Tuesday, March 10, 2009
Can you use your leased premises?
Before committing to a lease of premises, a tenant should ensure that the premises can be used for the activity intended eg sale of fashion or accessories, restaurant, cafe, fitness centre, etc. Whilst a landlord or its agent may tell you that they are willing to lease to you for your intended business, lease documents usually contain a provision stating that the landlord cannot guarantee that a tenant can use the leased premises as intended. Restrictions may come from local council regulations, or there may be an inherent restriction on the title of the property, which even the landlord may not be aware of. Further restrictions may come from licensing authorities, such as liquor or gaming licensing, or pharmaceutical boards, and other governing authorities.
Emissions Trading Scheme in Australia
It appears that the government is hell-bent towards pushing this draft bill into legislation by June 2009. The scheme affects industries which are emission intensive, such as electricity companies, and also upstream vendors of fuel. The additional costs will no doubt be passed on to end consumers. The trading scheme allows purchase of emission credits overseas, but does not allow vice versa sale of local emission credits to overseas buyers. The scheme also allocates "free" units to the major polluters.
My first thoughts:
1. There is no incentive to reduce emissions, only a cost burden if emissions limits are exceeded. Such costs can easily be passed on to consumers, given the high barriers of entry to competitors. The target reduction of 5% below year 2000 levels by 2020 is ridiculously low. The compliance burden will be high, and a bonanza awaits advisors in this area. It is doubtful whether such activities actually brings significant real benefits to the economy. Given current economic conditions, it is surprising that so much time and effort is being spent on a matter which will increase burdens on businesses.
2. Clients in the property sector are not highly impacted. For example, air-conditioning emissions from buildings are not covered. Clients in the retail sector will have to prepare for higher energy and fuel costs. Clients in the investment sector will need to examine profit making opportunities in the trading scheme.
My first thoughts:
1. There is no incentive to reduce emissions, only a cost burden if emissions limits are exceeded. Such costs can easily be passed on to consumers, given the high barriers of entry to competitors. The target reduction of 5% below year 2000 levels by 2020 is ridiculously low. The compliance burden will be high, and a bonanza awaits advisors in this area. It is doubtful whether such activities actually brings significant real benefits to the economy. Given current economic conditions, it is surprising that so much time and effort is being spent on a matter which will increase burdens on businesses.
2. Clients in the property sector are not highly impacted. For example, air-conditioning emissions from buildings are not covered. Clients in the retail sector will have to prepare for higher energy and fuel costs. Clients in the investment sector will need to examine profit making opportunities in the trading scheme.
Tuesday, September 30, 2008
IMF cash bank
IMF informed the market on 30 September 2008 that it has $83m in the bank. We need to subtract $6m for the impending dividend payout. So it has $77m in the bank, and assuming 120m shares on issue, then cash backing is 64 cents per share. Current share price of 85 cents implies $102m market capitalisation.
So the market is saying that the business is worth $25m (once you back out the cash). Realistically, IMF will have at least $10m per year in revenue, and on assumption that its fixed and recurring costs is $4m to $5m per year, IMF earns at least $5m per year before tax. The current business valuation price is at 5 to 6 multiples, which is akin to early start up valuations.
The market is not wrong, just unwilling to pay higher multiples for this business. Looks like Rob Ferguson will just have to work harder on this lumpy earnings beast.
So the market is saying that the business is worth $25m (once you back out the cash). Realistically, IMF will have at least $10m per year in revenue, and on assumption that its fixed and recurring costs is $4m to $5m per year, IMF earns at least $5m per year before tax. The current business valuation price is at 5 to 6 multiples, which is akin to early start up valuations.
The market is not wrong, just unwilling to pay higher multiples for this business. Looks like Rob Ferguson will just have to work harder on this lumpy earnings beast.
Thursday, September 4, 2008
IMF "panning" out
Further to my previous posts on IMF, things appear to be proceeding according to plan. The Aristocrat settlement has been approved by the court. Given that this is more or less already anticipated, it is still surprising to see a surge in the share price to 80 cents briefly. The price has now stabilised at about 76 cents.
Today, a further funding agreement for a case against the Federal government has been announced concerning the Pan Pharmaceuticals affair. Given the $50m settlement with Jim Selim CEO, albeit on a without admission basis, it is difficult to see how the Federal government can avoid liability.
There is also news today of possible multiple actions by councils against Lehmann in respect of investments in CDOs and losses being suffered from the subprime crisis. This has been a pet project of IMF Hugh McLernon. I believe the chances of further funding agreements on CDO losses related matters are fairly high.
Currently, IMF is sitting on cash estimated at $80 million, which is about 66 cents per share. Market cap is 91.2 m, therefore, the business is being valued at $11.2 m for a portfolio of cases with maximum value claim of over $1 billion. The market appears to be saying that IMF will only squeeze 1% out of its portfolio.
This is still within Ben Graham region, with no regard to a defensive business in a monopolistic position in a growing market.
As per previous post, watch out for court judgments.
Today, a further funding agreement for a case against the Federal government has been announced concerning the Pan Pharmaceuticals affair. Given the $50m settlement with Jim Selim CEO, albeit on a without admission basis, it is difficult to see how the Federal government can avoid liability.
There is also news today of possible multiple actions by councils against Lehmann in respect of investments in CDOs and losses being suffered from the subprime crisis. This has been a pet project of IMF Hugh McLernon. I believe the chances of further funding agreements on CDO losses related matters are fairly high.
Currently, IMF is sitting on cash estimated at $80 million, which is about 66 cents per share. Market cap is 91.2 m, therefore, the business is being valued at $11.2 m for a portfolio of cases with maximum value claim of over $1 billion. The market appears to be saying that IMF will only squeeze 1% out of its portfolio.
This is still within Ben Graham region, with no regard to a defensive business in a monopolistic position in a growing market.
As per previous post, watch out for court judgments.
Monday, August 25, 2008
IMF does not want a judgment
IMF's result is roughly in line with expectations. Even the dividend is expected, having regard to their franking levels.
Nevertheless, there are substantial risks ahead- well, one substantial risk actually. The issue is pretty well covered by Alan Kohler on the Business Spectator website in May 2008.
The main opportunities ahead are concentrated in non-disclosure court actions. The company in its results presentation flagged a very important factor- funding for non-disclosure class actions cost a lot of money- we are talking $6m to $8m per action. In non-disclosure class actions, the critical issue is one between reliance and loss ie whether a litigant needs to prove that loss was actually caused by the non-disclosure. This is current law in Australia. IMF's court actions hinged critically on persuading the courts to develop the law by embracing the concept of fraud on the market ie once non-disclosure is proven, losses follow automatically without having to link them up.
In my opinion, this is a big ask in the legal circles.
Perversely, IMF does better to settle cases before judgment is handed down, rather than risks having a judgment where the court refuses to embrace the doctrine of fraud on the market, which will effectively make these class actions non-viable. The insurance company defendants will also prefer not to risks a court making a decision, and in their case, embracing the concept of fraud on the market will be disastrous for their current policies. However, the insurance companies are busily rewriting their policies to exclude this specific risk, so it is a matter of time before an insurer will push matters all the way.
Needless to say, lawyers will want to be part of a landmark case, so it is in the lawyers' interest to push the issue to obtain a court decision. As for litigant shareholders, inevitably there will be a group wanting to push matters all the way, since individually, the consequence of an adverse decision on each of them is rather small.
Therefore, the situation will fast approach a point where IMF will be forced to take matters to a full verdict. From an investment perspective, this is a major risk, given the costs and time involved in these actions. The pay-off could obviously be huge, but then, once a precedent is laid down, competition from other funders will increase in earnest.
So for the moment, it is vital to IMF not to risk a judgment on these non-disclosure class actions- it is a lose lose proposition. However, this situation will not last for long. How long? Well, the Aristocrat case is the closest to judgment, therefore 28 Aug 2008 is critical to IMF, and in my opinion, settlement is critical. The rest of the other class actions have some way to go before hearing- about 2 to 3 years on my estimation. In these 3 years, it is critical for IMF to settle all these actions, and also for other class action litigation to settle without a verdict.
If there are any readers, I would be grateful for comments.
Nevertheless, there are substantial risks ahead- well, one substantial risk actually. The issue is pretty well covered by Alan Kohler on the Business Spectator website in May 2008.
The main opportunities ahead are concentrated in non-disclosure court actions. The company in its results presentation flagged a very important factor- funding for non-disclosure class actions cost a lot of money- we are talking $6m to $8m per action. In non-disclosure class actions, the critical issue is one between reliance and loss ie whether a litigant needs to prove that loss was actually caused by the non-disclosure. This is current law in Australia. IMF's court actions hinged critically on persuading the courts to develop the law by embracing the concept of fraud on the market ie once non-disclosure is proven, losses follow automatically without having to link them up.
In my opinion, this is a big ask in the legal circles.
Perversely, IMF does better to settle cases before judgment is handed down, rather than risks having a judgment where the court refuses to embrace the doctrine of fraud on the market, which will effectively make these class actions non-viable. The insurance company defendants will also prefer not to risks a court making a decision, and in their case, embracing the concept of fraud on the market will be disastrous for their current policies. However, the insurance companies are busily rewriting their policies to exclude this specific risk, so it is a matter of time before an insurer will push matters all the way.
Needless to say, lawyers will want to be part of a landmark case, so it is in the lawyers' interest to push the issue to obtain a court decision. As for litigant shareholders, inevitably there will be a group wanting to push matters all the way, since individually, the consequence of an adverse decision on each of them is rather small.
Therefore, the situation will fast approach a point where IMF will be forced to take matters to a full verdict. From an investment perspective, this is a major risk, given the costs and time involved in these actions. The pay-off could obviously be huge, but then, once a precedent is laid down, competition from other funders will increase in earnest.
So for the moment, it is vital to IMF not to risk a judgment on these non-disclosure class actions- it is a lose lose proposition. However, this situation will not last for long. How long? Well, the Aristocrat case is the closest to judgment, therefore 28 Aug 2008 is critical to IMF, and in my opinion, settlement is critical. The rest of the other class actions have some way to go before hearing- about 2 to 3 years on my estimation. In these 3 years, it is critical for IMF to settle all these actions, and also for other class action litigation to settle without a verdict.
If there are any readers, I would be grateful for comments.
Wednesday, August 20, 2008
Servcorp Results FY 08
Results are out today, and substantially in accordance with guidance given earlier this year.
Pleasing aspects of the results:
1. The four key expenses items as a percentage of total revenue have decreased, which is an indication of cost control.
2. Spending on Office square R & D is within budget.
3. Continued good performance from all segments except Europe.
Worrying aspects:
1. Mature floor occupancy has dropped from 85% to 84%, indication of economic slowdown.
2. Guidance of 5% only growth for profit before tax for next year, if conditions remain stable (they won't remain stable), despite a few more floors maturing, and reduced number of new floor openings next year. So they are expecting or are already experiencing soft business conditions and expect the trend to continue.
Unclear situation in respect of Office square, as to whether the investment will achieve a payback as expected by management.
The next signpost indicator will be Regus' results in a few months time.
Cashflow remains strong at $50m per year, so shares trading at 16% prospective cashflow yield. But I expect the share price will be waterlogged for some time, as management has not given any guidance of any upside expectation in the coming year.
Pleasing aspects of the results:
1. The four key expenses items as a percentage of total revenue have decreased, which is an indication of cost control.
2. Spending on Office square R & D is within budget.
3. Continued good performance from all segments except Europe.
Worrying aspects:
1. Mature floor occupancy has dropped from 85% to 84%, indication of economic slowdown.
2. Guidance of 5% only growth for profit before tax for next year, if conditions remain stable (they won't remain stable), despite a few more floors maturing, and reduced number of new floor openings next year. So they are expecting or are already experiencing soft business conditions and expect the trend to continue.
Unclear situation in respect of Office square, as to whether the investment will achieve a payback as expected by management.
The next signpost indicator will be Regus' results in a few months time.
Cashflow remains strong at $50m per year, so shares trading at 16% prospective cashflow yield. But I expect the share price will be waterlogged for some time, as management has not given any guidance of any upside expectation in the coming year.
Saturday, August 16, 2008
IMF follow up (I)
Further to my IMF long idea.
As at 17 August 2008, I note unusual activity in the stock with lots of off-market trades. The market is still waiting for confirmation by IMF of the Aristocrat setlement.
On the business front, the Federal Government has paid $50 m to Jim Selim, former CEO of Pan Pharm, in settlement of a lawsuit where Selim is alleging that the TGA wrongfully cancelled Pan Pharm's license. Readers should note that the pulling of this license probably caused the liquidation of Pan Pharm, which had a market cap of about $250 m. It also resulted in the loss of 400 jobs, plus a whole lot of losses to suppliers and customers.
I am waiting for news of massive class actions being launched against the Federal Govt, and inevitably, some of this will be funded by IMF.
As at 17 August 2008, I note unusual activity in the stock with lots of off-market trades. The market is still waiting for confirmation by IMF of the Aristocrat setlement.
On the business front, the Federal Government has paid $50 m to Jim Selim, former CEO of Pan Pharm, in settlement of a lawsuit where Selim is alleging that the TGA wrongfully cancelled Pan Pharm's license. Readers should note that the pulling of this license probably caused the liquidation of Pan Pharm, which had a market cap of about $250 m. It also resulted in the loss of 400 jobs, plus a whole lot of losses to suppliers and customers.
I am waiting for news of massive class actions being launched against the Federal Govt, and inevitably, some of this will be funded by IMF.
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