My Investment Journey

[Ariyahn2011]

I like your SBB hold. I hold SBB myself. Good luck!!

PS how do you find all these companies? Do you get a list and go through each sector and see what sector you like? Interesting how you find some of these companies. Cheers.

 

[KnowThePast]

Depends on your reason for investing. If you need to generate a living from your capital, it's less than reasonable to have funds tied up in some "might be good one day" company when there are plenty of profitable alternatives.

No argument from me, this kind of investment strategy is not suitable for everyone.

I don't think we said they're worthless. Just it's better if they do make money.

G'day KTP. I never said they are worthless. I guess it just depends on your investment strategy and preferences.

I may have come across a little too harsh before, apologies.

Yes, all things been equal, it's better to buy a profitable company. But things are never equal, are they?

Whenever comparing companies, it is always at least a two factor analysis - profitability and price. What I am saying is that it is incorrect to state that profitable company is a better investment without considering the price.

KTP, how do you go about valuing these companies, do you use things like price to sales ratios? Sorry if it's already been discussed earlier in the thread.

I have a speculative portion of my portfolio in stocks like these and am not sure what is the best way to value them.

Sales and Assets are a starting point. By estimating likely margins/ROC the company can achieve once recovered, you can calculate profitability.

The estimate is nothing that can be done precisely - it can be based on historical averages, industry comparisons, etc.

I then consider the likelihood of recovery or bankruptcy and the time it may take. Time value of money is an important concept here.

I consider how much assets and sales may be depleted by after restructure/sell offs/etc.

Almost every company will be different, with some unique challenges it faces, although most will fall into a few categories.

Another way is to just play the numbers, and buy companies that fall in price below some threshold. Statistically, this has been shown to beat the market most years, this is closer to the approach that I am taking. They key is to understand that you are playing the odds that should provide a positive expactancy in the long term. Short term (< 3-5 years), your bets can go against the odds many times in a row. I hope I am right

 

[KnowThePast]

PS how do you find all these companies? Do you get a list and go through each sector and see what sector you like? Interesting how you find some of these companies. Cheers.

Hi Ariyahn2011,

I wrote some software that allows me to run some fairly elaborate scans.

Commsec, I believe, has a feature to search on many values, I'm sure there's others too.

SBB is definitely my most exciting pick. I rate its chances of success quite low, but following it is good entertainment.

 

[pinkboy]

Hope is not a strategy.

pinkboy

 

[Ariyahn2011]

Hi Ariyahn2011,

I wrote some software that allows me to run some fairly elaborate scans.

Commsec, I believe, has a feature to search on many values, I'm sure there's others too.

SBB is definitely my most exciting pick. I rate its chances of success quite low, but following it is good entertainment.

Oh really? Wow sounds quite beyond me regarding the elaborate scans.

I actually felt SBB has a good chance of success given it has no debt and its sales have been growing. Its ROE its crazy. It is my only penny stock within the ASX.

New appointed management who can speak chinese to put the Aussie investors in the light. Pays a divi, and still has cash in the bank. And has shops in China which has a population of 1.357 billion approx. I feel SBB is in a good spot. I believe the financials are out in Feb. So let us wait and see .

 

[McLovin]

Oh really? Wow sounds quite beyond me regarding the elaborate scans.

I actually felt SBB has a good chance of success given it has no debt and its sales have been growing. Its ROE its crazy. It is my only penny stock within the ASX.

New appointed management who can speak chinese to put the Aussie investors in the light. Pays a divi, and still has cash in the bank. And has shops in China which has a population of 1.357 billion approx. I feel SBB is in a good spot. I believe the financials are out in Feb. So let us wait and see .

I saw the announcements the other day of the directo resignation and the director appointment. I thought, before I looked, what's the best it's one of the Australian directors resigning and a Chinese director being installed. I wasn't wrong. Check out the SBB thread.

 

[KnowThePast]

Oh really? Wow sounds quite beyond me regarding the elaborate scans.

I actually felt SBB has a good chance of success given it has no debt and its sales have been growing. Its ROE its crazy. It is my only penny stock within the ASX.

New appointed management who can speak chinese to put the Aussie investors in the light. Pays a divi, and still has cash in the bank. And has shops in China which has a population of 1.357 billion approx. I feel SBB is in a good spot. I believe the financials are out in Feb. So let us wait and see .

Financials, as reported, are excellent.

The reason for the depressed share price, however, are serious suspicions of either complete fraud, or significant fudging of the numbers. On top of it, Chinese companies tend to usually trade on half the valuation of Australian companies even without these concerns.

The seed investors have all sold out at the first opportunity which doesn't look good.

For the share price to re-rate, they will need to show good performance and pay dividends for a few years. The CEO will need to hold on to his shares once they come out of escrow as well.

I've written on SBB before, I believe the appropriate risk/reward is there, but the chances of the reward are under 50% IMHO.

I saw the announcements the other day of the directo resignation and the director appointment. I thought, before I looked, what's the best it's one of the Australian directors resigning and a Chinese director being installed. I wasn't wrong. Check out the SBB thread.

That's what I mean by the excitement of this stock, every little detail is discussed from every angle ad nauseum.

Director resignation/appointment would go completely unnoticed for just about all companies, but once suspicions are there, this attracts attention.

My speculation, while I place no value on it, is:
Positive: it is better to have a director who doesn't need a translator to speak to the CEO.
Negative: sure does look odd for a company that tries to improve its image with investors.

 

[Ariyahn2011]

Financials, as reported, are excellent.

The reason for the depressed share price, however, are serious suspicions of either complete fraud, or significant fudging of the numbers. On top of it, Chinese companies tend to usually trade on half the valuation of Australian companies even without these concerns.

The seed investors have all sold out at the first opportunity which doesn't look good.

For the share price to re-rate, they will need to show good performance and pay dividends for a few years. The CEO will need to hold on to his shares once they come out of escrow as well.

I've written on SBB before, I believe the appropriate risk/reward is there, but the chances of the reward are under 50% IMHO.



That's what I mean by the excitement of this stock, every little detail is discussed from every angle ad nauseum.

Director resignation/appointment would go completely unnoticed for just about all companies, but once suspicions are there, this attracts attention.

My speculation, while I place no value on it, is:
Positive: it is better to have a director who doesn't need a translator to speak to the CEO.
Negative: sure does look odd for a company that tries to improve its image with investors.

Some valid points. I would hope its not a fraud. But your right, lets see what happens with those divis.

 

[galumay]

Some valid points. I would hope its not a fraud. But your right, lets see what happens with those divis.

I hope for your sake its not a fraud, but I looked at them and decided there is definitely something really wrong with them, whether its straight out fraud or not remains to be seen. If you read through the SBB thread you will get a good idea of what all the issues are.

IMO, at best they are a highly speculative company that should attract a very small poroportion of your capital given the risk, i dont believe they are an investment grade company.

 

[KnowThePast]

Bought PHG, 2851@ $0.435.

Pulse Health manages private hospitals and day surgeries. It is in fairly early days; the strategy is to acquire more facilities to get benefits of scale. They concentrate on regional and specialist hospitals, rather than compete directly with the big boys.

I looked at them a year or two ago, at that point, they were running at a loss, raising shares and acquiring more facilities to scale up, I felt they were too risky. Now that they are profitable and started paying a dividend, I feel a lot more comfortable, even though this is still a higher risk, higher reward play.

The industry itself provides a form of competitive advantage. It is a necessary service, growing over time. Cost and complexity means it is rare for a couple to popup on the same corner and compete for foot traffic. Once established, there tends to only be a few in the area that are enough to service the population.

A lot of the admin function of running a hospital is the same, whether you are running 1 or 20. Supplies and logistics are also cheaper with scale. So, while the ROC at the moment is quite poor, I see it increasing substantially with more scale. Utilisation rates and capacity should also improve over time.

They own land and property of some of their facilities and have no debt, giving them some extra breathing room in difficult times.

The strategy is to grow by further acquisitions, which I think is definitely the right strategy. However, even after subtracting share issues and acquisitions, existing assets have been growing consistently as well, with 20% EBIT growth expected in 2015 from existing assets.

Assuming this kind of growth for a few years, the price does not seem expensive. My main target however, is not just sales growth, but the margin expansion that should come with scale and utilisation/capacity increase.

 

[galumay]

Bought PHG, 2851@ $0.435.

Hey KTP, just some quick questions if you dont mind, I had a scan of PHG and I cant understand why their numbers are so erratic, given the business.

Looking at sales/revenues they were 0 in 2011 & 2013 and $40m in 2012! Cash flow and earnings have also been very bumpy.

Another thing i found odd was very low debt, but high interest, (coverage ratio of only 2.41), I assume without digging deeper, this is because they paid off debt with the capital raising, but interest for the previous period was still an expense?

As you say the ROE - and the ROC - are on the low side.

The earnings growth expectations for this type of company seem a little optimistic to me, but maybe I am missing something in the bigger picture?

 

[galumay]

Also i am confused about reported earnings, the annual report lists eps as 0.73c, which would give them a P/E of around 59! But Commsec reports eps as 1.9c which would seem to be the earnings excluding one off items.

Given that the reproted NPAT is $875K and therefore the eps 0.73c I am not sure why Commsec have chosen to report what is basically an unaudited NPAT of $1.85m giving the higher eps.

Is this a normal practice?

 

[KnowThePast]

Hey KTP, just some quick questions if you dont mind, I had a scan of PHG and I cant understand why their numbers are so erratic, given the business.

Looking at sales/revenues they were 0 in 2011 & 2013 and $40m in 2012! Cash flow and earnings have also been very bumpy.

Hi galumay,

I have revenues against them as:
2008 - $12m
2009 - $31m
2010 - $34m
2011 - $37m
2012 - $39m
2013 - $52m
2014 - $52m

I got these directly from their reports. Looking at commsec, they do have zeroes, looks like data issues on commsec platform.

Profit is not linear growth, but for a company in their stage of development, I think it's perfectly normal. Taking away abnormals, it is a lot less erratic. Their strategy is to acquire existing facilities, change them to their systems and build capacity. This isn't a smooth process and will have its stops and starts. At this point, I want to see growth in revenue and profitability with dividends, but it doesn't have to be perfectly smooth just yet.

Another thing i found odd was very low debt, but high interest, (coverage ratio of only 2.41), I assume without digging deeper, this is because they paid off debt with the capital raising, but interest for the previous period was still an expense?

Yep, that's it. At the end of 2013, they had $20m in debt. They've paid it all off in 2014, but had to pay interest in the meantime.

As you say the ROE - and the ROC - are on the low side.

The earnings growth expectations for this type of company seem a little optimistic to me, but maybe I am missing something in the bigger picture?

I generally agree with you there about earnings growth. 20%/year organic growth will not be achievable for long. The bigger opportunity I see is margin/ROC expansions that will come with scale.

Also i am confused about reported earnings, the annual report lists eps as 0.73c, which would give them a P/E of around 59! But Commsec reports eps as 1.9c which would seem to be the earnings excluding one off items.

Given that the reproted NPAT is $875K and therefore the eps 0.73c I am not sure why Commsec have chosen to report what is basically an unaudited NPAT of $1.85m giving the higher eps.

Is this a normal practice?

I am not sure, I always take all numbers directly from reports.

 

[galumay]

I am not sure, I always take all numbers directly from reports.

On that basis they are running with a p/e of 59, while I dont normally use p/e as a metric of value, if its that far out of whack with market p/e i like to see some evidence of the massive growth that would be required to return it to mean.

You would need growth of 35% compounding for 5 years to return it to market average!

On another note its frustrating to find those sort of errors in Commsec, with the amount of companies I research and the detail i record, having to download say 5 annual reports for each company is a PITA, but if Commsec data cant be relied on i guess i have no choice!

 

[KnowThePast]

On that basis they are running with a p/e of 59, while I dont normally use p/e as a metric of value, if its that far out of whack with market p/e i like to see some evidence of the massive growth that would be required to return it to mean.

You would need growth of 35% compounding for 5 years to return it to market average!

Only if you think their abnormals are not really one-offs. Otherwise, you should use their underlying profit to calculate PE.

The number then is still high, but a lot more reasonable considering their growth forecasts and size.

On another note its frustrating to find those sort of errors in Commsec, with the amount of companies I research and the detail i record, having to download say 5 annual reports for each company is a PITA, but if Commsec data cant be relied on i guess i have no choice!

Yes, it's definitely frustrating. I've encountered it before and have since made it a habit to grab all the data myself when I started researching a new company.

 

[galumay]

Only if you think their abnormals are not really one-offs. Otherwise, you should use their underlying profit to calculate PE.

The number then is still high, but a lot more reasonable considering their growth forecasts and size.

Yes, it's definitely frustrating. I've encountered it before and have since made it a habit to grab all the data myself when I started researching a new company.

Fair enough, even when I use the unaudited numbers with the abnormals backed out I have to assume growth that is unrealistic to get an IV around current price.

Its an interesting exercise to keep track of companys like this and to see what unfolds, I have saved all the data I generated on PHG and I will be interested to revisit them and see how my assumptions bear up. I am starting to realise that its nearly as important to track the companies you dont buy as the ones you do!

For that reason I am starting to save all my working out and documenting the reasons I didnt purchase shares in a company that made it to my watchlist. I think there is much learning to be had there!

 

[KnowThePast]

Fair enough, even when I use the unaudited numbers with the abnormals backed out I have to assume growth that is unrealistic to get an IV around current price.

Its an interesting exercise to keep track of companys like this and to see what unfolds, I have saved all the data I generated on PHG and I will be interested to revisit them and see how my assumptions bear up. I am starting to realise that its nearly as important to track the companies you dont buy as the ones you do!

For that reason I am starting to save all my working out and documenting the reasons I didnt purchase shares in a company that made it to my watchlist. I think there is much learning to be had there!

Hi galumay,

It depends on the assumptions doesn't it.

I am not looking so much for revenue or profit growth, but EBITDA margin. If that gets to 15%+, as it is for other similar companies, then they are cheap even without any growth. Any growth that happens is a bonus.

I am not arguing with you, just throwing notes and numbers out here for future reference and discussion

 

[galumay]

Hi galumay,

It depends on the assumptions doesn't it.

I am not looking so much for revenue or profit growth, but EBITDA margin. If that gets to 15%+, as it is for other similar companies, then they are cheap even without any growth. Any growth that happens is a bonus.

I am not arguing with you, just throwing notes and numbers out here for future reference and discussion

Absolutely! It all depends on the assumptions, and there can be no analysis without assumptions - despite the risk of the old truism - "When you assume, you make an ass out of U and me!"

I use EBITDA margin as a metric in my analysis, I am generally happy if its over 8% taking the overall analysis into consideration, with PHL i have it as 9% - so it didnt raise any concerns there, but neither was it a stand out number.

It was certainly attractive on some of the other metrics i look at, but the dependence on very significant growth in earnings to deliver an IV above its current price worried me, I also wonder how quickly and how much debt they will add back on the balance sheet.

BTW, I certainly didnt get the impression you were arguing, I am very grateful that you should share your thinking and analysis around a specific company, its such a good learning opportunity and is invaluable IMO. Someties its even the little things, you used the term EBITDA margin, I had to do a quick check of what the definition was and then realised that I track what I call "Operating Margin" which uses the same inputs.

 

[skc]

BTW, I certainly didnt get the impression you were arguing, I am very grateful that you should share your thinking and analysis around a specific company, its such a good learning opportunity and is invaluable IMO.

Thansk for the robust discussions on PHG. I've looked at it myself and I think KTP has a solid investment thesis at current prices.

 

[KnowThePast]

Thanks guys,

It is super useful for me to be able to discuss it with you, clarifies my thinking tremendously.