My Investment Journey

[KnowThePast]

Hi KTP,

Interesting analysis. A couple of points:

1. As you have pointed out the Z Score uses the Market Value of Equity in the calculation, I personally think the Private Business version of the Altman Z Score which uses the Book Value of Equity instead of Market Value of Equity is more suitable for some listed companies to remove the effect of market volatility/illiquidity on the results (i.e. ignore the market!). Note Altman did research into proving his Private Business (and Foreign Markets) version of the Altman Z Score and provides the results in the paper. Revisiting your calculations by applying the Private Business version of the Altman Z score might be an interesting exercise.
2. For me the paper took some digesting, but I came to the conclusion that the Z score is a useful tool for certain turnaround situations and it is interesting to see his checks 30+ years later to see how effective the original formula has been. IMO, selecting an appropriate Z score formula, careful selection of cut-off and trending the Z score over time can provide insight into a possible turnaround (note I found on the web a business academic recommending it as a management KPI tool).

Cheers

Oddson

Hi Oddson,

I haven't read the paper yet, but I will once I get some time.

Using book value instead of market value does not seem to make much sense to me - Total Assets and Total Liabilities are already inputs into the ratio, so using Net Assets would seem to be measuring similar things, giving them a higher weighting. Market value makes more sense to me, as it measures "sentiment".

Nevertheless, here are the results using both Market Value (MV) and Book Value (BV) side by side:



Giving a much rosier picture.

There are 3 things in Alt Z calculation, that, in my opinion, potentially give a lower score to PMP than it may currenly deserve:

1. Market price - as seen above, it has no direct correlation with financial stability.

2. Net Assets - Alt Z formula uses Revenue/Net Assets, meaning that company with more assets will get a lower score. Last year, PMP sold off some underperforming assets, and this margin will improve significantly once restructuring costs are removed.

3. Retained Earnings being negative. This is a matter of time, probably 3-4 years. The money was spent long ago, on bad acquisitions. Writing off goodwill now has absolutely no effect on the stability of the company. As long as they keep avoiding acquisitions, as they've been doing for the past few years, this is a non-factor. Using my projection numbers, should retained earnings have been +20, instead of -100, score would have been above 3, meaning Nil chance of bankruptcy.

 

[Ves]

OCF less a reasonable estimate for maintenance capex was negative this year. Reported FCF was massaged by the asset sale and lease back. Debt reduction was solely as a result of the assets sales.

I’m not saying with enough detailed analysis that a case for an adequate risk/reward investment doesn’t exist – I haven’t done the work.

Just saying this is no sure turn around bet – It’s a HIGH risk play. If that’s going to be your game you should recognise it in your rules and consider your risk management accordingly.

Looks close to being fully-priced to me at 6.5-7x EBIT with a fairly high debt. No growth, no competitive advantage, shrinking industry with high capital requirements (looking at the historical numbers they are nearing the bottom of their lumpy capital cycle and there is more pain ahead). So agree with the comment about reasonable estimates of maintenance capex.

Another one I could only value at net replacement cost of assets (after subtracting debt).

 

[KnowThePast]

OCF less a reasonable estimate for maintenance capex was negative this year. Reported FCF was massaged by the asset sale and lease back. Debt reduction was solely as a result of the assets sales.

I’m not saying with enough detailed analysis that a case for an adequate risk/reward investment doesn’t exist – I haven’t done the work.

Just saying this is no sure turn around bet – It’s a HIGH risk play. If that’s going to be your game you should recognise it in your rules and consider your risk management accordingly.

Hi craft,

Yep, OCF - depreciation was negative this year. But, this is a business that relies mainly on long term contracts. Timing of payments may distort things from year to year. Looking at it on a 5 year view, profit matches cashflow well enough. Not all of their one-offs were write-offs either, some were restructuing charges that cost real money.

I certainly think that the reward justifies the risk in this case.

I don't agree that it is a HIGH risk play, with all capitals, but it is high risk. Higher than my rules allow. I am still thinking this over, haven't yet reached a decision on whether I need to change anything or not.

Thanks for keeping me honest.

- - - Updated - - -

From memory a lot of the Z sore factors have Total Assets as the denominator. Increasing Z scores based on improving profitability would have to be a lot more robust then an increasing score due to the company writing off good will and implementing asset sales and lease backs.

Absolutely.

But selling off assets is still better than having those assets produce low/negative return.

The interesting thing about Alt Z ratio is that increase in Total Assets increases the risk of bankruptcy. In other words, taking two companies, both without debt - one with more assets is considered more risky than the other.

Makes sense from a capital expenditure point of view, but still looks slightly odd.

 

[KnowThePast]

Looks close to being fully-priced to me at 6.5-7x EBIT with a fairly high debt. No growth, no competitive advantage, shrinking industry with high capital requirements (looking at the historical numbers they are nearing the bottom of their lumpy capital cycle and there is more pain ahead). So agree with the comment about reasonable estimates of maintenance capex.

Another one I could only value at net replacement cost of assets (after subtracting debt).

Hi Ves,

I think one of us made a bad calculation error. I have EBIT at $34.2m for 2013, with the current market cap of $115m, giving me 3.36x EBIT. At 7x EBIT, I would agree it is not a good investment.

Furthermore, current EBIT is obscured by restructuring, which I expect will improve EBIT. Just by reducing deprectiation+interest, if nothing else. An EBIT of $45m, which I forecast for next year puts it on 2.6x.

I agree with all your other points, except for competitive advantage. A high fixed cost, low margin business does not invite new competitors, so existing businesses can continues generating their (low) returns until the demand reduces to nil. Not the best kind of advantage to have, but an advantage nevertheless.

Still, they are essentially protected by the fact that replacement cost of assets does not generate sufficient returns and therefore no sane person would start up a business to compete with them. Which would value them at even less than replacement value. I certainly don't envy those that supplied capital to PMP to acquire those assets in the first place.

But I can now acquire those assets at a massive discount to replacement value.

P.S. A quick note about capital expense cycle as well. Looking at historical numbers may be misleading - while cap expense was higher, so were PPP assets. $403m in 2008 vs $244m in 2013.

 

[craft]

Hi Ves,

I think one of us made a bad calculation error. I have EBIT at $34.2m for 2013, with the current market cap of $115m, giving me 3.36x EBIT. At 7x EBIT, I would agree it is not a good investment.

I reckon V is talking EV/EBIT multiple.

Reported EBIT (before non-recurring items) was 33.9 Million.

Current EV is 205 Million.

EV\EBIT = 6.04

Doesn’t make much sense to compare EBIT (which is before interest) to market cap which is price of equity only.

Furthermore, current EBIT is obscured by restructuring, which I expect will improve EBIT. Just by reducing deprectiation+interest, if nothing else. An EBIT of $45m, which I forecast for next year puts it on 2.6x.

EBIT is a before Interest measure. Depreciation is an accounting charge - potentially misleading if it doesn't corresponded with economically sustainable level of maintenance capex.

I agree with all your other points, except for competitive advantage. A high fixed cost, low margin business does not invite new competitors, so existing businesses can continues generating their (low) returns until the demand reduces to nil. Not the best kind of advantage to have, but an advantage nevertheless. Hmmmmm

Still, they are essentially protected by the fact that replacement cost of assets does not generate sufficient returns and therefore no sane person would start up a business to compete with them. Which would value them at even less than replacement value. I certainly don't envy those that supplied capital to PMP to acquire those assets in the first place.

But I can now acquire those assets at a massive discount to replacement value.

A competitive disadvantage deserves a discount to NTA if they reinvest capital into that business then the discount can not be large enough for a long term holder (the real reason I can't be bothered with this sort of investing)

P.S. A quick note about capital expense cycle as well. Looking at historical numbers may be misleading - while cap expense was higher, so were PPP assets. $403m in 2008 vs $244m in 2013.

I have 22 years of data over that time and after allowing for growth capex net PPE /Receipts from customers has averaged 3.2%. That would give a normalised maintenance capex on current receipts of 35 Million.
Last years capex was 23 million, dep’n was 37 Million. I would expect that as a major restructure is being undertaken and some of the assets have been migrated to lease liabilities that maintenance capex would come down. At a guess - 20 million maintenance capex + few ?? million lease obligations hot on the heels of the restructure with a longer term degeneration back towards 3% PPE/Receipts. That sort of capital intensity in a low margin competitive industry doesn’t rock my boat but if you can see the leverage working out in your favour over the short term and it fits your plan .... happy investing.

I'll leave it to you now, gotta get back to reading reports of good companies. Timing leveraged turn arounds not my thing.

 

[KnowThePast]

I reckon V is talking EV/EBIT multiple.

Reported EBIT (before non-recurring items) was 33.9 Million.

Current EV is 205 Million.

EV\EBIT = 6.04

Doesn’t make much sense to compare EBIT (which is before interest) to market cap which is price of equity only.


EBIT is a before Interest measure. Depreciation is an accounting charge - potentially misleading if it doesn't corresponded with economically sustainable level of maintenance capex.

Ah, of course. My apologies to V, should have thought about it first before replying.

Depreciation charge, at the moment, is too high if anything. They are scaling down, so expect their cap expense to remain below depreciation charge for a bit longer.

A competitive disadvantage deserves a discount to NTA if they reinvest capital into that business then the discount can not be large enough for a long term holder (the real reason I can't be bothered with this sort of investing)

Couldn't agree more. But over the last few years, PMP's management has shown that they will continue downsizing and paying off debt, rather than invest any money into expansion. At the first sign of acquisitions, or plant expansion, I am out.

I have 22 years of data over that time and after allowing for growth capex net PPE /Receipts from customers has averaged 3.2%. That would give a normalised maintenance capex on current receipts of 35 Million.
Last years capex was 23 million, dep’n was 37 Million. I would expect that as a major restructure is being undertaken and some of the assets have been migrated to lease liabilities that maintenance capex would come down. At a guess - 20 million maintenance capex + few ?? million lease obligations hot on the heels of the restructure with a longer term degeneration back towards 3% PPE/Receipts. That sort of capital intensity in a low margin competitive industry doesn’t rock my boat but if you can see the leverage working out in your favour over the short term and it fits your plan .... happy investing.

I'll leave it to you now, gotta get back to reading reports of good companies. Timing leveraged turn arounds not my thing.

Point taken, and you could well be right. As I said, I am still trying to decide whether I should on occasions be involved in riskier plays such as this.

 

[KnowThePast]

Another purchase - WTP 2800 @ 0.695.

Market Cap = $128m.
2013 NPAT = -$4.6m.
Without writedowns, a profit of $17.2m
Share price = $0.695
NTA = $1.14

The company is involved in 3 operations:
- construction
- civil and mining
- property

Construction and mining are profitable, property is not. But that is not a problem for much longer, as the company is selling off all of its property assets. Over $100m were sold in 2013, a little under $100m remaining.

Both construction and mining divisions have a strong order book, and with the current financial position of the company, I see no reason to worry about any short/medium term slowdown.

This, however, is an asset play. I am only concerned with assets here. I am looking at earnings only for the margin of safety. Should the company continue making money and pay dividends, that will be a welcome bonus.

It is looking very attractive at the moment, with no debt, cash reserves, profitable underlying business, trading at 60% of its NTA. Next year, I'll assume they break even and ignore earnings all together. I will also assume that they will sell their remaining property assets for $70m. This will leave the balance sheet with:
- an extra $70m in cash, taking it to $207m.
- debt reduced by $70m, to just $6m.
- NTA remains the same, or less should they make a loss on sales. But, more of it will be made up of cash, a lot more.

Which means that Current Assets - Total Liabilities = $115m. Market cap = $114m.

This is what Ben Graham called a Net Net, and it is extremely rare to see for a company with a profitable underlying business. Not a stellar business, and one without a competitive advantage. But profitable nevertheless.

Pick it apart, guys.

P.S. I should talk more about my invest once a month rule. This is now the third time I've bought out of schedule. I've made allowance for special situations, but what does that mean? Basically, it means that I see something trading at less than 50% of my valuation. This doesn't happen often, and I am surprised I got 3 such opportunities in less than 4 months.

 

[notting]

It is looking very attractive at the moment, with no debt, cash reserves, profitable underlying business, trading at 60% of its NTA. Next year, I'll assume they break even and ignore earnings all together. I will also assume that they will sell their remaining property assets for $70m. This will leave the balance sheet with:
- an extra $70m in cash, taking it to $207m.
- debt reduced by $70m, to just $6m.
- NTA remains the same, or less should they make a loss on sales. But, more of it will be made up of cash, a lot more.

They should do just fine selling the property in this environment.

 

[Ves]

What about the off-balance sheet finance lease liabilities under note 19?

$123.823m in the next five years. That's about $0.60 a share which to me explains the difference between NTA and the share price.

Happy if someone more experienced can explain how this works... but I assume that is where the difference lies.

 

[Ves]

What about the off-balance sheet finance lease liabilities under note 19?

$123.823m in the next five years. That's about $0.60 a share which to me explains the difference between NTA and the share price.

Happy if someone more experienced can explain how this works... but I assume that is where the difference lies.

please ignore... I read the report wrong at first. They're on the balance sheet at $110.908m which matches total debt.

 

[tech/a]

Have worked for WATPAK

If they don't have the contracts then they will continue to shrink to maintain viability.
Then when larger contracts come along they may find it difficult to gear up.

There is a reason their chart looks like this over the last 5 yrs.
And looked healthy 5 yrs prior.
And unless there is an expansion phase again in infrastructure then this is not going to out perform.

 

[odds-on]

Pick it apart, guys.

Hi KTP,

My analysis is similar to yours, so is of no help to you. I am watching WTP as I think there is a probability of a turnaround/takeover catalyst causing a market re-rate; a dividend will probably do it or a move by Besix. Traded for a tidy profit early in the year and am watching for a suitable re-entry.

Cheers

 

[craft]

Another purchase - WTP 2800 @ 0.695.

Market Cap = $128m.
2013 NPAT = -$4.6m.
Without writedowns, a profit of $17.2m
Share price = $0.695
NTA = $1.14

The company is involved in 3 operations:
- construction
- civil and mining
- property

Construction and mining are profitable, property is not. But that is not a problem for much longer, as the company is selling off all of its property assets. Over $100m were sold in 2013, a little under $100m remaining.

Both construction and mining divisions have a strong order book, and with the current financial position of the company, I see no reason to worry about any short/medium term slowdown.

This, however, is an asset play. I am only concerned with assets here. I am looking at earnings only for the margin of safety. Should the company continue making money and pay dividends, that will be a welcome bonus.

It is looking very attractive at the moment, with no debt, cash reserves, profitable underlying business, trading at 60% of its NTA. Next year, I'll assume they break even and ignore earnings all together. I will also assume that they will sell their remaining property assets for $70m. This will leave the balance sheet with:
- an extra $70m in cash, taking it to $207m.
- debt reduced by $70m, to just $6m.
- NTA remains the same, or less should they make a loss on sales. But, more of it will be made up of cash, a lot more.

Which means that Current Assets - Total Liabilities = $115m. Market cap = $114m.

This is what Ben Graham called a Net Net, and it is extremely rare to see for a company with a profitable underlying business. Not a stellar business, and one without a competitive advantage. But profitable nevertheless.

Pick it apart, guys.

P.S. I should talk more about my invest once a month rule. This is now the third time I've bought out of schedule. I've made allowance for special situations, but what does that mean? Basically, it means that I see something trading at less than 50% of my valuation. This doesn't happen often, and I am surprised I got 3 such opportunities in less than 4 months.

Whether you leave it as cash or pay down debt – selling something that is already in Current Assets as Inventory does nothing to improve your Net-Net position. The current Net-Net position is negative 25m and apart from potentially dragging forward conversion of a bit of Non-current inventory I can’t see the NET-NET position improving much – nowhere near getting to Graham’s definition. And as V said don’t forget the off balance sheet liabilities.

If you are serious about your original rules then I would pay serious attention to this quote.

It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.- Warren Buffett

Don’t think you are very serious about your stated rules so maybe just disregard.

- - - Updated - - -

please ignore... I read the report wrong at first. They're on the balance sheet at $110.908m which matches total debt.

I think you were right the first time looks like there is 123M of lease commitments in addition to the debt.

 

[Ves]

I think you were right the first time looks like there is 123M of lease commitments in addition to the debt.

I think the $123m is financial equipment lease commitments + future interest. The principle amount stated in that note of $109m matches the balance sheet and also the first table and second table in note 19.

Operating cash flow in 2013 was $155m. However, non-repeatable changes in working capital (including inventories) and tax benefits was $108m. This leaves $47m cash flow from existing operations before taking into account a fair assessment of future maintenance capex. If you consider this requirement then it most likely either negative or barely positive. Co-incidently this was very similar to the total debt repayments.

Working capital deficit funding is still required - so cash on hand & the term deposit (held as security for the debt refer note 19) is not distributable.

Non-current Assets on the balance sheet (to calculate NTA) are based on purchase costs less past impairments. If assets earn a return that is less than the cost of capital then there will be further impairments and no willing buyer will pay for them at balance sheet cost. Where are we at in the cycle and what are the future returns? Profitability is still important - because it dictates whether the assets are worth their replacement cost or should be treated closer to their liquidation value which may be substantially different to the reported NTA.


Hmmm not my kind of company.

 

[craft]

I think the $123m is financial equipment lease commitments + future interest. The principle amount stated in that note of $109m matches the balance sheet and also the first table and second table in note 19.

I went and had another look (wasting more time on another crap company Hmmm)

I now agree with your second take - no lease liabilities. The 123M is made up of on-balance sheet Interest bearing debt and the forecast interest due. The 123 is just a total.

ps.

crap layout in the headings for this note - so we are excused for being dumb.

 

[McLovin]

I think you were right the first time looks like there is 123M of lease commitments in addition to the debt.

Maybe I'm misreading the note but it doesn't appear that they are off balance sheet. Whoever did the accounts could take a lesson in how to make information presented in a meaningful way.

 

[odds-on]

Oh come on...everybody knows WTP is not the next Coca Cola...but it is cheap (or am missing something here?) and there is a probability of a turnaround/takeover (again, am I missing something here?). Position sizing will be important.

I am genuinely interested in learning this art.

http://www.youtube.com/watch?v=_7Jq3Y3FceQ

 

[craft]

Oh come on...everybody knows WTP is not the next Coca Cola...but it is cheap (or am missing something here?) and there is a probability of a turnaround/takeover (again, am I missing something here?). Position sizing will be important.

I am genuinely interested in learning this art.

http://www.youtube.com/watch?v=_7Jq3Y3FceQ

I know most people interrupt that video as Buffett saying he would look for Graham type investments with small sums but for me the most important point is that he mentions the irony of GEICO . In one of the appendixes of a later edition of intelligent investor Graham also talks about the irony of his investment in GEICO – it’s very informative.

Give me a large position in a quality company with a high probability of long term success any day over a small position in a turnaround that is ‘cheap’ if my maybe assumptions turn out to be correct. Even if I’m right in my business assumptions timing of the repricing becomes a time value of money issue and I have to get out pay tax and repeat to have a decent long term record.

A large position in an almost inevitable asset revaluation – that’s a different proposition and worth looking for if you want to give a small sum a turbo boost (and you have the balls for it) – haven’t seen one of those mentioned on this thread.

all just my

 

[Klogg]

Give me a large position in a quality company with a high probability of long term success any day over a small position in a turnaround that is ‘cheap’ if my maybe assumptions turn out to be correct. Even if I’m right in my business assumptions timing of the repricing becomes a time value of money issue and I have to get out pay tax and repeat to have a decent long term record.

I was just listening to a lecture with Thomas Russo speaking about Buffett's well-known idea of buying a dollar for 50cents. He then goes on to add to that idea...
Paraphrasing his lecture, he states that you'd rather buy the dollar for 60c and have it increase in value over time, than buy it for 50c and have its intrinsic value remain at $1. Not only do you avoid having to constantly find undervalued opportunities, but you avoid having to pay tax each time.

He does add more on the subject, but it's probably better you listen to it yourself:
(http://www.bengrahaminvesting.ca/Resources/audio.htm - by the way, the audio download of Pabrai is also very worthwhile)

I believe this is what Craft is saying and it's a very important point.



Finally on the topic of WTP - I only very briefly looked at the company, but I question the value of those particular assets. 3% margin on its revenue (based on 'underlying' profit) speaks for itself...

And if this is an asset play, there are other questions that arise... It has 238mil net assets - 30mil of that in Intangibles that will essentially be wiped out (although I haven't looked at each segment/entity). Leaves you with 208m and 184m shares (diluted). Factor in that the 'property, plant and equipment' may be overvalued (I don't know the assets well enough) by 30% and you're not far off the current share price...
(There's a section in Security Analysis about asset values that's a great read... if only I could remember which chapter/s)

This is all hypothetical as I don't want to spend too much time on this company, but I would have thought the evidence is clear.

 

[KnowThePast]

Whether you leave it as cash or pay down debt – selling something that is already in Current Assets as Inventory does nothing to improve your Net-Net position. The current Net-Net position is negative 25m and apart from potentially dragging forward conversion of a bit of Non-current inventory I can’t see the NET-NET position improving much – nowhere near getting to Graham’s definition. And as V said don’t forget the off balance sheet liabilities.

Hi craft,

Thank you so much, great advice as always. I've made an embarrassing mistake of just assuming it's all NCA.

But to my defence, some of it is! Their inventory is $60m in current, and $35m in non-current. Redoing my calculation.... Next year, we get, assuming $70m is realised for $95m of those assets, and writedowns are cancelled by some profits:
Current assets = $413.
Total Liabilities = $333m.

Yes, not quite a net net, but very close, unless there's a total meltdown in property prices and/or underlying business performance. I've allowed for a 25% reduction in property prices and $13m EBIT reduction.

I think we are all in agreement now that there are no hidden leases, there's also this statement in the commentary to make it a little more clear: "The balance of gross debt at 30 June 2013 totals $110.9M and relates solely to equipment financing facilities which support the National Mining and WA Civil business. The Group’s debt therefore now only supports income producing assets. There are no significant off-balance sheet lease commitments relating to plant & equipment assets."

Operating cash flow in 2013 was $155m. However, non-repeatable changes in working capital (including inventories) and tax benefits was $108m. This leaves $47m cash flow from existing operations before taking into account a fair assessment of future maintenance capex. If you consider this requirement then it most likely either negative or barely positive. Co-incidently this was very similar to the total debt repayments.

Hi Ves, it's great to get your feedback as well.

What do you use for assessment of future cap ex? Sounds like their current depreciation charge of $48m, which I don't think is any indication of what their cap ex will actually be, now that a lot of assets have been sold, with more sales to come. They have $177m in PPP, so $50m maintenance capex, is a bit excessive, I think. About half of it sounds right, looking at similar companies. Which would leave a very healthy cash flow.

Working capital deficit funding is still required - so cash on hand & the term deposit (held as security for the debt refer note 19) is not distributable.

Non-current Assets on the balance sheet (to calculate NTA) are based on purchase costs less past impairments. If assets earn a return that is less than the cost of capital then there will be further impairments and no willing buyer will pay for them at balance sheet cost. Where are we at in the cycle and what are the future returns? Profitability is still important - because it dictates whether the assets are worth their replacement cost or should be treated closer to their liquidation value which may be substantially different to the reported NTA.

Hmmm not my kind of company.

All fair points. ROC is a lot better than it looks once you take out property division out, and better still once you subtract cash balances. But, I do not think this company deserves liquidation value status, very far from it. Yet, it trades at a price awfully close to it.

If they manage to sell their remaining properties at a 25% discount to book value, they will have:
Cash = $207m.
Receivables = $158m
Inventories = $15m
Other = 7m

Let's discount some of these to allow for bad debtors, etc. Say by $25m.
Total Current Discounted Assets = $362m
Total Liabilities = $333m.

Remainder = $29m.

On to NCA:
Goodwill, Tax Assets, etc = 0.
PPP = $177m.

So, in order to justify the current market cap of $114m at liquidation value, PPP needs to have a sale value of 52% of book value.

I have absolutely no idea whether that is achievable or not. But this price is close enough for me to say that the only questions that needs to be answered is "will this company remain a going concern", and "will their capital structure allow them to survive any unforeseen short term difficulties".

I went and had another look (wasting more time on another crap company Hmmm)
I am very sorry, and extremely grateful for your advice here.

I wanted to thank you again for your commentary on my previous purchase of PMP. Some of what you said changed my thinking and I am still thinking of what to do with that.

I know most people interrupt that video as Buffett saying he would look for Graham type investments with small sums but for me the most important point is that he mentions the irony of GEICO . In one of the appendixes of a later edition of intelligent investor Graham also talks about the irony of his investment in GEICO – it’s very informative.

Give me a large position in a quality company with a high probability of long term success any day over a small position in a turnaround that is ‘cheap’ if my maybe assumptions turn out to be correct. Even if I’m right in my business assumptions timing of the repricing becomes a time value of money issue and I have to get out pay tax and repeat to have a decent long term record.

No argument from me, I fully agree.

But I think there's another message there that goes unnoticed - just because great companies are better investments, does not mean that Graham type investments are bad ones!

I would love to only buy great companies, and I am prepared to pay significantly more for them. But opportunities like that don't come often. In the meantime, I must make a decision on whether to hold cash, or to invest them in other opportunities. The opportunities like WTP are not my ideal investment, but it's far better than holding cash, in my mind.

I've chosen a strategy that takes me around 2 years to invest my capital. Possibly longer, as I will be getting dividends and selling some shares. Therefore, I know that I can make a few plays like this, and still have plenty of capital available should a great company come up at a good price. Once I find myself in a position where I am short of cash and a great opportunity appears, WTPs and PMPs will be out of my portfolio in a heart beat.

Buffett is also not the only value investor with an outstanding record. There's plenty others, including those with massively diversified portfolios and those that spend most of the time looking at the sewers of the stock market. Buffett himself had a great record looking for bargain stocks earlier in his career.

I was just listening to a lecture with Thomas Russo speaking about Buffett's well-known idea of buying a dollar for 50cents. He then goes on to add to that idea...
Paraphrasing his lecture, he states that you'd rather buy the dollar for 60c and have it increase in value over time, than buy it for 50c and have its intrinsic value remain at $1. Not only do you avoid having to constantly find undervalued opportunities, but you avoid having to pay tax each time.

He does add more on the subject, but it's probably better you listen to it yourself:
(http://www.bengrahaminvesting.ca/Resources/audio.htm - by the way, the audio download of Pabrai is also very worthwhile)

I believe this is what Craft is saying and it's a very important point.

Hi Klogg and thanks for the input.

I fully agree with that thinking, as I said above I would prefer to do that. But I won't turn down the other scenario either if I have cash available and no "great company" opportunity available.

Finally on the topic of WTP - I only very briefly looked at the company, but I question the value of those particular assets. 3% margin on its revenue (based on 'underlying' profit) speaks for itself...

And if this is an asset play, there are other questions that arise... It has 238mil net assets - 30mil of that in Intangibles that will essentially be wiped out (although I haven't looked at each segment/entity). Leaves you with 208m and 184m shares (diluted). Factor in that the 'property, plant and equipment' may be overvalued (I don't know the assets well enough) by 30% and you're not far off the current share price...
(There's a section in Security Analysis about asset values that's a great read... if only I could remember which chapter/s)

This is all hypothetical as I don't want to spend too much time on this company, but I would have thought the evidence is clear.

Hi Klogg,

That's absolutely correct - the company is now trading at rougly its liquidation value? So, I am asking myself - is this really such a bad company that it has no chance of future earnings and the best use of capital is to liquidate all of it? Really? There's hundreds of companies on ASX that are worse in every sense of the word trading at a much higher price.

I have to agree with what Oddson here - yes, there's plenty wrong with this company. Some things were mentioned, I could mention a few more myself. But it's trading at liquidation value, of course there's things wrong with it! But as a private owner of this business, bought at this price, what are the chances of me losing my investment?