Reporting Season EOFY 2014- Part 1

Okay folks, back to serious business.

The run-up to this year's reporting season was much more boring than usual due to the dearth of any news. In fact, 2 weeks into the reporting season, things are still pretty dull in terms of any exciting business developments or news that matter in the long term. The reality is that things just do not move that quickly in the business world.

5 August 2014

COH- NPAT $93m. FCF $80m. Market Cap is $3.8b. FY15 NPAT will be around $150m to $170m assuming half on half performance continues together with growth in the high teens. At current prices, implied growth is over 10% CAGR for 10 years with 10x terminal value. N6 surprised on the upside with good sales. I do not understand COH adequately on a qualitative basis to make an informed guess as to its possible long term growth rates. It also appears that this industry is akin to an arms race, not unlike the smartphone battles, where new products are constantly required to keep ahead of competitors. This is not a healthcare play unlike say Ramsay Health Care, it is a technology play.

TCL- $20b EV. $500m in FCF.

Question of the day: Which businesses are able to provide an analogue experience in a digital world?

6 August 2014

I have an ABC policy- Anything But China. So it was with some reluctance and disgust that I reviewed SBB. I even managed to persuade my darling missus to do some research for me. If you want to know more, I am afraid you will be disappointed, as I am not going to make myself an unwitting target of a potential defamation suit.

OFX 1^st quarter numbers up over 30%. 1st quarter EBTDA is $7.8m.

7 August 2014

IPP results out. Still cashflow negative despite revenues up 40%, positive EBITDA before writedowns. Losing ground in Singapore, but making money in Malaysia, and turning profitable in HK as expected. Share price is still strong due to REA taking a big stake. Current market cap is $650m. Maybe REA can make it work, but REA can afford the risk of losses more than me.

IRI- growth in H1 did not follow through to H2 due to lack of once-off license sales. Lack of recurring revenue is spooking market. Not much growth but somehow priced for growth.

TTN results out. Still not much FCF despite being in a good sector.

8 August 2014

REA- Revenue up 30%, NPAT up 37% to $150m. FCF about $150m. Results driven by Australia. Market cap pre-results is $6b- implies 20% CAGR for 10 years. Market marked down REA by 8% because results did not reach expectations. 

ASW- full year result flat yoy. Difficult to advance without ability to scale due to small size and already very efficient operations. The registry game is about scale.

UOS- profit guidance of about $64m PBT before minorities. Some headwinds coming due to sliding property market in Malaysia with the introduction of GST.

11 August 2014

COF FY results out. As expected, Geosciences still under pressure but International Developments division revenue improved. Operating Cashflow is over $20m (steady for last 3 years). No restructuring costs this half. Net debt reduced to below $50m. No dividends declared, as directors continue with debt reduction strategy. Contracted work in hand is $100m for ID and $90m for Geosciences. EV at $120m. Geosciences margins continue to be under pressure at 4%. As a leading indicator of conditions in the mining services sector, COF’s results indicate that things are not improving in a hurry. The initial investing thesis remains solidly intact. But it has been a roller-coaster ride with the share price dropping over 75% to 10 cents at one stage, and then staging a recovery. To make matters worse, I failed to top up during the entire ride. Not my finest moment.

FLN- revenue increased 40% but running a loss. CEO certainly likes the word "monotonic." Commented that FLN is like Ebay in 1997. Mate, we can talk again once you show a profit and positive cashflow.

TGA- Perennial ceased to be a substantial holder. TGA has a moat as competitors have little mindspace for this sort of unsexy business, and the banks are not interested in this sector due to small profits. TGA’s size and penetration of the communities it serves give rise to economies to scale. It went through the GFC with hardly a blip, testament to the resiliency of its business model. One of the more neglected quality businesses on the ASX.

OFX- director picked up nearly $60k worth of shares on market.

12 August 2014

SGH- WIP now exceeds total yearly revenue. Expenses/Revenue static at 79%. I have examined the figures for each year back until 2007. It was an exercise which was both intriguing and disgusting. It was also interesting that total revenue and total cash receipts from 2007 to present tally to an exact figure of $1.462b. An exact match...hmmmm. For your information, I am halfway through drafting a blog post which attempts to discuss concepts of accrued revenue, work in progress, prepaid revenue, unearned income and other such similar exciting items in balance sheets.  I know, I know, you can hardly wait to read more on accounting arcania.

RKN- results are pretty good, still growing in business market, strong cashflow. News reported hiccup with new software, with lots of complaints on social media.

BOL results out. Total assets is $389m (negligible intangibles). Total liabilities $155m. Equity is $234m vis a vis market cap of $84m. OCF= $23m before asset sales. Management expects further strong FCF in 2015 which will be used to reduce debt currently sitting at $89m net. Finance cost is $8m which will decrease by at least $2m in 2015. Expects infrastructure to kick in in late 2015, and picking up speed in 2016 and 2017. Flagged another $15m to $20m of capex in 2015, which is largely covered by expected asset sales. CEO confident that business is cashflow positive, and asset sales only supplement cash on top.

13 August 2014

CRZ- sales up 10% NPAT up 14%. FCF nearly $100m. Market cap $2.6b.

AMM- FCF $20m. Capex $27m. Maintenance capex=$10m. Since DA=$11.4m, Owner’s earnings= $24m. Forecasted NPAT growth of 20% for 2015. Trading at 20x owner’s earnings.

CPU- results out. NPAT up 60% with flat revenue.  Need to check interest margin revenue.

CSL- R & D is US$466m. OCF less capex is $1b- US$1.5b after adding back R & D. Share price has gone off again. The waiting game continues.

VOC splurged another $11.7m for WA data centre. Purchase price nearly 6x EBITDA. Pouring capital into a commodity business at the height of the boom. Wisdom of this acquisition will depend on cross-sales eg revenue synergies. Risky.

SSM FY out. Cashflow from operations is over $50m. Out of this they paid off the Syntheo liability and $5m interest, with a net cashflow of $25m. The money raised was capital raising they paid down debt. Gross debt is $17m, and net debt is $11m. EV is $88m. Next year’s cashflow will be in the range of $30m to $50m, putting SSM at cashflow multiples of 2 to 3x.  Cashflow boosted by lack of capex spending which was running at $10m per annum. Normalised cashflow should be about $20m to $40m. SP unmoved. New management remuneration based on EPS and TSR again (current fashionable metrics- way inferior to return on capital).

14 August 2014

TLS and FXJ results out. TLS increased dividend and announced buyback.

15 August 2014

IRI results out. Very little growth, good ROE. Recurring revenues on the increase to over 40% of revenues. Priced for growth at $160m compared to less than $10m FCF.

Lastly, dear readers, a small riddle:

"How would a one-legged man win in an ass-kicking contest?"

Hint 1: Bobby Fischer

Hint 2: Sun Tzu

Enjoy and Prosper,

Yours One Legged

A No-Brainer "Investment"

This post drew its inspiration from a great blog post written by Tony Hansen, which I urge all readers to read here.

The Australian Superannuation Co-Contribution Scheme (CCS) was introduced in 2004. For each of the years from 2004 to 2011, a low income earner paying $1000 into his/her superannuation fund would have received into their super another $1500 tax free from the CCS. In 2012, the CCS would have paid $1000. In 2013 and 2014, and for future years (assuming no changes), the CCS payment is $500 for every $1000 of after tax contribution.

A low income earner who made use of this opportunity from its inception in 2004 right up until 2014 would have received a total of $12,500 superannuation co-contributions from the CCS for an outlay of $10,000 over this ten year period. Assuming a relatively modest 8% yearly returns, a sum in excess of $32,000 would have resulted from this exercise. The only investment "skill" required is the effort of saving the equivalent of $19.20 per week from after tax pay. Bearing in mind the low income tax rebate available to low income earners every year, the actual saving required drops to a mere $11.50 per week.

In advertisement lingo: "Receive $32,000 in 10 years by paying less than $20 per week."

There are very few investment opportunities, in fact none that I could find, available to the general public which provides such fabulous returns for virtually zero risk and miniscule effort over such an extended period of time. The mystery to me is why so very few take advantage of it. One logical inference is that for many people, saving $20 per week is just too difficult. Another logical inference is that our education system and financial system have not been doing a good job of lifting standards of financial literacy amongst Australians.

The good news is that it is not too late to act now (ala Demtel and TV infomercials). A low income earner saving $20 after tax per week into his/her superannuation for the next 10 years, assuming 8% per annum returns (quite achievable with a low cost index fund), would have accrued a total of nearly $22,000.00. Yes, the money is locked away for a long time, and yes, the laws governing superannuation is quite likely to change in the future. On the other hand, to carry the cheesy advertising angle a bit further, what have you got to "lose", other than one less $20 note in your wallet every week? If the CCS is removed 5 years from now, there is no loss to the saver, who can just redirect his/her savings elsewhere.

For young people just starting out working, perhaps in low paying apprentice jobs, it will be difficult to find a more rewarding alternative to the CCS. Consider the fact that a 18 year old out of high school, working as a low paying apprentice, by saving $20 per week, would have accumulated an extra $22,000 in their superannuation account before they turn 30, on top of any employer contributed superannuation.

Whether one is low-income, mid-income or high-income, I hope that this post delivers the message clearly: how you play the cards you have been dealt in life is equally important, if not more important, than the cards you have to start off with.

Disclaimer: Opinion of a General Nature Only, containing facts that may be wrong or outdated. Definitely not financial advice of any kind.

Dogs versus Darlings 4 months later

A follow up on this amusing exercise.

As at midday 11 July 2014, the Dogs are down on average 7.8%, and the Darlings are down on average 19%. The Dogs are still outperforming the Darlings by nearly 11%. This does not include the effect of dividends.

Diehard aficionados may also like to track FLN, probably one of the most expensive shares you can buy on the ASX at this time. Please do remember that shares are not Veblen goods.

Hummingbird Value's Investment Strategy

Another great read here.

The strategy outlined by Paul Sonkin is very similar to the strategy currently employed at Castlereagh Equity, from philosophy, stock selection, buying and selling, to portfolio management.

Arlington Value 2013 Letter

Inspiring read. 

Thoughts on Aggregators

The following is an excerpt of my diary notes in September 2013. It contains extracts from an email conversation I had with another investor whose opinions I admired. The central part of this excerpt concerns the issue of aggregators, namely companies that grow by acquiring others.  I call them the Pac-Mans. 

24 September 2013

Aggregators

Thought of the day: aggregators versus organic growers. Spending on acquisitions are capitalised whereas spending on organic growth is expensed.

Buffett has previously warned of the "sleight of hand" with the accounting treatment for acquisitions. He pointed out that post acquisition, the acquirer gets a free kick with margins and earnings as the target usually comes with accounts receivables and contracts in progress for which the costs of sales has already been expensed.  Since the acquirer capitalises all acquisition costs, the metrics such as cashflow, earnings and margins are boosted in the operating section.

Your point that organic growth spending is usually expensed is an excellent point. Although in cases of heavy R & D, this may need to be revised.  CSL provides an excellent support for your point, as they expensed all their R & D every year.  The value of their IP does not show up on the balance sheet.

On the subject of aggregators (or roll-ups as they call it in the US), various anecdotes and studies I have read appears to suggest these fail more often than not.  Neptune Marine Service (NMS) was an example.  AMA was another failed example which got turned around. ABC Learning, MFS and Allco are the well-known bad-boys in the aftermath of the GFC. Nevertheless, early investors can make a lot of money on those who execute correctly.  I am thinking ONT ran by the excellent ex-army Daryl Holmes, CPU in the days of Morris, QBE in the mad days of Frank, and Navitas.

Here is a quick list with my current thoughts:

SGH- I still believe this will implode, but may survive implosion. Dislike management intensely.

AMA- made good money on this when Malone turned it around.  Very close to implosion before Malone.

ONT- this is a keeper, but not at current prices.

GXL- the debt load is getting scary, not as compelling as ONT.  Not sure whether retailing business has any relevance to the core vet business.

VEI- another one which nearly imploded. I dont think it will do well, as the specialist doctors have too much bargaining power.  Very different to ONT.

TRG- interesting but have not had a close look.

IVC- very good run, but I have questions about how they manage their prepaid book.

One quite common theme is that many of these aggregators have a strong run-up before they implode. The ones that don’t implode are runaway successes.  The ones that do implode can do well if they are turned around. A good specialist in this field can make decent money.

Cross post on SRV

The serviced office business has no barriers to entry. It is also difficult to get any meaningful advantages by being the lowest cost player via economies of scale. As stated by others, these businesses have large operating leverage due to high level of fixed costs and low variable costs. 

The way I see it, SRV is a play on very good and shareholder friendly management. Just like the insurance industry, you want management which is disciplined and focused on the bottom line for the long term future, as the industry is prone to be buffeted by economic cycles.  Management of SRV is savvy in that they pick their spots carefully in the market instead of trying to be everywhere and everything for everybody, a strategy used by Regus. Focusing on great service, great locations and innovative business solutions allow them to attract and keep high margin customers. As a contra reference, just Google "Regus Complaints" and you will see the point of distinction with SRV.

Due to the inherent cyclical nature of the industry, one needs to fully understand the boom and bust economic cycle (something I really need help on), to watch carefully what management does in good times and in bad times, and as always, to pick a good price for entry.  A lack of understanding will result in ruin, because it is precisely when things are all hairy and ugly that one should start buying, and precisely when things are going gangbusters that one should be selling. For SRV, it is in the midst of both economic downturns post tech crash and post GFC crash, when things are looking bleak and financials are weak that presented great buying opportunities. 

Over the very long term of say 10 to 20 years, I would venture to suggest that SRV under current management will increase intrinsic value quite steadily plus a respectable dividend return, however the ride will be very bumpy like a rollercoaster.

On a side note, plays such as HUB and other hipster plays are probably in a different market segment. For example, if a corporation needs to send over a specific team to implement a project in a specific location, serviced offices provide the ideal short term solution. No such team would want to work in a HUB or a hipster work environment. As we move more towards an information based economy, the need for segregated and quiet space for concentrated uninterrupted work increases.  As such I see no systemic risk to the underlying demand for serviced offices.