UOS putting in another solid year

I commented on UOS here in May 2013 and here again in April 2014.

Another year, another UOS annual report rolls along. A 10.6% increase in book value is plenty enough. Whilst waiting, we got paid a nice 2.5 cents dividend per share.

At current price of 54 cents, the market capitalisation is $630m market cap. This is the price that you pay.

This is the value that you get: UOS’ 70% holding of UOADB at current market capitalisation is about AUD$750m.  UOS’ 46% holding of UOA REIT at current market capitalisation is about AUD$110m. Cash at parent level is $80m. Total=$940m.

Would you like to swap 63 cents for 94 cents?

 Disclosure: I own shares in UOS.

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.

UOS got better again

In May 2013, I commented on UOS in this blog post.

The interest generated by that post was delightful.

Almost one year later, we get to see yet another UOS annual report.  Without going into the boring details, I would just highlight the increase in book value of 22%.  There are also the piddling matters of cash increasing nearly 100%, and the increase in investment properties.  Not to mention a nice dividend paid to shareholders for the full year.

This is the thing that puzzles me- UOS would nearly qualify as a Graham-type cigar butt net-net investment, and yet its historical growth rates for the past 2 decades would have put most so-called growth stocks to shame.

  Disclosure: I own shares in UOS.

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.

Further one-legged update on the reporting season

Well folks, we are at the tail end of reporting season. I don't know about you, but I will be glad to give my one leg a much needed rest after this bout of ass-kicking.

23 August 2013

LYL results out. NPAT for FY 2014 will be reduced by 50%. Price is getting interesting, but my call is that there could be slightly more pain for LYL given their position in the food-chain.

CAB analysis. Postulate that market is overweighing the impact of ACCC recommendation to reduce 10% to 5% for payment systems.  The absolute downside is that $45m being wiped from the top travels right to the bottom, reducing FCF from $60m to $15m. Multiple compression follows as ROE of 20% becomes 5%, turning a good business into a capital intensive substandard business. A compression of multiple to 8 means the current market cap of $500m falls to $120m, which is a 75% drop. It is probably obvious that the outcome lies somewhere in between the absolute downside and the current situation, therefore it will be helpful to map out multiple scenarios in preparation for a price opportunity.

26 August 2013

SCD results.  Operating cashflow of $2m, resulting in $7.2m in cash, but there is $1.2m in tax liability and $1.6m tied up with banks as security for bank guarantees.  Factory revalued downwards from $4.4m to $3.2m. Equity increased from $10.2m to $12.6m.  Service revenue increased from $4.5 to $5.2m.  Orders on hand $6.9m. One customer made up 30% of revenue. I have covered this company in a previous post.

MTU results.  Underlying margins appear to be declining.  ROA declining. Debt increased.

VTG results.

MLD results.

HSN results out.

27 August 2013

SRV results out. Operating cashflow of $27m (after paying tax of $10m). Occupancy increasing. Cash on hand $99m. Weakening AUD may boost earnings in FY14. 23 out of 38 immature floors will mature in FY14.  Opening another 8 large floors which will boost total office space by 10%.  All USA floors are cash flow neutral and all expected to mature in FY14. Occupancy rate is 88% as at June 2013 (USA recovery).  Using $27m of FCF, with 10% RRR, assuming zero growth for 10 years and adding unencumbered cash of $90m, yields $345m value.  Using dividend discount model, on grossed up dividend figures, current market cap requires dividend to rise by 5% every year, and terminal value of 10x grossed up dividend.  Current price means that an investor gets growth for free. I have held this for over 5 years now (first post here), and this long holding period has been helped immensely by a very competent management.  

FLT results out. NPAT up 20%.  Amazingly, current price implies growth of 5% per annum in FCF for the next 10 years. I missed picking this up during the GFC for under $4, which means a 10-bagger has gone down the gurgler.

VEI results out.  All metrics declined. Revenue down, gross margins down, cashflow down, but surprisingly, wage expenses and doctor payments were also down.  FCF of $18m, debt of $45m. DCF of $168m, less debt of $45m, yields $123m. 148m shares on issue.

Examples of edge- information, analysis, behavioural, structural. From Robert Robotti.

28 August 2013

TWD results out.  Good yield. Exposure to housing in SE Queensland. Worth a deeper look.

AMA results out. Revenue up, but EBIT down. EBIT margin increased by 2%.  Company is debt free, with cash at $10m in August 2013.  Cashflow very strong at $10m. 332m shares. Net of cash, AMA priced for no growth. Good to see a capable and honest CEO delivering on his promises.

IFM- founder CEO is leaving and has sold all his shares.

WTF results out.  Revenue down, profits down, and cashflow down. But somehow market is valuing shares for 10% growth pa for 10 years. Madness.

MLB results out. Heavy in cash, new management team coming in, but premium core business under pressure.  Core business valued at 5x cashflow after backing out cash chunk.

TTI results out. Debt still of concern.

29 August 2013

VOC prelim results out. Revenue increased to $66m. Profit down. Cashflow $18m, tax $3m. Free cashflow $15m.  Fibre and DC showed tremendous growth.  Cash balance of $14m will fully fund next year’s $13.3m capex. Locked in recurring cashflow will pay off IRU obligations of US$10m next year. USD hedge runs out in Dec 14, so some exposure to declining AUD. FCF $15m, current market cap implies 5% growth pa for 10 years. Adding debt to get EV of $220m, with FCF $15m, implies less than 10% growth pa.  In the presentation, VOC stated that FY14 capex is in response to customer demand, and this was repeated.

CTE Prelim report out. NPAT $1.25m. Operating cashflow $1.9m. FCF $1.6m. Cash on hand $5.7m. No dividend declared.  Wage costs up $300k and one-off capex spend.  $2m tax losses remaining.  Record number of blood cord clients. FCF estimated at $1.7m. Fair value at $23m, assuming no growth. But note:   “The Board is confident that subject to any unforeseen circumstances, the benefits of its common infrastructure and operations systems to support the business units will allow it to increase revenue, improve margins and overall financial performance of the Company during the next financial year.”

IPP HY report out.  Revenue period to period hardly moved.  Not a good sign, as M’sia went backwards due to elections, but increase in prepaid services plus record month in July, so momentum will continue. HK shows very good growth and is close to breakeven, locking in 4 out of 5 major developers.  INA growth slowing but still strong, whereas Singapore is lagging (still number 2). REA trading at 14X revenue. IPP is trading at 12x revenue.  We await next quarterly cashflow statement.

30 August 2013

DDR results out. Cashflow negative.

SST results out. Loans paid to other entities??

UOS HY results out. I have held this for over 3 years, and posted about it here. Within the HY report, I found an amazing and pristine balance sheet:

Cash	$429m
Receivables	$159m
Inventories	$294m
Land held for property development	$20m
Property plant and equipment	$28.2
Investment properties	$566.8m
Total of Asset Items above	$1497m
Financial liabilities	$319m

Rent and parking fees for half year is $20m.  Shares on issue is 1.1b, market cap is AUD$580m.  Book value increased 15% over 6 months.

That's it folks.  Time to sit back and think through ideas. By the way, the reading list has been updated, for those interested.

Disclosure:  My family and I own shares in AMA, CTE, SRV, SCD, TWD, IPP, VOC and UOS.

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.

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.

Xmas and New Year break

Investing does not provide much of a "break".  I am making the best of the situation, and taking a rest, so my time spent on investing is much reduced during this period.

Given the events in the US at the end of the year, the markets and the portfolios under my management have been given a fillip. Though pleasing, this means that buying opportunities are being reduced with the daily rise in prices.

I have a suspicious feeling that finding bargains may not be as easy in 2013. Nevertheless, there is no reason not to be fully prepared.

To my readers, best wishes for the coming year, and may your portfolio be headed steadily towards the top right hand corner!

Another angle on FGE plus tidbit on CMI

Clough Limited (CLO) is another mining services company listed on the ASX and exposed to the oil and gas sector. On 11 December 2012, CLO announced that it had renewed a $200m debt facility.  How is this relevant to FGE?

CLO is the biggest shareholder of FGE, holding roughly 36% of shares in FGE.  As at June 2012, CLO had $146m cash on its balance sheet. The last substantial shareholder notice published by FGE in May 2012 showed that CLO added a further 3% in compliance with the creep provisions of the Corporations Act. 

In 2012, CLO made $42m in profits and is currently trading at PE 15. FGE has $130m cash as at June 2012, and has had a good half with NPBT forecasted at $50m. If CLO takes $100m of its cash, combined with $130m of FGE cash, totalling $230m, it could afford to take over FGE for up to $360m. The current market cap for FGE is $335m. Alternatively, CLO could just use $200m from its debt facility to do the same thing, and after the takeover, repay the debt in full with FGE’s cash plus a bit of its own. With CLO’s huge blocking and controlling stake, a rival bidder is very unlikely.

An acquisition by CLO will be immediately and significantly PE accretive without any synergistic costs savings. In fact, CLO’s earnings would more than double, and its margins will increase by about 50% with FGE in its fold, and this can be done with minimal dilution.

All these are pretty obvious, so what am I missing?

My best guess from CLO’s perspective is that there is no hurry since CLO has a large blocking stake which renders the possibility of a rival bidder vanishingly small. CLO can take advantage of lower prices using the creep provisions. In the current environment for mining services, it is also prudent for CLO to preserve its cash rather than making any bold moves. CLO’s largest South African shareholder is probably loath to risk contributing more capital to CLO and prefers CLO to keep a clean healthy balance sheet.

A takeover by CLO has been long anticipated and speculated by the market, at much higher prices for FGE than the present.  These speculations have intensified with recent management changes at FGE, and the recent exercise of options by outgoing management at prices up to $5.60 perhaps indicate that they do not see any potential upside beyond $5.60 for FGE due to the potential for a takeover at prices below that.

It will be interesting days ahead for FGE.

Lastly, a little tidbit on CMI, with the newest director, Stephen Lonie, spending over $120,000 of his own money buying up 65000 shares in recent days.

Disclosure: The author owns shares in FGE and CMI.

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.

Forge Limited (FGE)

I recently tweeted that I am examining 3 shares which I believe are undervalued.

The third of these is Forge Limited (FGE), and I am forced to publish this earlier than expected as the company has jumped the gun on me (explanation below).

An extreme valuation sometimes makes purchase decisions very easy. The investor is given such a large margin of safety in relation to the purchase price such that not many things need to go right to get a decent return. On 5 December 2012, FGE provided this opportunity when it released an earnings update for FY13. 

FGE told the market that it expected to make Net Profit Before Tax of $90m to $100m for FY13. Give that 5 months of FY13 have already elapsed, and given that FGE stated that it expected the NPBT to be split evenly between two halves, at least $40m of NPBT has already been earned.

By way of background, FGE is an engineering and construction company providing mining services to the mining industry in Australia and Africa. As a group, mining services companies on the ASX have been deserted en masse by investors fearing the end of the commodities boom and a contraction in mining investments.

In the words of Jamie Mai, extracted from the book Hedge Fund Market Wizards by Jack Schwager, “markets tend to overdiscount the uncertainty related to identified risks.” Further, “although markets are generally good at estimating the magnitude of a contingent liability, they are often poor at evaluating outcomes probabilistically.”

It is my view that in the case of FGE, the market has overdiscounted both the rate and the magnitude of future earnings decline.

Valuation

FGE has 87 m shares on issue.  At AUD$3.85 cents, market cap is AUD$335m.  

Earnings

Earnings update on 5 December 2012- NPBT$100m. NPAT $70m. At least $40m of NPBT has already been made to date.  Backing out cash of $130m on the balance sheet (as at June 2012), this is effectively PE 3. An investor is paying about $210m for all future cashflows from FGE, bearing in mind that as at June 2012, FGE had an order book of $900m, and since June 2012, FGE has announced further contract wins totalling $360m.

A good part of FGE fortunes are tied to the actions of RIO, FMG and Roy Hill. These companies are racing against time to expand their iron ore output before iron ore prices decline further. 

Going through the financial statements, variable costs made up 60% of revenue in 2012, up from 46% in 2011. However, wage costs as a percentage of revenue have declined from 37% in 2011 to 27% in 2012.  This lower level of fixed costs provides a safety buffer in the event of a contraction in revenues.  At current prices, even if FGE's earnings declined by 50% (which is quite a distinct possibility), earnings multiple are still in the lowish single digits.

The market is pricing FGE as if it will experience an earnings decline to the vicinity of $20m per annum.  This is not impossible, but for what it is worth, I believe that the chances of this happening in the next 5 years is quite remote. The more likely scenario is that within the next 5 years, total free cashflow from FGE will exceed the share price being paid today.

Disclosure: The author owns shares in FGE.

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.

Coffey International Limited

I recently tweeted that I am examining 3 shares which I believe are undervalued.

The second of these is Coffey International Limited (COF).

COF is an engineering consultancy company with a history going back to 1959. It listed on the ASX in 1990. The company went on a diworsefication spree from 2003 to 2008, acquiring more than 30 businesses from a combination of cashflow, capital raisings and debt, until the GFC stopped this stupidity. Faced with heavy losses from write-offs, coupled with heavy staff turnover, management changed hands in March 2011. Since then, current management has restructured the business by selling and discontinuing non profitable businesses, cutting down debt, and improving operational efficiencies. 

In a nutshell, the core businesses of COF are quite stable.  This arises from its entrenched relationships, embedded expertise and geographical reach, aided by a very fragmented customer base. Not unlike the story of GEICO, management is engaging in cancer surgery, stripping away the useless parts and retaining the good businesses at its core.  Management’s efforts are starting to gain traction- costs are coming down, margins are being maintained or improved, staff turnover is reduced.

Due to disappointing results in the last few years, and an anticipated slowdown in mining investments, I believe that the market is now overdiscounting near term uncertainties for COF, and overlooking the underlying trend improvements in COF’s businesses.

Valuation

COF has 256 m shares on issue.  At AUD$0.32 cents, market cap is AUD$82m.   Operating cashflow is AUD$21m per annum, giving P/Cashflow multiple of 4.  If I add $66m of net debt, the enterprise value/ cashflow multiple is 7. Given COF’s long operating history and stability of its revenues, a reasonable valuation is about 10 times multiple.  Hence current market price is a 30% discount, assuming no costs improvements and no revenue or margin growth.  Recent update by management on 4 December 2012 appears to indicate that revenues are holding whilst costs are still being removed, although the outlook for the second half is still uncertain.

Earnings

Trailing PE is 11 based on NPAT of $7m derived by adding back $37m worth of write-offs.  At this stage, due to write-offs and restructuring, earnings multiple is not a reliable indicator of the value for COF.  In the long run, we expect the earnings to match the cashflow, which will bring earnings multiple into the low single digit figures. 

Balance Sheet

As at June 2012, COF has net debt of $66m.  There are $9m in franking credits.  

Disclosure: The author owns shares in COF.

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.

CMI Limited

I recently tweeted that I am examining 3 shares which I believe are undervalued.

The first of these is CMI Limited.

CMI operates two divisions, Electricals and TJM. 

Electricals revenue for FY 12 is $74m, returning EBIT of $21.5m.  TJM revenue for FY 12 is $40m, but EBIT is only $1m.

Electricals are facing headwinds due to declining coal sector investments in Qld, and also subdued industrial and housing activity.  

TJM has a lot of room to improve when performance is compared with ECB and ARP.  TJM is an established high quality brand with steady revenue, however the division is saddled with high costs due to the number of distribution centres, and management appears to be trying to contain costs by moving manufacturing to China.  ECB and ARP both generated EBIT margins in the mid teens, and if TJM can do just 10% EBIT, the EBIT from this division will go up 4x. I suspect that the TJM division is being dressed up for an eventual sale, and logical acquirers are AMA and ARP.

The problem with CMI has been management’s treatment of minorities over the last several years, culminating in litigation brought by Troy Harry last FY. With the death of long time owner Catalan, and succession to his daughter Leanne Catalan, the situation with management is still less than optimal, especially as management owns a controlling stake.  We suspect management’s actions account for the perennial share price underperformance, made worse by the previous unwieldy structure of having two classes of shares.  The structure has since been rationalised this FY following litigation brought by minority shareholders.  There is still some overhang of a big parcel of shares bought by Leanne allegedly in contravention of the provisions of the Corporations Act which was the subject of litigation at the Takeover Panel.  This matter is still subject to appeal, although I believe this is unlikely to matter in the big scheme of things.

Valuation

CMI has 38.2m shares on issue.  At AUD$1.70 cents, market cap is AUD$58m.   Operating cashflow is AUD$9.5m, giving P/Cashflow multiple of 6, and the multiple is slightly less than 7 if we include debt of about $8m.  Normalised EBIT is about $20m. A very conservative 5x EBIT puts CMI at AUD$100m. Current AUD$58 implies a 42% discount to a very conservative valuation. Even if EBIT drops by half to $10m, the EBIT multiple of 6 is still within conservative territory.

Earnings

Trailing PE (normalised without write-off based on NPAT of $14m) is 4.   Outlook given on 30 November 2012 appears to indicate that Electricals is holding and TJM is improving.  Market cap of AUD$58m allows an earnings deterioration by 50% to $7m,  and even then, the PE is still a lowly 8.  This provides a degree of margin of safety

Balance Sheet

As at June 2012, CMI has $8m in bank debt.  This is more than covered by operating cashflow of $9m. There are $16m in franking credits. There is also an impairment provision for a third party loan of $17m which has been written off to zero, but which I am confident will result in some recovery. There is a personal guarantee for $2.5m for this loan which CMI is now pursuing.  Working capital is about $37m which is about 1/3 of sales, and I expect there is some room for improvement here to boost the balance sheet.

Disclosure: The author owns shares in CMI.

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.

Seeking Patience

 "All man's miseries derive from not being able to sit quietly in a room alone.”   Pascal, Blaise

Patience is a great asset, and I believe, a major differentiator of performance between fund managers.  Every one of us are blessed (or cursed, depending on your viewpoint) with different abilities. It is a simple logical inference that the more actions we take, the more mistakes we are likely to make. This is an undeniable fact in the highly probabilistic world of business and investing.

Once again, patience is a simple concept in theory, but very difficult in practice. As some pundits say, even inaction is an action by itself. Stock prices can meander for years before a sudden spurt brings prices back to fair value.  The time period for such spurts varies between 2% to 9% of the total holding period. So in a holding period of say 5 years, the share price performance comes in a period lasting only 1.2 to 5.4 months. In the meantime, glamour stocks are flying, and other opportunities appears to be zipping by while your own stocks do nothing. A similar situation arises when we attempt to resist the temptation to sell stocks which have increased in price. Let your winners run, they say. It is not an easy task to maintain equanimity and objectivity in such situations. 

Needless to say, this week has been quite trying on my patience.

22 October 2012

Listening to TGA presentation. TEF aiming for $50m critical mass, funded by debt. Both TEF and Cashfirst to start major contributions in 2014 and 2015. One person kiosks reminds me of Bank Rakyat.  Pretty significant competitive advantage once fully rolled out. NCML getting some major exposure to QBE, CBA and SDRO.  Rentals maintaining excellent performance and spitting back cash to fund other lines.  I can easily envisage a situation within 3 to 5 years when TEF, Cashfirst and NCML collectively contributes as much as Rentals, and a doubling of EPS.

23 October 2012

Rereading Competition Demystified by Greenwald.

UOA DEV Q3 results out. Total assets increased by 13.5% to MYR$2430m.  Total liabilities increased by 21% to MYR$357m. Total equity increased by 12.3% to MYR$2072m.  MYR$88m NPAT for quarter. 4 quarters=MYR$300m-$360m. UOS 66% share is MYR$200-$240m=AUD$60m to $80m. On a lowly PE 8 range, UOS should have a valuation range of AUD$480m to AUD$640m, and this ignores rental from investment properties held at parent level. A second way to value is taking UOADB’s market cap of MYR$2.1b, of which 66% is MYR$1.4b=AUD$460m, which ignores UOA REIT and also all assets held at parent company level. Every which way I cut it, there is a significant undervaluation. A slap in the face type of undervaluation.

Assessing CAB- bearing in mind that the market usually overdiscounts near term uncertainties. AGM on Wednesday 28 November 2012.

26 October 2012

IPP still headed the right way. http://blog.iproperty.com.my/ceo-blog/the-iproperty-group-is-gaining-weight/  Cannot wait for this baby to turn cashflow positive.

IPP extended leadership in HK- arguably the most important of all its markets. Waiting for news that the other 3 property developers have joined the party, and it will all be game over for the competitors. HK will make more money than Malaysia, Indonesia and Singapore combined. IPP revenue running at AUD$15m per annum now.  Compared to REA in 2003 with AUD$9m revenue.  In 2004 REA revenue jumped to AUD$19m, and it started making a profit.  REA revenue is AUD$280m in 2012 with penetration of 60% of RE spend. IPP  currently at 5% penetration of RE spend. A six-fold increase to 30% RE spend will online will see revenue at AUD$90m.  Current market cap for IPP is AUD$160m.

27 October 2012

CSL- profit guidance up 20% despite currency headwinds. This is a sad miss for an entry price below $30 in February 2012. The opportunity cost is a whopping 66% gain forgone, not counting dividends.

AMA- CEO address. Appears to be squeezing out growth and good performance from all divisions, especially FluidDrive with quarterly EBIT up a stunning 200% pcp.

Disclosure: The author owns shares in AMA, IPP, UOS and TGA.

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.

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.

A Post Mortem of a Fairy Tale

On 5 October 2011, the Motley Fool Australia kindly published an article written by yours truly.  You can find the article here:

http://www.fool.com.au/2011/10/investing/road-map-to-riches-treasure-hunting-on-the-asx/

The Fairy Tale

A portfolio of the 5 small cap shares I mentioned has not done too badly in the intervening 13 month period. The five shares are AMA, IFM, UOS, KNH and ZGL. If an investor has allocated $10,000 equally to these five shares on the date of my article, the portfolio will be worth $14,838 today, and this does not include any franking credits attached to the hefty dividends from AMA and IFM.  A satisfactory 48% per annum return.

As a matter of comparison, the benchmark All Ordinaries Index returned about 6% during the same period.

The Reality

So much for the hypothetical portfolio.  What actually happened in reality?

AMA was bought in two tranches with average entry price of 11.8 cents. About 20% of portfolio was allocated to AMA.  It is still being held today with a gain of about 215% on initial stake.

IFM was never purchased. To put this omission into perspective, IFM could have been bought for below 20 cents, and it is now selling for 35 cents after paying 2.4 cents of fully franked dividends. That is an 87% gain thrown away.

KNH was bought for 23 cents.  About 2% of portfolio was allocated to KNH. It was sold for 20 cents after publication of its annual results in February 2012, in the wake of massive diworsefication by management into unrelated low margin businesses, and a rapidly deteriorating financial position. KNH trades at 13 cents today. The loss was about 13% of initial stake which would have ballooned to 43% if held till today.

UOS was purchased at 34 cents. About 4% of portfolio was allocated to UOS. Gains from share price appreciation, capital returns and dividends total 14 cents, resulting in a gain of about 41% of initial stake.

ZGL was purchased in two tranches with average entry price of 26 cents. About 10% of portfolio was allocated to ZGL. It was sold in February 2012 for 22 cents for a loss of about 15% of initial stake. The sell was prompted not only by deteriorating business conditions, but also due to increasing unease over management’s self-interested actions and late disclosures of bad news on projects in hand.

Overall, the total gain is about 110% of initial portfolio stake. The gain is still sitting as unrealised gains in the two remaining shares being held, namely AMA and UOS.

The Lessons Learned

I need to have the courage of my convictions. The sad omission of IFM resulted in outsized gains being missed which would have vastly improved the returns.

Buy and hold does not mean buy without regard to valuation and holding on blindly. The 5 shares were picked based on valuation, and the hypothetical portfolio shows that even if an investor held blindly until today, the gain is still a satisfactory 48% per annum. By not holding blindly and following the companies closely and continually doing due diligence, further losses in KNH and ZGL were avoided.

A concentrated portfolio is risky if I lack competence in judging the quality of a business. When these 5 shares were selected, I remember being equally optimistic about all 5 of them, with the least optimistic being IFM, resulting in its sad exclusion. Yet I choose to concentrate my holdings on AMA. In hindsight, this was a mistake despite the great outcome. I had no real rationale why AMA was preferable over the rest, I could have concentrated my holdings on KNH and suffer some significant losses.  The hypothetical portfolio assumes an equal weighting, which returned a lower result, but is still more than satisfactory with much less risks involved.

Management matters a lot more than I initially assumed. It is a very rare business that could withstand the ravages of bad management. AMA had the guidance of Ray Malone, a man of discipline and integrity, even though the business did have some industry tailwinds. UOS continues to benefit from its management of several decades of experience. IFM staged a turnaround with the return of founder Richard Graham to the helm. On the other end of the spectrum, KNH was skewered by bad diversification choices from management. ZGL’s management lost the confidence of the market when they belatedly disclosed problems that should have been apparent much earlier.

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.

Investing as simple as ABC

On 2 November 2012, I grabbed a copy of the share tables in the Daily Telegraph and started trawling through the list, aiming to start at A and ending at Z. For several years, I have screened shares using rudimentary software provided by Etrade. I cannot help but feel I am playing a mugs game. Everyone will be screening for shares using popular criteria such as PE, ROE, Book Value, etc.

So I finally overcame my laziness and procrastination and took Buffett's advice.  There is really no other way, given that I am not blessed with talents of imagination and creativity, and that I am basically an introvert without a benefit of a wide network to draw information upon.

It was not as painful as I feared. As at today, I have finished all industrials up to G. At this rate, this exercise will be done and dusted well within a month. True to Buffett's experience, there are many names which I spent very little time on. There are also quite a number of decent companies which I already own or have kept on my watchlist for a good entry price.

As a matter of perspective, there are over 2000 listed entities on the ASX. Only 1/3rd of them are making profits. Let's see whether there are some gems hidden in there.

Like I said, simple as ABC.  I never said it will be easy.