomotives, wagons, bearings, and other rail products for rail operators and maintainers. This segment offers wheel-set, bogie, and in-field wagon maintenance services; and manufactures new and refurbished wagons, bogie component parts, customized remote controlled ballast car discharge gates, and rail maintenance equipment and spares. The company serves defense, resources, marine, power generation, rail, heavy industrial, and infrastructure sectors in Australasia, Europe, and the United States. Engenco Limited was founded in 1989 and is headquartered in Melbourne, Australia.

I think this is a turn around opportunity the market has missed so far, the business was severely negatively impacted by very poor management in the last few years but has largely been turned around by the current team and looks to have a solid future. It is currently undervalued by my quick and dirty FCF DCF and looks to be moving to a business that can get a high return on incremantally invested capital - although its hard to be sure because the turn around is only in the last 2 years so there is not a sufficient history to make an informed decision.

Dale Elphinstone has brought a discipline and improved capital allocation discipline to the board and his background with Catapillar has been important in the turn around of the business. He has also been an active acquirer of EGN shares and holds over 200,000,000 shares!

91% of the shares are held byt he top 20 and the Elphinstone interests hold 65%!

The business has no debt and significant cash on hand.

Risk to the business is not obvious, possibly the biggest risk would be a poor capital allocation but given Elphinstone's huge stake, this would seem a little unlikely. But I guess one should never under estimate management's capacity to do harm!!

Competitive pressure is possible from Downer EDI as the big player in the field.

This is from Pioupiou - "Egenco is the renamed Coote Industries Limited (CXG). The CXG-Greentrains contract caused CTX much woe, and brought Elph Pty Limited in as the controlling shareholder. I am, in part, relying on memory, but I think the gist of the history is as follows.

In FY2008, a Coote family-owned Orange Grove Brickworks (Michael Coote was a director of its controlling entity) was involved in a deal to purchase refurbished rolling stock from the Gemco unit of CTX for $82.7m, and lease the rollingstock back to CTX. Greentrains Pty Ltd, with no funds to speak of, was registered on 26 June 2008 to purchase the rollingstock. CTX recognised the sale and the profit in FY2008, and recorded the debt as a current asset. The Annual Report looked good, and the SP rose well above $1.

In FY2009 it emerged that Greentrains could not pay the debt. The net effect was that CTX took ownership of Greentrains (81% to be exact), and Elph Pty Limited injected $8m into CTX sometime prior to 26 April 2009. Elph later provided Greentrains with a loan facility, and by acquiring more shares it gained effective control of CTX. Greentrains was discontinued in FY2016 The agreement to sell the majority of Greentrains's locomotive fleet to Holdco Holdings Pty Ltd was signed on 28 April 2016.

If you can find ASX announcements made in FY2008 and later, you can read how matters unfolded.
At you will find less sanitised comment. The gist of what is in is correct, except for the sentence, “It was formed in June 2008 as a subsidiary of Coote Industrial”. Greentrains was not a subsidiary initially – it became an 81% subsidiary later as part of a debt-offset deal. I suspect that the original contrivance of the 2008 deal was based on a funding expectation that did not materialise."

bgt 16666 @ 60c 14/1/20

Shares / CXZ
« Last post by galumay on January 13, 2020, 06:47:52 PM »
Looking at taking a position in CXZ, CXZ Telematics.

Connexion Telematics Ltd develops information technology solutions for automotive industries in Australia, the United States, Canada, and Mexico. Its principal products include CXZ Telematics, a cloud based integrated vehicle management system that gives control of a fleet of cars, trucks, and other vehicles from a central control point; and miRoamer, a multi-platform app, which provides an Internet radio and music infotainment service through approximately 35,000 stations to consumers worldwide. The company also provides Commercial Link, a vehicle management system that helps to manage vehicles; and WEX Motorpass, a real-time fraud protection tool that offers security. The company was formerly known as Connexion Media Limited. Connexion Telematics Ltd is headquartered in Melbourne, Australia.

The company specialises in vehicle telematics, which is essentially the the integrated use of telecommunications and informatics for application in vehicles and to control vehicles on the move involving GPS system technology integrated with computers and mobile communications technology in automotive navigation systems. Typically its an integrated approach with installed hardware in the vehicles, software to monitor and report vehicle information like fuel use, speed, maintenance shedules, roll angles, braking force etc and remote monitoring with cloud storage.

CXZ has developed a specialty integrated solution for car companies so that dealers can monitor lend and hire cars to potential and actual customers, they have a significant contract with GM in the US for their dealer network.

The business is free cash flow positive and if they are able to grow customer base the increased revenue should see the revenue drop pretty well straight thru to free cash flow. Any growth should see significant value creation for the business.

The risks are lack of growth in a competitive market with low barriers to entry, like all SaaS businesses, CXZ claims high barriers to entry - and as with most of these businesses I am unconvinced that this is true. I think there is a significant risk that CXZ will be unable to grow the subscriber base in a meaningful way.

There is also the risk that at the end of the current 3 year deal with GM, it will not be renewed and given the significant part of the business this contract provides, it would have a highly detrimental effect on valuation. Its probably unlikely, but its possible.

My view is that at the current price of 2c its not expensive and worth a small position to see if management can execute, the upside is large if they can and given the business is debt free, cash positive and profitable, its unlikely to completely fail.

Competitors - cTrack, Mix Telematics, eRoad

Mix is international, African based, profitable. eRoad, NZ based not profitable, cTrack owned by Inseego, US tech business, loss making.

bgt 238095 at 0.021c 14/1/20

Shares / CG1
« Last post by galumay on January 07, 2020, 08:12:22 AM »
Looked at this a couple of times, in the end its not been profitable in the sense of cash flow positive and I would want to see a couple of 4C's showing positive cash flow before entering. The primary issue at the moment is debt is more than equity, until they address that its not for me.
Thoughts and Ideas / On learning and testing...
« Last post by galumay on December 11, 2019, 08:06:02 PM »
General Discussion / Re: Things People Say...
« Last post by galumay on December 11, 2019, 07:05:56 AM »
"Value investing to me is a philosophy where you treat a stock as a business, not as a symbol. You have a long-term time horizon. Mr Market is there to serve you, not the other way around. You treat risk as a permanent loss of capital, not as volatility."

Shares / Re: Companies I didnt buy
« Last post by galumay on October 30, 2019, 12:34:38 PM »
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
Shares / VOR
« Last post by galumay on October 29, 2019, 03:05:16 PM »
VOR - I have started looking at this little cloud and cybersecurity business, it has 3 main business units, cybersecurity through their Decipher Works product which is a vertical system, CLoud Ten which is a cloud service provider using Amazon's AWS product, they are an accredited partner and appear to have a strong client book in enterprise and government. Finally they have a 25% interest in an Indian ATM servicing business that they are trying to divest themselves of. It has a current audited value of around $9m

The positives are that its operating cash flow positive, and once the final tranche of payment for Cloud Ten is made, should be free cash flow positive, its extremely capital light because it doesnt own data centres because it uses AWS. Earnings are negative but this is a function of the writedown in value of the share in the ATM business, accounting rules mean that the negatively adjusted value of this asset, which is down by $5m, has to be applied to the profit and loss. In fact they made a small operational profit once the $5m is backed out.

Given that there is not much backwards looking to work from, I have inverted and considered what sort of FCF or EPS the business would need to earn to be fair value at its current price, I am calculating it would need approx 0.08c per share earnings to give a valuation in the range of its current price of 1.4c
($0.014) which would equate to $1.9m earnings.

Given current revenue growth this is not a stretch at all, in fact the operating cash flow is already at that level in 6 months, and if you back out the aquisition costs (which finish next quarter), its already reached the required earnings in FCF in 6 months.

I think its clear that with any sort of trajectory of revenue growth without increased aquisition costs, the business will prove to be cheap on current metrics, the big question is what are the threats to that trajectory of revenue growth and what is the probability?

The obvious threat to the business is another provider of similar services cutting their lunch - presumably with margin squeeze.The question is whether the current relationship with AWS provides any sort of competitive advantage.

Datacom, private, AC3 privael, ARQ.ASX, Versent, private Idea11, private Cloud Conformity, private.

This is a short list of the many AWS Advanced Consulting Partners, its the Australian ones, mostly private, ARQ being the only other listed one I could find. This is a crowded market place, and its unclear why or how VOR is growing revenue so quickly.

Another issue is the millions of options on issue, this will have a dllutive effect on what is already a high share count.

In the end I couldnt build enough conviction about the business to invest.
Shares / OMN
« Last post by galumay on October 29, 2019, 08:20:38 AM »
I took a position in OMN as a pure arbitrage play, @auscontrarian again drew my attention to this one with a very well researched article,

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