Decision Journal

[galumay]

Resulting is a really important thing to look for in assessing decisions,

Resulting is using the outcome quality to directly derive decision quality.

So if share A goes up a lot, its because we made a good decision.

If share B goes down a lot, its because we made a bad decision.

We need to access 2nd level thinking and assess the outcome and its correlation to the decision.

So why did share A go up? Was it because the market rose as a whole, causing multiple expansion and growth in SP that had no relationship to our original thesis, therefore it didnt go up because we made a good decision.

Alternatively, why did share B go down, if it went down because we were incorrect about our view of the future in terms of revenue growth, earnings, and return on invested capital, then it WAS because we made a bad decision.

Humans tend to use resulting asymmetrically - things that went well we attribute to good decision making (resulting), and things that go badly we tend to say were bad luck. (not resulting). Of course if we are assessing what happened to others its the opposite!

[galumay]

Made a snap decision on Friday afternoon to add a large topup to our position in LBL, this was based on a late announcement to market that they had secured another technology service agreement,


I spent a short of amount of time looking at my average cost price and considering the implications for the bottom line on the business, I noticed there had been no reaction in the share price to the news, so I assumed very few had noticed the news late on a Friday afternoon. I considered this to be one of those cases where it was better to make a snap decision rather than spending too long analysing it, (and writing a decision analysis here).

In hindsight it was probably a mistake, the share price has risen over 20% in the last couple of weeks on no news, partly I believe due to a pumping campaign by serial pumpers, Motley Fool, but looking back maybe a fair bit of it was anticipation of this deal closing. I may well have ended up still deciding to buy more, but it would have been a more informed decision.

It makes LBL our biggest position other than AAPL, the average cost is only 45c so the last parcel at 81c still looks like a reasonable decision, just not sensible to avoid the written decision analysis unless the situation is totally compelling.

Next day & its up 2.5% from my purchase price y'day. Didnt pop until after lunch so I had time to do better due diligence.

3 days later and its up 10% to 90c, perhaps this somewhat vindicates the fast and definitive decision making?

[galumay]

Made a snap decision today to increase our position in Paradigm, (PAR), it announced that the FDA had replied to the answers they gave to the 6 supplementary questions the FDA had asked prior to approving Phase 3 trials. The FDA were still not happy with one of the 6 questions and wanted further details and changes. None of this seemed onerous to my reading, nor could I see it impacting on the timeline to completion of Phase 3 trials to any significant amount. Yet the market obviously had enough waiting and lost interest, or read it much more negatively than me as it was down over 8% when i picked up another parcel. It finished the day down over 10% so perhaps I moved too early, but happy to build the position at that price as I believe its now a de-risked speculation from our initial entry at $1.50 so at $2 I was happy to add.

[galumay]

My perusal of the recent season of 4C's has left me with only 2 businesses that might be investible, RLG and ACU.

RLG, RooLife Group Limited, together with its subsidiaries, provides integrated digital marketing and customer acquisition services with a focus on driving online sales of products and services for its clients in Australia and China. Its online e-Commerce marketplaces assist businesses to sell directly to Chinese consumers and accept payment through the WeChat and Alipay mobile payments platforms. The company also offers e-commerce and cross-border, digital marketing, export, B2B distribution, travel and tourism, Daigou networks, and research and strategy services.

 FCF+ve, priced at $0.03 could do 0.04c FCF per share over the next 12 months, would give a valuation of round $0.05 so say upside of 80%. Risk is the FCF dries up and it goes back to loss making. Could be worth a punt leading into FY results.

Discovered those numbers are wrong, they have issued heaps more shares diluting everything by nearly 50% so not investible IMO

ACU, Acumentis Group Limited provides valuation, research, and advisory services in relation to property and businesses in Australia. The company offers residential property valuation, government, commercial property valuation, insurance valuation, rural and agribusiness, property advisory, quantity surveying, buyers agency, illicit substance screening, projects division, self-managed super funds property assessment, stamp duty assessment, family law and litigation, and homebuilder grant valuation services. It serves the private owner and investor, professional/SME, corporate, government, banking, finance, REIT, and development industries.

ACU was the subject of a significant cyber attack in 2019 that had a negative impact on the business, and I imagine its reputation with investors. I believe that is behind the business now, systems have been improved to prevent a repeat and the primary actor was arrested, (they were someone with internal access to the business systems.) The business is now generating strong FCF and has done for several quarters now, delivering full FY FCF. FCF yield is over 10% based on this year, and my quick & dirty IV is around 20c. The FY21 results have been released while I have been thinking about this business, and as expected the company reported a loss due to the impairments around a loss of a significant government contract. I am yet to quantify the impact on future cash flows of this loss of contract. The contract continued with extensions to the EOFY so there was no impact on FY21, ACU are just saying that revenue will increase overall in 2022 so no impact there. (of course there is an impact, revenue would have been even higher for 22 is they still had the contract.)

Its impossible to draw any conclusions at this stage about ROIIC as returns have been so lumpy with so many impairments, it could probably be normalised to give some sense, but given that FCF has also been lumpy its probably not going to add any conviction for me.

In conclusion it looks like a reasonable turnaround opportunity, its trading at a significant discount to my range of value, 12c v 20c, it doesnt look like its a business that is likely to have significant growth, and given its history there may be more stumbles along the way, but it could also see a consistent improvement, single digit growth and a rerate if it maintains FCF and can translate that into earnings.
 
PreMortem

There was a further cyberattack in 2022 and more big customers were lost causing further impairments and continued negative reported earnings. Price falls back to 8c

The business recovers but Management make a series of poor capital allocation decisions and FCF is reduced and earnings still negative price falls back to 8c

The business recovers, growth is very slow to negative due to a property crash in the Aus market, share price still around 12c

The business recovers, no more miss steps, single digit growth, EPS grows to around 2c per share as does FCF, share price 25c

Prie expectancy - 8c* 10% + 8c*10% + 12c*40% + 25c*40% = 16.4c

[galumay]

KPG - Kelly Partners Group Holdings Limited provides chartered accounting and other professional services to private businesses and clients, owners, families, and high net worth individuals in Australia.

KPG is a business I have looked at a couple of times, the main stumbling block for me has been the debt - especially when considered as a proportion of equity - its basically 1:1 and that is way higher than I have ever considered in a business I am looking to invest in. Because I really like the metrics of the business otherwise and the culture of the business as expressed in the KPG "Owner's Manual" is as good as I have seen in any business, I have kept coming back to look at it. It also has a unique model for rollups, using debt not equity, and the acquired businesses retain 49% ownership so they retain skin in the game. I have finally got past the debt issue by talking with a friend online, Tristan Waine, I said,



"Hey Tristan,
I am doing some more work on KPG to see if I can find enough conviction to take a position. After your comment to me the other day I downloaded the owners manual and went thu the pages on debt, but I really struggle to understand it.

In my mind, its all debt that ultimately the parent company is potentially responsible for - hence its on the balance sheet, it massively exceeds my hard limit for debt to equity, but I remember you said I shouldn't use that metric for services businesses, it still looks like a lot of debt to me, and I really don't want to own businesses with anything but very minimal gearing!

I may have a blind spot on this, so thats why I am asking you to see if there is something I can learn here not just for KPG but also other companies I may research. Cheers, RIck"

Yeah no worries.

So first thing is that comment about 'ultinately the parent is responsible for' is just flat out wrong.

Partners have a 49% stake in their own partnerships and the vast majority of the debt they are responsible for. Not the parent

And the second thing is that you're viewing gearing on a debt/equity basis, this is a business that doesn't need much equity so it's just a flawed way of viewing gearing

Ultimately leverage is lower risk the easier it is to repay. And in this case, the parent attributable debt can be paid with a year of cash flows. Interest and principle

The interest coverage is some 20-30x

On my other metrics I really like the business, it has a fantastic ROIIC - mainly because its such a capital light business, the FCF yield is pretty decent at 7% despite the business being fully priced at around $4. I think its one of those businesses that I will never get an entry point if I wait for it to be cheap, its probably good enough that you just have to pay up a bit more and wait for the power of compounding to work its magic.

Premortem

KPG partner businesses lose a couple of their founders to Covid and the families want out of the businesses, KPG suffers significant write downs and cash expenses which both impact growth and profitability. The share price falls back to $2.50

Interest rates have risen sharply as inflation takes off, Covid continues to cause the collapse of many SME's, the interest costs impact profits and cash flows as does the loss in business revenue across the accounting sector. The share price falls back to around $2.50

KPG has grown revenue steadily in line with guidance, no significant additional acquisitions though so growth is on the lower end of expectations, share price has remained in the range of $4

KPG has grown revenue strongly, beating guidance, a number of new acquisitions were announced during the previous couple of years and share price has continued to grow to around $5.50 with FCF increasing to over 40c

So price expectation, $2.50*10% + $2.50*10% + $4 * 50% + $5.50*30% = $4.15 so only a slightly positive expectancy which reflects the fully valued nature of the current price.

9/08/21 I bought KPG today at $3.65 - over 8% down from its last close after releasing its 2021 results.

I think I made a mistake, what I failed to understand is that the ASX entity, KPG has to distribute half its profit/FCF to the partner businesses it owns 51% of, so in reality its only delivering half the return to shareholders. This makes all my calculations wrong and after spending most of today trying to understand how this all fits together I have to admit I dont have the slightest idea, the terms and metrics used by the company change all the time and its impossible to really distill out what value accrues to shareholders in the business.

At the moment my inclination is to sell straight away and escape from a position I should never have taken.

11/8/21 Sold at $3.50, I got this one wrong, the sudden drop in price on Monday led to an impetuous decision to take a position before I had finished my analysis. It was reading the Annual report after I had bought that made me aware of how I had completely missed the opaque nature of the financials, the effect of all the partners only being held as 51% interests, and I started to notice how promotional the founder was and in particular what grated with me was the claim of being Buffett like in his thinking and then seeing him use Owners Earnings in a way quite different to how Buffett uses it, and also seeing his claims for CAGR to shareholders - using the share price as a metric! The most un-Buffett like thing imaginable, nearly all of the "gains" are from multiple expansion - so its not Mr Kelly, but Mr Market who has given the return to shareholders!

Anyway, out at a small cost, a position that I would have had no conviction in and would have worried about - something I dont like doing!

[galumay]

This is a post script to a decision to take a position in AMO, Ambertech Limitied,

Ambertech Limited, together with its subsidiaries, provides various technologies for the professional and consumer audio/visual markets in Australia and New Zealand. It operates through Professional, Lifestyle Entertainment, and New Zealand segments. The company distributes high technology equipment to professional broadcast, film, recording, and sound reinforcement industries; home theatre products to dealers; projection and display products for business and domestic applications; and custom installation components for home theatre, and commercial installations to dealers and consumers. Its home entertainment products include home cinema and theatre systems, Hi-Fi, and personal audio solutions; speakers, sound bars, and headphones; remote controls and antennas; and connectors, cables, and accessories. The company's professional performance equipment comprise live sound and video production solutions, music equipment, recording equipment and microphones, and video editing and post production systems. It also offers content creation, acquisition, deliver, processing, and asset management for broadcast and media in the areas of production systems, data management, video delivery, infrastructure hardware, cloud and IP video, post, remote operations, and workflow management. In addition, the company offers acoustic panels, amplifiers, audio preamps and matrix controllers, cameras, cases, guitars, hearing augmentation products, microphones, networking products, projectors, receivers, screens, sound level meters, speakers, speech transfer and tour guide systems, vocal and instrument processors, racks, studio and stage products, and audio video content players and recorders; and commercial and residential installation services. It operates through a network of dealers. The company was founded in 1987 and is based in Warriewood, Australia.

In essense they provide high end AV hardware & solutions to businesses like TV stations, Government and others needing such solutions. They also distribute AV hardware to companies like JB HiFi and Hardly Normal for retail customers. They also distribute a range of music related products thru their own dealers.

Historically its been a horrible business, I suspect too many parts and not enough focus on business management has led to very lumpy revenue & earnings, never really getting to the point where it looked like an investible business. For that reason when I first had a high level glance at it after Claude asked me my opinion, I dismissed it out of hand. The link below has the details of the conversation.

Previous commentary

This is a case where I learnt to change my mind when there was disconfirming evidence, so the FY 2021 annual report for AMO was released this week and the result was very strong, it implied a business trading at a PE of about 4, a divvy yield of over 11% and FCF yield of 20%. When I looked at the ROIIC for this last year it was over 100%.  This made me go back thru all the announcements for the past few years and check whether there was an actual transformation of the business or whether it was just a one of Covid type impact.

It soon became obvious that there was a clear plan from management to improve the business, and a cornerstone of this was the acquisition of Hills AV business in late 2019, this was the turning point really and although it took longer than expected to translate into results in the financials due to external impacts including covid, it was clear they had a vision and were executing it. From 2019 they were guiding for revenue of $70m in 2020, which they missed because of the external factors, and $43m in H1 2021, which they only just missed coming in at $39m and showing good profit, FCF and an increased dividend.

This is what I missed when I dismissed it after a high level look originally - because it was really only one half year that had shown any sign of promise in the last 10 years of trading!

So now for the full year of 2021, they hit $80m revenue,



On putting all this together I realised the business was still very cheap, even if they only achieved very low growth from here, the 11% dividend alone would put pressure on for a significant rerating, on the morning of the announcement they were up about 9% and I bought a parcel at 30.5c.

So what can go wrong, well the most obvious is that the business returns to its historical band of revenue, in the $50-60m range and therefore they go back to being borderline profitable and the yield becomes low to zero again. This seems unlikely to me as it was an unprecedented increase in business activity to take itt up to $80m revenue and I cant see any special circumstances - eg covid driven activity.

If the business did just have a one off boost from the addition of the Hills business and growth is flat from here, its will still be likely paying a dividend yield that is higher than average and that will provide a floor for the price in the medium term.

If its truly a transformative change and some steady growth continues, then there should be a strong multiple expansion as well as increasing dividends over time.

Probabilistically i can see if the first instance plays out the price droping back to 15c, I would rate that a 20% chance, in the second instance I would see the price maybe settling out at 35c and about a 50% chance, in the best case i think it could run to around 60c - 20% chance. I think there is a chance it
could perform so poorly that the price drops back to 5c, I would rate this a 10% chance, so price expectancy is, 3c + 17.5c + 12c + 0.5c = 33c

Thats only about 10% above my buy price, but its based on a pretty conservative outlook probabilistically.

My thesis is that at worst revenue will be maintained in the band around $80m, EPS of 6c & dividend will continue to be around 3c and that the share price will rerate to a price more in line with market valuations, my quick & dirty DCF gives a range of value around 80c and an implied return at purchase price of over 20%.

It will be a case of watching the financials very closely going forward to make sure the execution continues to add value for shareholders.

Here is the commentary on twitter after I bought the parcel, read from bottom up,

[galumay]

I am considering selling our PPH Pushpay holdings, the business recently announced a significant acquisition of a video production company, RESI Media, a private US company servicing the church industry. They have agreed to pay $150m for the business, but have published no info at all about the actual value of Resi, no earnings, no cash flow, not even EBITDA, so its impossible to tell whether this is a good allocation of capital or not. I emailed PPH investor relations asking for more information on the financials of Resi, but they have responded by linking me to the existing info - which doesnt mention valuation or financials for Resi!

I think there are genuine questions about the motive for this takeover, the new CEO making a name for themselves? Pressure from bigger investors? With the CFO on the way out the door its not a great look. (thanks to @Larryjamieson on twitter for raising some of these questions.)

The continued sell down by founders is also a concern.

Current thought is not to sell as then we have cash to allocate, wait and if a better opportunity comes along move into that, otherwise it remains a low conviction hold & watch.

[galumay]

Decided to sell my lowest conviction position, TNE, its mainly a valuation decision, while the ROIIC remained very strong ( a function of the very capital light model & some pretty aggressive accounting practices), the FCF yield is only 2.73% and I feel like thats inaccurate on the high side due to accounting practices. My quick & dirty DCF range is around $4.50 and the implied growth rate in the current price is around 8%!

I bought first in 2016 and my average price was $5.77, sold for average of $13.37 so a bit over 100% return over the 5 years holding so a CAGR of over 18% which is more than satisfactory and excludes dividends.

[galumay]

Looking at taking a position in HLG:NZX, Hallenstein Glasson Holdings Limited, through its subsidiaries, retails men's and women's clothing in New Zealand and Australia. The company operates 114 stores, including 43 stores in New Zealand and 4 stores in Australia under the Hallenstein Brothers name; and 36 stores in New Zealand and 32 stores in Australia under the Glassons name. It also sells its products through its e-commerce platform. In addition, the company leases various retail outlets under operating lease agreements. Hallenstein Glasson Holdings Limited was founded in 1873 and is headquartered in Auckland, New Zealand.

At a bit over $7 its not super cheap, but its certainly a high quality business, the Lindy effect comes into play with a business that has been around since the 1870's! It has a reputation for both customer focus and very frugal operations. There are various stories on the history of the business, here is one - CLICK

My back of the envelope valuation in north of $12, but I am mindful that is based on very strong FCF coming out of Covid. Applying a normalised FCF from the last few years would see a value nearer $5, I feel that on balance the current price is fair value with a little optimism about the outlook. A continuation of the dividend of recent years would see a yield of 4-5%. ROIIC is very strong, around 60% ROE & ROC are both around 30% on 10y median returns.

So its an easy business to like, well managed, profitable, slow but steady growth, no debt, share count same for last 10 years, enduring, founding family hold over 20%, and directors have skin in the game, but what are the risks?

I think the biggest risk is the business growth that looks apparent through Covid is temporary in nature and revenue, profits, FCF & yield return to historical levels. In this case $7 would look pretty pricey but yield would still be satisfactory.

It would take a more severe disruption to the business to make it a bad investment decision, something like a misstep in capital allocation, an attempt to accelerate exansion into Australia or US? Or a poor acquisition/merger.

One potential red flag maybe the company's decision not to repay the wages subsidy many of its employees received through Covid, there is no requirement to repay, the money went to the employees, not the company, and they broke no rules or guidelines - but there is a moral argument the equivilent money might have been returned. article link and and HERE

The other issue I have is the lack of trasparency about performance payments for executives, although the Annual Reports reference the Renumration policy on their website, there is no policy on the website, just a statement that they have on. The only thing I can say is that the share count has been static for years so they are not issuing themselves shares!

Why wil this business be round in 10 years, as mentioned Lindy effect - its already been around 150 years, also retail clothing is one of the most online resistant retail sectors, people want to see, feel and try on clothes before buying. Also NZ based is a small barrier to entry of itself. What would it take to mean the business was not around in 10 years - really would take some sort of black swan event, unforseeable disruption, fraudulent management, total collapse of NZ economy...

I dont expect to see much growth or multiple expansion with HLG, its the type of business I would like to hold for a very long time, it generates significant cash, reinvests what it can (which is only around 25%) and pays out the rest as dividends. While management allocate capital with the conservative approach they have done so far, I will happily accumulate dips and build a larger position.

Bought 2886 at $7.08 NZD 23/11/21

[galumay]

I wrote a lengthy post about the process we followed in finding our new boat, something went wrong with an attachment and I lost the whole post! I had to walk away for a couple of days, but I will have another crack at it!

We have been looking for a bigger boat for about 12 months, it grew out of a desire of mine and our friend Dave, to cruise the NT coast from Gove to Darwin, exploring all the rivers, bays, islands, reefs etc and developed into a realisation that the 3 of us wanted a bigger boat not just for this trip but to spend more time cruising our coastline over more of the year. This meant a boat big enough to do more thru the windier dry season and initially our thinking was a 12-15m monohull motor boat with an economical motor like a Gardner or John Deere. We slowly developed a set of essential criteria in terms of fuel economy, range, galley location, seperate accomodation spaces, outdoor living spaces, and so on.

We built a process of searching for boats that seemed to suit most of our criteria, and then creating lists of everything we could find wrong with each one and in particular any issues that breeched our initial criteria. This was dont to avoid the likelihood of talking ourselves into buying something because we liked a lot about it, while missing something critical that would have been a problem once we owned it. It also helped prevent FOMO and impulsive purchasing in what is a red hot sellers market.

What we discovered as we looked at boat after boat, is they all had quite a long list of things that we found problematic or in outright contradiction with our criteria. Then one day, only a month or so ago, i somehow came across a sailing catamaran for sale in Darwin, and it got me thinking about how well a sailing cat met our criteria and after a while I built up enough nerve to ask sal to hear me out and after explaining my thinking, asked her if there was anyway she would consider a sailing cat. She was like, sure, "looks great, as long as it doesnt lean over I am fine with it" so then I had the same discussion with Dave and he was "Oh yes, well I have always thought a cat would be great up here".

So we pivoted and started looking at sailing cats and one thing became really obvious quickly, our list of negatives and things we couldn't live with became very, very short - for every cat we looked at!

In the end we settled on a Foutaine Pajot Bahia 46, a 46' or 14m French built cat. She is built in 1997 and has been owned by an Aussie couple who bought her in the Caribbean and lived on her for 8 years before ending up back in Australia. I flew down to Brisbane and did a quick sea trial, and the deal was done. I feel we got her at a reasonable price in a very hot market, $310,000. Its a lot of boat for the money and one of the things that influenced our decision was that Lumiel is a production boat which does help with resale - not just value but liquidity.

Also buying in a seller's market meant we were selling our old boat in the same market, i very much doubt we would get nearly as good a price and in fact may have had great trrouble selling it in a soft or buyers market so it evens out to some extent.

So thinking about what could go wrong with this decision, the obvious one is that my belief that having a yacht will add a whole new dimension to our boating and allow us much more flexibility, may prove to be wrong if Sal and or Dave end up really hating the sailing side of it. The potential offset to that is we could just not use the sails and still have an effective motor boat.

Secondly we could find that the boat is simply too uncomfortable in dry season conditions to take on the sort of trips we plan at that time of year, I think this is unlikely but possible. The question then is would any type of boat in our price range be suitable?

Thirdly we may find the amount of work and stress of keeping a boat on a mooring in the bay in a a cyclone zone may be too much for us as we get older. There is probably a cross over on this, currently I have the time & energy, Dave has the energy, Sal not too much of either at the moment. At some point as we move past our mid 60's this may become more of an issue.

We could end up having to spend a lot more money to maintain her than we expect, this is somewhat offset by the price we paid, nearly everything else we looked at was in the high $300k's so even if we had to replace the rig, sails, an engine & sail drive we would only be at about the same cost as the more expensive boats we looked at.

Anyway, here are some pics of Lumiel, she is currently on a jetty in Birkdale Qld, Sth of Brisbane and we are looking at sailing here home in March April next year.





Also a couple of videos,

 

[galumay]

Thinking about buying some more $CDA, its fallen from around $18 to $7 over the last few months. I am trying to work out what the thesis is for selling the business at $7, in other words, what am i missing that others see? 

The recent H1 report for 2022 did offer some concern as operating cash flow was actually negative for the first time in over 10 years, it didn't even go negative when the company was in dire straits in 2013 and I bought in under $1. The company explanation for the -'ve OCF is -

• Increased debtors driven by higher Communications sales in November and December 2021
• Investment in inventory, reduced freight costs and mitigate supply chain risks
• Payables high at June 2021 due to prepayments from customers to secure supply
 They claim,

• As working capital normalises over the second half the cashflows will follow

The $65m extra working capital and hence -'ve OCF is my biggest concern along with the $48m debt but I actually doubt either of these are the reason for the steep drop in price. Few investors get as far down as the cash flow statement so hard to see that being a big impact, and most wouldn't care about a debt ratio that low so its also unlikely to be that.

So the question remains, what am I missing that others see?

Are they just panicked sellers that bought in around $18 and can no longer bear the losses? Possible, but I am unconvinced.

I just feel like I am missing something!

My guess is a combination of fears, a potential collapse in the detector sales due to recession, loss of markets in countries like russia for all products, weak gold prices and a general sell off in the market.

Its now fallen to $6 and the temptation to buy some more is strong. After the FY2022 results came out FCF for the year was 25c, largely because of the negative cash flow in the first half. The last time the FCF was this low in 2018 the share price was around $3.50, but the big difference here is that it looks more like a one off and the normalised FCF going forward is probably going to be much higher given the impact of H1.

So FY OCF was around $52m, but H1 was -$13m so 2nd half was about $65m, H2 typically higher, so maybe normalised FCF was around $90-100m so lets say around 50c per share. That gives me a range of value around the $7 mark.

The question remains, is it the perceived fall in FCF that is driving the price or am I missing something else? Debt and departing CEO probably part of the story. Debt is hardly stressful, its well under my conservative debt to equity ratio and is at about 2% interest.

When I reverse engineer my DCF for CDA I get an implied FCF of 45c - while that is nearly double the number for 2022, I think its very unlikely it will be that low in 2023. It also implies growth of 6% - which seems high, but if the FCF for 2022 of 25c is the outlier I think it is, then that number will quickly shrink. Finally the implied MoS is only a bit over 7% - again a function of the FCF of 25c, but that is the point of reverse engineering the numbers. Could I live with paying a price that only gave me a MoS of 7%?

Really the whole question comes down to the probability that 2022 was an outlier and the business will return to something like normal state over the next 5 years or so. Was 2022 a structural shift in the long term financials of the business or was it an aberration borne of all the usual suspects, Covid, frieght, supply issues, inflation, etc How much is temporary and how much permanent?

Given that I am a long term investor I am fairly confident that the business will continue to do well enough over the next 5-10 years, even if there is further short term pain to come. At sub $6 I think there is enough MoS and I think the mid term downside is very low. My pre mortem is that the H1 results showed continued +'ve FCF, a soft recovery in growth and a moderate re-rate of the business by the market while maintaining the divvy yield. A worse outcome than this, black swan, -'ve FCF, falling revenue and a further drop in SP is about a 20% I think, i see a business like it was in 2018 - maybe a 10c divvy. A better than expected outcome with a return to strong growth and an improvement in all financials is probably about a 20% chance. Somewhere in between the 2 about a 60% chance.

Obviously the yield is important as a long term holder, probably more so than the share price, so I am probably comfortable if it drops back to around 20c per share, but much lower than that for an extended period would be sub optimal.

Bought more in personal pf at $5.68 and took a position in the SMSF at $5.68 26/09/2022

[galumay]

The recent drawdown in stock markets around the world has seriously impacted the potential, unrealised capital gains from our portfolios. I haven't quantified the impact as its purely theoretical, but it would be significant were we to sell out of our fractional ownership of businesses.

Its the first real drawdown that we have seen since starting serious investing so its a good check on my emotional response - its easy to say that as a long term investor, short term volatility doesnt worry me, but until you live thru a significant drawdown/crash, that is just an assumption.

I am pleased to confirm that there has been no sense of alarm or rush to action on my part. My initial instinct was to consider investing cash on hand into the best businesses we hold already, that were cheapest after the drawdown, but I have not acted on that instinct. Part of the reason for not acting is that having a significant cash buffer makes it easier to not worry about the drawdown at all, we will continue to grow the cash holdings with dividends going forward and as I am now over 60 I can access the cash balance in the SMSF anytime I need to for living expenses etc.

If I became fully invested again, then needed any extra cash, I would have to sell something to release cash, which might be uncomfortable if the market stays depressed for the medium term.

I would like to think that my whole investing strategy and philiosophy has been developed to deal with just such a situation as we appear to be facing now, falling markets, inflation rising, recession looming, negativity and bearish commentary all about.
The strategy of buying fractional ownership in businesses that if we had sufficient capital, we would seek to own outright, should, if I do a reasonable job of picking the businesses, in the long term deliver sufficient absolute returns.

Based on my assessment of the quality of the business, lack of debt, healthy balance sheet, profitable, high FCF generation, long term dividend payment, generating superior ROIIC, lengthy operating history, founder involvement, I would certainly hope to whether the storms of economic cycles. As someone who believes the future is unknowable, especially in terms of both micro and macro economics, I fall back on trying to construct resilient portfolios that can weather the storms that may come and go in our investing journey.

We will end up with our best year ever in terms of real, cash return on our investments, the only really measurable benchmark. Our gross dividends will end up over 8.5% on invested capital (Original capital, plus contributions, plus dividends), and prior to the markets tanking was 5% on unrealised market value. If the negative trend in markets continues thru to end of financial year, this will obviously become a higher number as the dividends are already all paid, its just the unrealised market value that will change now.

So my response to date has been to do nothing! I am neither a buyer or a seller, there is some possibility this inactivity is a bit of rabbit in the headlights - scared to invest in case things get much worse, but I dont thin thats the case, after all cash is only less than 10% of our capital anyway. I guess I could use the line of credit on our house to go all in and try to make big returns, but that is not my style. I am happy with the amount of capital we have invested and the returns we should see from those businesses over the long term. Of course it would always be nice to make lots more money, but I am very grateful for the luck that got us from our starting point about 7 years ago to where we are now and I dont expect to see that growth again in the next 7 years.

I wont be surprised if cash returns deteriorate next FY if economic conditions do worsen, but thats the swings and round abouts of investing, no doubt we have enjoyed excess earnings in the very odd Covid world, as always its the long term absolute performance that matters, not the year on year volatility.

nb Here is a much better written post from Chris Mayer of Woodluck House that really resonated with my poorly articulated thoughts above. CLICK HERE

Interesting, I finally realised my recent mood and background 'heaviness', anxiety and concern was a manifestation of all the negativity - inflation/bear market/recession/rising interest rates etc. My re-focus was simply asking myself, am I do what I really want to (yes), so at 60, does it really matter if we run out of capital a bit sooner? No, so stop worrying, choose to be happy and get on with it!

[galumay]

trying to decide whether to go with 2 new fixed props on the boat or just replace the missing folding prop, cost of a new folding gori is probably over $3k and 2 fixed props is $1500 so half the cost.

disadvantage of fixed props is the noise when free wheeling and the loss of sailing speed due to drag.

disadvantage of folding is cost, maintenance and loss of performance under power.

the noise is worse as speed increases, but can be mitigated by putting in gear, but then drag is increased. Question is whether extra drag matters once you are sailing that fast. Drag is increased maybe as much as 3x when locked in gear, but on its own that is meaningless, without knowing how much drag reduces potential speed we dont know if 3x more is significant or not. Anectdotal evidence is locked 3 blade props would cost about 0.5k at normal sailing speed.

loss of speed and sailing performance will be most noticable at low wind speeds, probably particularly when it is below 10k.

On the other hand the disadvantages of the folding props, cost is significant, if the fixed would do the job without too much noise or performance hit then saving over $1500 is significant. The potential loss of motoring performance is probably similar to the sailing one for fixed - maybe 1/2k less at cruising speed. Could be significant in terms of motoring against tidal streams and heavy seas?

If we go with the cheaper fixed props and they work out then we have saved a lot of money, they may also prove to be better overall for our usage and conditions. If they are worse than i expect and we find the speed penalty and noise untenable, then we can still go back to folding by spending the $3k and getting one more folding prop.

If we go with replacing the missing folding prop, it will cost us double the amount, and we will never know whether we might have been better off with the fixed props.


Another factor is that if we go with a second folding prop and another one gets damaged or lost, its another $3k compared to under $1000

I spoke with Jaques who owns a Bahia and asked him about the noise and impact on sailing,

"When you refer to «  noise » I am not sure of what you are talking about , under sail or under engine power , should not be any noise that I can think off under sail as long as you engage reverse on the control which will stop them free spinning !
Mine has two three blades fixed prop fitted at the factory , I have had feathering props on my previous FP , a Lavezzi and sailed in convoy with another Lavezzi which had the original 2 blades fixed props , if I recall correctly , over a 24 hours sail passage I travelled 9.2 nm more than he did , so NO I cannot justify the investment on speed gain , further more while berthing stern in the feathering props were pretty useless when it came to torque
The folding props require regular maintenance, early this year while cruising Tasmania we met a couple on another Bahia high was equipped with feathering props , we wearable o compare speed under engine while motoring up the Dentrecastaux Chanel , @ 1500 rpm Kitten was giving me 7.2 knots SOG , his 6.4 knots ! and once we hit the tidal current getting into Barnes bay he lost another 05. Knot .
So instead of buying 2 x $3,295.00 feathering props when I purchased Kitten  I spent the money on an asymétrique spinnaker in a sock which gives me great boat speed 👍👌👏 under mild win speed conditions."


so my decision is to go with the 2 new fixed props, my gut feeling is the sailing performance wont be impacted to the point that we regret the decision, the motoring performance will be better and the noise will be controllable.

[galumay]

The downturn in the markets has kept me sitting in the sidelines this year, I have naturally become more inactive as time passes anyway but I suspect there has been some trepidation on my part to allocate capital in the current climate. Its difficult to know whether that is the case or not. There is also a train of thought I have had that I want a cash buffer so if I need capital for any reason its accessible without forced selling. This is informed by my having retired for superannuation purposes, so I can drawdown on the fund at any time now. With interest rates rising and carrying a bit of debt from buying the boat, I think I have made a move to being slightly more conservative.

I think that writing the annual report for the SMSF this week made me think about the fact that maybe I was losing touch a bit with the investing process due to my inactivity. That has at least prompted me to briefly look at a couple of ideas that popped up in my universe (they went no where!), and also consider which business would be best to increase position size in within our portfolio.

SXE and AMO are the two most obvious candidates, they have the best metrics, are well below my calculated range of intrinsic value and are both smaller positions in the SMSF. At this stage that's the extent of my decision making - I am the "if I was going to allocate some capital, it would be to one of those 2 businesses."

*I realised I was leaning towards AMO because its a smaller position, that is not very clever! The capital should be allocated to the best opportunity regardless of size.

** Again the benefit of decision journals and slowing the 'doing' down, thinking about it today, both SXE & AMO are about the same price as I paid for the existing parcels, they 'feel' cheap because they have then gone up quite a lot and now fallen quite a lot!

[galumay]

I am thinking about taking a position in JB Hifi, this is not a particularly cheap business normally, but there has been considerable negative sentiment this year and the price looks pretty reasonable to me. Its trading on a PE of about 10, i calculate a range of intrinsic value of around $60 on last years results. The results released this week show a small improvement in metrics,



ROIIC is not able to be calculated because the debt reduction has meant there has been negative capital employed. ROIC & ROE are both very high, FCF is strong, yield is over 5%.

I am not sure why the market is discounting the price to this extent, I guess the concern must be that inflation or recession will cause a downturn in the business and impact profits and yield?

My intuition is that its not often the opportunity to buy a business as good as JB Hifi at a real discount to value comes along.

In terms of alternatives I think the nearest is to instead take a position in CDA for the SMSF, but its not quite the same discount or margin of safety. SXE is another possibility, its discount and MoS is even greater so perhaps a more attractive option? On checking AMO has the greatest so that is probably where any extra capital should be directed. Now I notice JYC is way out there, I already own a lot, but its the cheapest by most metrics.

So really the only reason to add JBH is if I think overall its more likely to be a better business in the long term than any of the alternative homes for the capital. Off the cuff, i suspect its a better business than AMO with more growth prospects, not sure its any better than CDA, SXE or JYC though.

I went for a walk on the beach and thought about it, which gave me another approach, was JBH worth buying just for the high yield, given that we really have sufficient capital so the yield becomes very important. But on checking the yield on NTD is currently higher than the JBH yield - that may change, JBH might increase, or more likely NTD drops, but its not a persuasive reason to sell one to buy the other. (given that NTD is now my lowest conviction holding).

Given that I think my decision is to do nothing, JBH was $44.15 today for a 6.6% yield, NTD was 93c for a 8.6%yield others mentioned - CDA $8.70, AMO 36c, JYC $2.51, SXE 72c