Decision Journal

[galumay]

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.

[galumay]

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

[galumay]

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

[galumay]

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.



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.

[galumay]

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!

[CiriColet]

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?

[galumay]

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

[galumay]

$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!

[galumay]

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.

[galumay]

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.

[galumay]

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%.

[galumay]

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!

[galumay]

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.