Monday, March 11, 2013

CMI update

I purchased CMI base on the premises set out in this blog post.

On 19 February 2013, CMI's share price jumped as ASIC sold the overhang parcel for $2.65. The resulting market capitalisation of CMI reached $100m.  being what I estimated to be conservative fair value.

Consequently, I began to prepare to sell. The share price has reached a conservative fair value and more importantly, I was unwilling to stay the long haul with the current management. As I have explained previously, management competency and integrity at these relatively small companies can have a major effect on shareholder value.

On 20 February 2013, we found out that Acorn Capital has emerged with slightly less than 10% holding in CMI. I have great respect for the managers at Acorn Capital, and accordingly, I was prepared to wait until the half yearly result is published and hence deferred my sale decision.

On 27 February 2013, CMI published its half yearly results.  My overall impression was as if management has fallen asleep on the wheels. No doubt Mr Colin Ryan had other more pressing matters to attend to, notably his prosecution by authorities in New Zealand on charges of misleading conduct. Just to backtrack a little, CMI's announcements on 18 and 20 February 2013 did nothing to allay my deep mistrust of this board. If anything, my fears were actually accentuated by the contents of these announcements.

Looking at the results, accounts receivables and inventories continued to increase. CMI has enough inventories for 10 months worth of sales. This is an inefficient use of capital. The tax bill was higher due to an overprovision of $581k in the previous period which ate into cashflow. Only half of debt repaid. Electrical is still making good margins, but margins are decreasing. TJM still making losses of $600k despite a revenue increase, and taking up over $29m of assets. This division should be sold.  

What took the cake was that recently appointed director Stephen Lonie mysteriously resigned without any reason.  

On 27 and 28th Feb 2013, all CMI shares in the incubation fund was sold at $2.65. The gain is 59.6% in slightly under 3 months. Quite a fortuitous windfall considering the circumstances.

As a matter of disclosure, I still own a small holding of CMI in my family account. Unless circumstances change, this holding will also be sold if the share price approaches $2.65 again.

Obviously, this will continue to be on my watchlist. No doubt there are some lessons to be learned here, primarily as to whether assessment of management should be a strict filter, or whether this factor can be balanced off against a deeply undervalued share price.

Disclaimer: the content of this post is not to be relied on as financial advice.  It contains my personal opinion only, plus facts that I cannot verify to be accurate.  Do your own research and seek financial advice where appropriate. I have made many mistakes in the past, and will continue to do so in the future.

1 comment:

Dean said...

Well done Peter. Excellent investing as usual. Thanks for the update. Knowing when to sell is an under-appreciated skill.