The One Legged Investor

The title of this post was prompted by a good friend and fellow value investor. He recently emailed me to tell me that he was as busy as a one-legged man in an arse-kicking contest.  Well, it is reporting season on the ASX after all.

The one-legged man construct was a very clever use of vivid imagery by Charlie Munger to hammer home his message concerning the advantages of multi-disciplinary learning.  I use this imagery on myself with a slight twist- there is always something that I do not know, and hence, I am the one-legged investor in the ASX bottom picking contest. 

Readers will note that I have even changed the blog name to reflect this.

And herewith, without further ado, are my snippets from recent half year results:

CSL continues to forge ahead. R & D is now a whopping US$190m per half year. 

CBA is benefitting from Ian Narev’s focussed approach, centred on improving core competencies and customer service via use of technology.  A recent interview with the Business Spectator illuminates further Narev’s risk management approach.  My preferred bank by a country mile, but not at current prices.

CPU results were lacklustre. A big chunk of earnings contributed by margin income, which is unsustainable in the long term.

REA FY revenue estimated at $300m, and market cap is now over $3.3b yielding a market cap/sales ratio of 11.  IPP 2012 revenue is $15m and market cap is $180m yielding a market cap/sales ratio of 12.  Both still growing strongly http://www.propertyportalwatch.com/2013/02/iproperty-reports-record-traffic-in-january/

CCV reported good growth in personal finance.  Heads up TGA.

COF- three directors picking up shares.

BSA- continuing with dismal results.

FFI revenue and profits slightly down, affected by difficult trading conditions and rising costs. Full effect of property deals will not flow until 2014.  ACCC inquiry into supermarkets behaviour may improve FFI’s margins in the future.

FGE HY results- as expected. Revenue of $504m, EBITDA $62m, NPBT of $50m, NPAT $34m.  Cash on hand of $187m, order book $1.04b, and work won over last 6 months total $600m, with management providing a strong outlook for growth. Contrast this with sombre outlook from MND, which has spooked the market.  Capex $11m.  If iron ore prices continue to stabilise, projects by RIO, FMG and Roy Hill will go ahead, and FGE is the front running incumbent for these huge projects.

CLO- cash holding increased to $177m. Record order book.

SRV results held up despite difficult conditions (77% occupancy).  Operations churned out cashflow of $18m this half.  US is now cashflow neutral, with 2 floors turning mature, and 19 floors still immature. Earnings figure boosted by $3m due to artificial change in accounting treatment with the lowering of depreciation rate for leases from 15% to 10%. But the focus is clearly on cashflow.  With a market cap of $330m, and backing out cash of $100m, SRV has an EV of $230m underpinned by over $30m in operating cashflow.

FMG- Operating Cashflow barely enough to cover Interest during last half when IO price collapsed despite average realised price of US$116 per metric tonne.  There is no room for hiccups here due to the high leverage. On the bright side, FMG announced commencement of last phase of Solomon, which will benefit FGE.

IFM continues to improve under the guidance of its founder CEO. Revenue up 4% but NPAT surged 30%. A reminder that I missed this opportunity at prices under 20 cents.  SP is now over 40 cents. 

CDA has hit the ball completely out of the ballpark.  Metal detection division’s revenue of $91m for the last six months is nearly equal to one year of sales last FY.  Mining technology is also increasing strongly, albeit from a lower base. I am a bit worried about the Daniel’s acquisition. Management has upgrade guidance from $40m to $50m NPAT for this FY. I reckon this will be exceeded. Metal detection market is mind blowingly huge, even management has no idea how to quantify it.

Readers with a statistical bent will note the preponderance of shares starting with the letter C.

Activity Update

Mulling over my activity over the last 7 days since my last blog post, I am reminded of John Arnold’s famous quote:

“War is sometimes described as long periods of boredom punctuated by short moments of excitement. History is often similar, if rather safer.”

I would tentatively venture that investing is similar.  After all, history is a record of the endeavours of humankind. Business is but one small facet of these endeavours. Logically, the same process should apply. My investing is characterised by a never-ending search for ideas, many of which are discarded.  Looking back over my notes, good ideas that are investable are rare, about one every 3 months where I am concerned.

Here is a summary of what I have been up to over the last 7 days, gleaned from my journal.

14 November 2012

Thinking about businesses with longevity, a long compounding trajectory. Growth rates should be moderate, should not be rapidly changing.  Compounding machines.  Need to learn more about financial history, especially businesses that have been around and unchanged for a long time.  Very few businesses can stand the ravages of time and competition.  Banking and law are two examples. BHP is another. Needless to say, adaptability is crucial.

Continued going through list of shares.

15 November 2012

ABS data shows MV vehicle sales for Oct down 2.8% from Sept, and SUV down 3%. Data conflicts with FCAI figures published at the start of the month.  Investigated cause for difference.

Continued going through list of shares.

16 November 2012

Looking closely at CMI Ltd. TJM has a good brand, but management is stuffing up via wrong business model. Electricals facing some serious headwinds.

19 November 2012

Boom in shale gas- LNG transport- shipping.

Finished treasure hunt project for industrials.

20 November 2012

TGA results out- NCML continues to drag- lesson= large acquisitions seldom work. Cashflow strong. Rentals steady. Arrears/impairments down. Cashfirst and TEF looking promising. TEF being funded entirely by debt.  Market did not like result. Dividend lifted. No long term reason to sell but unsure of whether to add more.

FFI- catching up with news. Chairman's presentation and latest leasing deal are positive news as value is unlocked from the land parcel.  Attempting to do a revised valuation.

21 November 2012

Considering the implications of the US becoming energy independent, and the many projects in the pipeline for LNG.  A long tailwind. Thinking of industries that will benefit from declining input costs of LNG. There are 4 obvious candidates on the ASX that my non-creative mind can think of.

LYL management gave an unusual downward guidance over next 2 years.  Mining services slowing down rapidly. Hats off to a management with impeccable integrity.

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.

FFI Holdings Limited

I have kept an eye on FFI for quite a few years. Its main business is food manufacturing in Australia, mainly chocolate products, bakery products and small goods, both under its own brands and also contract manufacturing for house brands.

Given the dominance of the two retail chains in Australia, and the ongoing price war with the resurgence of Coles, not to mention inroads made by interlopers such as Aldi and Costco, it was always going to be a tough slog for this minnow. Over the last 2 years, FFI's NPAT has decreased by over 50% even though sales volumes have been maintained. Rising input costs and labour costs did not help. This is the main reason why I have not bought any shares in FFI, despite a fabulous special dividend two years back, and consistent dividends coupled with a long operating history with shareholder friendly management.

The open secret about FFI is that it holds a huge parcel of industrial/commercial land- 67000 square metres to be exact.  This is carried in the books at historical cost of $14m. With a market cap of $28m, if we back out the land, the business is actually trading at PE 7. Although this appears cheap, everyone knows that holding vacant land is a money chomping exercise, and coupled with the operating headwinds facing the business as described earlier, there is really no table thumping reason to get excited yet.

This all changed after trading hours on 5 November 2012, when FFI announced that it had sold a parcel of land (about 2700 square meters) for just shy of $1m.  I will leave readers to work out the valuation implication of this announcement.

This is evidence based investing at its purest. By my estimates, there is now some 30% to 50% upside based on valuation, assuming that the current headwinds faced by the business do not abate. I view this as unlikely, and in any event, the bad news have already been baked into the valuation (poor pun intended).  The more important thing is that given the healthy cashflows generated by the operating business, a market cap of $28m presents a very low downside risk to an investor.

Disclosure: interests associated with my family holds shares in FFI.

Disclaimer: the contents 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.