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?