Recent Posts

31

Shares / Re: NWH

« Last post by galumay on February 15, 2024, 08:09:39 AM »

A solid HY for $NWH, the report as usual, clear and concise. I like that they credit external factors for most of the positives rather than claiming management expertise! Divvies backed to franked & nearly equal to my cost basis!

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32

Shares / Re: CXZ

« Last post by galumay on February 09, 2024, 08:48:38 AM »

H1 2024 was a good one for CXZ, its taken a while but starting to show some returns for patient investors!

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Earnings about half that after adjusting for Government grants, but even so the Cash Flow Statement really shows the simple power of this business in its present state,

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No PP&E expences, no finance expences, no debt, no leases.

But worth noting the $1.3m OCF, is really $1.0m after deducting Government grants, then deduct $180k for SBC, so $800k then deduct some component of the R&D expences which are certainly Capex, given that its $1.3m this year its a not insignificant amount even if you consider it having a life of 5 years and then work out the NPV of this years share of that. So for 'back of the envelope" lets call it another $300k and we end up with $500k of FCF. Still not too shabby!

The only thing I am not a big fan of is the CXZ specific Bullshit Earnings Bingo, "DMEPS", "NPBT" and "RGS".
Plus Aaryn mentioned "Flywheel effect" which is an automatic 🚩

33

General Discussion / Re: Decision Journal

« Last post by galumay on February 07, 2024, 07:58:54 AM »

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%.

34

Shares / Re: JAN

« Last post by galumay on February 06, 2024, 07:48:56 PM »

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.

35

Shares / EZZ

« Last post by galumay on February 04, 2024, 02:05:43 PM »

Discovered this little company while doing some screens along the lines of Greenblatt's secret formula. EZZ Life Science Holdings Limited provides skin care and consumer health products in Australia, New Zealand, Mainland China, and internationally. The company operates in two segments, Brought in Lines and Company Owned products. It is involved in the wholesale distribution of EAORON branded skin care products to pharmacies, supermarkets, and specialist retailers, as well as grocery retailers. The company also designs, develops, produces, distributes, and sells consumer health products, including vitamins and dietary supplements, sports nutrition, weight management and wellbeing, herbal/traditional, and paediatric products under the EZZ brand through its e-commerce platforms and stores, such as Tmall Global. EZZ Life Science Holdings Limited was incorporated in 2015 and is based in Silverwater, Australia.

Basically they were totally dependent on revenue from the distibution of EAORON products a few years ago, they have transformed that to where their own EZZ product line is over 80% of revenues now - on much higher margins obviously. They are growing revenue fast, and are profitable, paying a dividend in the last couple of years.

I think because there are only a few years data available the metrics are distorted in the companies favour, but here is what caught my eye.

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One of the things that I noticed reading back thru 4Cs & reports is that the marketing spend is very high, the last 4C shows just how much,

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Although OCF was -$749k, the revenue was $13575k and sales and marketing a massive $9040k - yes, $9m!! you can imagine how much cash it would be throwing off if they significantly reduced spend on S & M. The question is, how dependent are sale on S & M?
Also product manufacturing and operating costs were up more than 2x, company noted both were up due to the new product lines being released. Notably there was almost no impact yet on sales from the new product lines but sales still rose 100% from Q1!

Looking at FY 22 & FY 23, basically in 12 months they7x'd S&M spend for 2.5x in Sales and 2.75x in NPAT. I think that link between sales growth and earnings growth is important, I suspect it doesnt matter much what you spend on S&M if you can increase Revs and NPAT at similar rates. At some point you should be able to cut S&M and still see plenty of cash generation. Although as my mate Claude pointed out when I discussed with him, online sales tend ot have high fixed advertising costs, you cant reduce spending or sales fall. So I think I am looking at it wrong, the very strong Sales growth is driving the S&M expense growing so much rather then the other way round.

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FCF for 2023 by my calculations after adding back SBC, Lease payments and PP&E, was $3575267 - nearly exactly the same as NPAT, so FCF of 8.5c per share. Given its trading at 60c thats a 14% FCF yield!

Because it hasnt been listed very long I cant do my usual 5 year ROIIC calcs, I adjusted back to 4 years. Looks very impressive on all my metrics.

The issue for me is the negative OCF last quarter, that would normally be enough to stop me considering a position, but the other metrics are very strong so I am encouraged to explore the reasons for the negative OCF. Clearly its caused by the growth in manufacturing costs and Advertising and marketing. The manufacturing costs alone would have had very little impact given the big jump in revenue, but they are also likely to be sticky and in fact continue increasing as revenues increase (if they do.)

The advertising and marketing costs are the key to deciding the future of the business, if they are transitory to some extent then OCF will increase by the amount these can be reduced. Last year OCF was about 10% of sales, if it returns to a similar amount this year, it would only require a fairly small reduction in A&M expenses - under $1 out of a spend of $9m last Q.

This seems a reasonable probability and would make the business cheap on most metrics. So the positive thesis is cash flows revert to the historical pattern, business trades on a PEG or under 0.5, EV/Sales of 0.2, operating cushion of 18% and a DCF valuation range about 2x its price.

The negative thesis is the business continues to run Manufacturing costs and A&M spend ahead of revenue growth and so OCF remains negative.

The upside is high, given the strength of all the other metrics, if they turn OCF round it will be deserving of a much high price and will also be able to continue to pay dividends. The downside is quite possible, the only mitigation is that it looks to have quite a lot of that downside priced in. If the OCF doesnt revert then they can still cut the spend and maintain previous margins on smaller revenues in all likelihood.

On the basis of all the above, I plan to take a small position in EZZ in the personal pf, the thesis is then for a reversion to +'ve OCF over the next half and if this is unsuccessful then exit the position.

Bought 9615 shares in EZZ at 52c. 16/2/24

36

General Discussion / Re: Decision Journal

« Last post by galumay on February 01, 2024, 10:00:42 AM »

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.

37

Shares / PRO

« Last post by galumay on February 01, 2024, 08:29:07 AM »

Prophesy International Holdings is a business that a friend on Twitter posted about, very much an unknown microcap that has flown under the radar. I do try to avoid buying other people's conviction because it rarely works out, but without reading his substack I decided to have a look at it.

So PRO has been around for a fair while - since 1980, it engages in the design, development, and marketing of computer software applications and services in Australia, the United States, Europe, and Asia. It offers Snare, a security analytics platform that converges logs from network, identity, endpoint, application, and other security relevant sources to generate behavioral alerts and facilitate rapid incident analysis, investigation, and response; and eMite, a reporting and analytics solution focused on driving operations and customer engagement from the contact/call centre and customer experience market segments, which provides chat, chat bots, CRM, service ticketing, work force management, transcription, sentiment analysis, survey, IVR, email, contact centre software, and other services. The company serves banking and finance, public sector, defence and military, healthcare, utilities, manufacturing, and retail industries.

Basically 2 main software channels, one that is a cybercrime analytical solution and the other a customer engagement analysis solution. It is moving to a subscription based model and shows signs of good growth and increasing profitability (from loss making). Client base is international and impressive, Australian Tax Office, Macy's, Cochlear, Stellantis,  Service NSW, NZ Inland Revenue, Verizon, Charles Schwab, Occidental Petroleum, UK Royal Air Force, the Australian Department of Defense, Northrop Grumman, BAE Systems, PSEG Long Island and Westinghouse.

The business is debt free, $10m cash on hand, $41m market cap, revenue growth is high teens, its not profitable and OCF -'ve at this stage. Directors and management have decent skin in the game, reports are concise and no glossy pics!

The H1 results will be very interesting, potentially it is on the cusp of turning profitable and I would be interested in taking a position if this were to occur.

Current price implies a FCF of around 3c per share, or a bit over $2m. The question is how quickly could it get there? (based on 5% growth which is very conservative given its recent history. If I adjust for a much more optimistic growth rate, say 8%, then implied FCF is down to 1c or $700k which is probably achievable in 2024.

added - Walnut Capitals substack - HERE

LOL! Just finished writing this up and then added PRO to my Commsec Watchlist, of course they just dropped a trading update and its up 9%!

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Also discovered the CEO, Brad Thomas is a piece of work! Now his personal philosophy and politics may have nothing to do with his ability to run a business, but it is a serious red flag for me. He is a Trump supporter, retweets and endorses racists, extremist Zionists, Jingoistic bogans, was a Covid cooker against Health controls. Usually regressive extremists like this are very selfish and individualistic, which is probably not a trait you want at the top of a corporate structure.

Ended up buying at 0.598c on 19/2/24

38

Shares / Re: AER

« Last post by galumay on January 31, 2024, 05:21:57 PM »

4C for Q2 2024, very poor result, further proof of the failure to scale of this business, looking at the last few H1's results

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* adjusted to remove government grants.


Looking a bit deeper, maybe there is some cause for optimism, revenue hit just under $1m for the quarter, which is the best ever and the loss was much smaller than overage. The problem is if you look back to March last year, on $200k less revenue, OCF was similar, shows how the costs are running ahead of revenue growth now.

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39

Shares / EVZ

« Last post by galumay on January 31, 2024, 01:03:57 PM »

Another interesting little business that i discovered via its 4C this week, EVZ Limited operates in the engineering and energy services sectors in Australia and Asia. It operates through Engineering, Energy, and Water segments. The Engineering segment designs, manufactures, and installs silos, cooling towers, pipe spooling, and pressure vessels, as well as large steel and smaller bolted steel plate tanks for use in the water, petrochemical, and chemical industries; and fabricates structural steel. This segment also engages in the installation and provision of ongoing support and maintenance for its products. The Energy segment designs and installs constant load power stations, base and back-up power generation equipment, communications equipment, marine installations, and sustainable/clean energy solutions, as well as offers mobile generation capabilities. It engages in the service, maintenance, and hiring of various generators and associated equipment. The Water segment is involved in the design and installation of syphonic roof drainage systems to various buildings, such as airports, shopping centers, and sporting venues; supply and installation of metal panel tanks and prefabricated hydraulic systems. The company also provides design, construction, on-site installation, maintenance, and shutdown of engineering services to the mining, wood chip, petrochemical, aluminum, glass, cement, defense, and agriculture industries. EVZ Limited was incorporated in 1984 and is based in Docklands, Australia.

It has about $10m in cash and a market cap of $19m so its valuing the whole business at under $10m, made $1.5m profit last year so thats a pretty low multiple! FCF last year was also about $1.5m so strong conversion rate.

Should do about $2m NPAT this FY based on guidance for H1.

Share register relatively illiquid, 75% in top 20. Directors & executives have reasonable skin in game.

Company indicated some contracts due to roll over and there may be some margin expansion as a result.

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So the upside thesis is that they have some consistent growth in revenue, which seems to be true, and they also get some margin expansion due to contracts rolling over on more favourable terms and "operational improvements". The unknown is the margin expansion.

This seems to be supported here because H1 2023 sales of $49m delivered bulshit earnings of $2.1m, they then did $111m for the FY, and $3.7m bullshit earnings, so the 2nd half was $60m for 1.7m bullshit earnings and now they are saying H1 2024 will be $60m rev $2.5m bullshit earnings. Given the contracts havent rolled over yet, that would mean significant gross or operating margin improvement?

(This highlights a red flag with the business, they do use Bullshit earnings (EBITDA) as a metric. There is no way a business that has obvious D & A expenses should ever be using this metric, but the use of it is endemic sadly.)
So without the benefit of any potential gains from contract renewals we are already seeing improvement in margins.

The thing is this is not the sort of business I would consider for the SMSF, as its not good enough to generate decent ROIIC, but it does seem intrinsically cheap with reasonable upside if they can execute the narrative, so worth considering for the personal portfolio.

The downside risk is the narrative is not executed and either the growth flattens or the margins dont improve, but its mitigated by the current cheapness of the business to some extent. The other question I have on the downside is, why has it taken so long to turn this around, its been around for 40 years!

If I were to take a position my thesis here is that the business executes the narrative and has a rerating as a result of higher margins and sales growth and I would then look at exiting the position.

40

Shares / ABV

« Last post by galumay on January 30, 2024, 07:59:15 PM »

ABV, Advanced Braking Technology Limited engages in the research, design, development, manufacture, distribution, and sale of braking solutions worldwide. The company offers braking solutions for light, heavy, defense, and electric vehicles, as well as autonomous vehicle emergency braking and brake controllers under the ABT Failsafe, ABT Failsafe Emergency, and Terra Dura brand names. The company also exports its products. It serves mining, defense, civil construction, and waste management industries. The company was incorporated in 2001 and is headquartered in Wangara, Australia.

The 4C released in Jan 2024 drew my attention to this business, as they were OCF +'ve by about $350k (after deducting gov grants), there are probably some SBC costs that need to be deducted as well, but its probably about $280 FCF, which on an annualised basis would be $1m and I believe that would be a first for the business. The problem is the -$867k OCF in the previous quarter. On this basis I am thinking that around $500k OCF for the full year.

They look to have done $7m revenue for H1, basically just a touch more than H1 last year, but they had a very strong Q2 in 2023 due to inflows from the developement projest with Glencore. In the Q3 4C this was the comment -"Revenue in the quarter also includes a small portion related to the development stage of the ABT Glencore joint product development."  Ok, realised the R&D revenue is split out in each 4C, its why they quote Revenue from Ordinary Activities & Revenue from Continuing Operations Because they only started splitting it out like this after Q2 2023, I assume they commenced when the R&D income started flowing in - which means the Q2 result in 2023 was an outlier at $3.96m

So small growth in Revenue so far this year and some good improvement in margin.

A couple of things attract me about this business, its easy to understand, the reports are very concise and fluff free, no glossy photos, almost no mention of bullshit earnings, no bullshit bingo terms like AI, flywheel effects, inflection points, SaaS, ARR etc. Also directors and management have skin in the game with significant shareholdings. Also last 5 years show strong ROIIC, and a strong operating cushion of 23% suggesting to me the business is starting to scale up. Also its debt free. Shares a director with another of our holdings, LBL. Ms Dagmar Parsons

At the current price of 5c, and assuming a discount of 10% and a growth rate of 5%, it implies a FCF of about 0.0025c - which would be roughly $1m total FCF - which would be a stretch after the poor first quarter result., but its not wildly expensive. PEG is under 0.5 both on revenue and earnings growth.

Things I dont like is its still not profitable in any meaningful sense, complicated SBC thru various tranches of options, potentially adding to an already large share count.

I imagine there are some risks to the business, I get the impression there are only a fairly small number of customers, it seems like a product that has some risk from competition, although its not very sexy! Brakes are not where most entrepreneurs are focussed! Some geographic risks, they are active in Africa.

So the downside thesis for ABV is probably just that growth slows and it remains a very small business eeking out a small profit, the problem is that the current price implies some continued growth so there is a real probability of loss of capital if it cant at least continue modest growth. My calculations are that it needs about 5% growth to justify price. This would be a significant drop from the average of 20% revenue growth over the last 4 years. Obviously the other risks are things like management making poor capital allocation decisions, mergers & acquisitions, new business ventures, dividends, buy backs etc. This is somewhat mitigated by their track record and skin in the game.

The upside is thesis is that growth continues at a similar rate to the last 4 years - 20% revenue growth average. I would expect this to generate strong earnings and FCF growth, hard to quantify but I expect it to be more than the 5% my modelling gave for the current share price. So to comply with my thesis ABV will need to grow FCF at better than 5% going forward and this should be the test for continuing to hold.