SKC fundamental positions

New Position

25/7/2011 Buy 35,000 CSE @ $0.15 = $5,250.

Rationale

Thanks Silver Ranger for point out the opportunity. Net assets in CSE is worth ~19c so there's 20% gap to be picked. The risk of the asset sale deal (upon completion will see 14c capital return to shareholders) not going is small as this is the second time KZL has knocked on the door. CSE has a couple of Chinese major shareholders that might block the deal, but if they do there's the potential upside that they will takeout CSE themselve. So the risk is balanced by the upside imo.

I will sell these on market for 19c or wait until the completion fo the deal.

Cash on hand ~$24k.

Well done skc. A 21% return in well under a year is a phenomenal result. Even Roger Montgomery - Australia's most well known fundamental investor - hasn't achieved results like that. Granted, the two strategies are very different.

skc said:

New Position

25/7/2011 Buy 35,000 CSE @ $0.15 = $5,250.

Rationale

Thanks Silver Ranger for point out the opportunity. Net assets in CSE is worth ~19c so there's 20% gap to be picked. The risk of the asset sale deal (upon completion will see 14c capital return to shareholders) not going is small as this is the second time KZL has knocked on the door. CSE has a couple of Chinese major shareholders that might block the deal, but if they do there's the potential upside that they will takeout CSE themselve. So the risk is balanced by the upside imo.

I will sell these on market for 19c or wait until the completion fo the deal.

Cash on hand ~$24k.

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The Chinese have actually indicated their intention to withdraw the share placement @ 18c, which makes sense as their intension was to co-develop the key asset, so they must go all-in or get out. (if they decide to go all-in, this week is their last chance)

In the latest quaterly report, KZL had a 12% drop in copper production vs a 120% increase in Zinc. Their copper reserve is also relatively weak compared to other base metals. So they would be keen to boost their current copper reserve a bit by picking up any low hanging fruits. The Einasleigh copper can be brought to production with minimal effort by KZL as they already have processing plants nearby (it saves them time for any feasibility study that CSE is doing as they have to build everything from scratch, and figure out how to sell the stuff)

I am hoping to get out before the capital return, just to avoid the extra tax complications.

Billyb said:

Well done skc. A 21% return in well under a year is a phenomenal result. Even Roger Montgomery - Australia's most well known fundamental investor - hasn't achieved results like that. Granted, the two strategies are very different.

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Thanks Billy. Actually had 20% in 4 months So pretty poor quarter since then.

No point comparing this to Roger... apples and oragnes like you said. His methods have good merits and a rolling 12 month performance means very little. Although I do prefer my apples better.

SilverRanger said:

The Chinese have actually indicated their intention to withdraw the share placement @ 18c, which makes sense as their intension was to co-develop the key asset, so they must go all-in or get out. (if they decide to go all-in, this week is their last chance)

In the latest quaterly report, KZL had a 12% drop in copper production vs a 120% increase in Zinc. Their copper reserve is also relatively weak compared to other base metals. So they would be keen to boost their current copper reserve a bit by picking up any low hanging fruits. The Einasleigh copper can be brought to production with minimal effort by KZL as they already have processing plants nearby (it saves them time for any feasibility study that CSE is doing as they have to build everything from scratch, and figure out how to sell the stuff)

I am hoping to get out before the capital return, just to avoid the extra tax complications.

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That's my sense as well. The placement had to be cancelled since you can't ask people money for an asset you are about to sell. So that in itself doesn't mean a lot. KZL is very keen, and any Chinese bid will be a bonus, not that I am counting on it.

Hopefully the only extra tax implication is that your cost base is reduced by the capital return, but apparently if you bought <14c you will have to pay tax on the difference straight away.

New Position

27/7/2011 Buy 10,000 AUN @ $1.06 = $10,600.

Rationale

I am calling ACCC bluff here on the AUN takeover. Austar doesn't really compete with Foxtel, they work together and buy contents, the NBN will increase competition on all fronts and similarly digital TV. ACCC can't use hypothetical post-NBN competition landscape to ban this deal. If they do it will be challenged in court without doubt.

With a $1.52 takeover offer on the table and AUN trading around this price before the bid announcement, I can see it falling to 95c or so if the deal is dead, but with 40c upside if the deal goes ahead. The reward to risk is justified imo.

9 September is the date of ACCC's decision. Let's see.

Cash in hand ~$13.5k

skc said:

New Position

27/7/2011 Buy 10,000 AUN @ $1.06 = $10,600.

Rationale

I am calling ACCC bluff here on the AUN takeover. Austar doesn't really compete with Foxtel, they work together and buy contents, the NBN will increase competition on all fronts and similarly digital TV. ACCC can't use hypothetical post-NBN competition landscape to ban this deal. If they do it will be challenged in court without doubt.

With a $1.52 takeover offer on the table and AUN trading around this price before the bid announcement, I can see it falling to 95c or so if the deal is dead, but with 40c upside if the deal goes ahead. The reward to risk is justified imo.

9 September is the date of ACCC's decision. Let's see.

Cash in hand ~$13.5k

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That is interesting SKC I was looking at AUN as well with the same sort of thought process, on the down side however I will have to delve a little deeper and try to work out what what the negative equity or book value is all about.

robusta said:

That is interesting SKC I was looking at AUN as well with the same sort of thought process, on the down side however I will have to delve a little deeper and try to work out what what the negative equity or book value is all about.

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I don't know but it would be accounting related rather than real. AUN has net debt ~$500m and quarterly free cash flow ~$20-25m so I am not concerned about the company's solvency per se.

Not to mention the fact that I am buying the takeover, not the balance sheet. It has proven itself to worth ~$1 before the bid so there's a fair chance it will stay there abouts even if the bid was to fail.

skc said:

SNL made an annonucement yesterday that the full year EBIT is expected to be ~$3.5-$3.8m. The company has ~$3m debt (so more than managable), so expect NPAT to be $2.3-$2.5m, or 6.6 to 7.2cps. That's the 3rd such profit upgrade announcements for the last 3 reporting periods.

This pitches the company at a PE ~7. Last year dividend was 4c (which is well covered by the EPS) so a prospective yield of ~8% fully franked at my buy price. Revenue should grow in the high single digit, and margin should be helped by the high $A.

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Earnings forecast announcement today. FY11 EBIT to be $3.8m which is the top range of previous forecast. NPAT of $2.5m which is exactly as I expected. EPS 7.3cps so current PE ~8.6. Interim dividend a fully franked 3c and DRP is not required due to ample cash.

The target remains PE ~12 or ~85c.

skc said:

Today they released a market update. Revenue for FY10/11 will be $12.7m (up 22%) and PBT of $1.51m (up 147.5%). EPS = ~1.5c after tax. Management is forecasting further growth. One of the division (responsible for all of the profits) is moving to a new premise that is 2.5x the existing size by the end of the financial year. The other division is turning around showing small profit for the half year.

The company has debt ~$0.7m. Operating cash flow was positive $468K in H1 against profit of $363K, so cash conversion is pretty good. If they can continue their growth at say 20% top and bottom line, the share price at PE ~6 is very cheap. Tentative target is PE ~12 or 18c. Usually a thin stock which may be a good thing when it wants to move up. Would have bought more at my entry price but that's all I could get.

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LBL came out of its trading halt today with a profit upgrade. PBT is now $2.06m, so EPS is 2cps after tax. Nice spike up today to 15c to it is now trading at a PE ~7.5. Target updated to 24c based on the increased EPS. There's still the facility expansion to come so potential upside remains.

End of Week 38 Summary

Portfolio value up 23.9%
XJO -6.75% (Last 4424.6, Starting value 4745)
XJOAI -4.35% (Last 33132, Starting value 34639.1)



Commentary

Another weekly close high thanks mostly to good gains from MLM. LBL and SNL also put on new highs but have now fallen back due to the lack of liquidity. The market on the other hand had a shocker of a week, XJO down almost 4% and XSO 3.5%, showing that it was a pretty broad based sell off on the majors.

I said last week I was bullish but now I am quite bearish. I think we are in for some sustained falls, regardless of whether there is a debt ceiling deal or not. We will most likely see a bounce if we do get a deal, but any deal now will not solve the underlying problem.

I've got some ES put options on the account as a small hedge. I hope they will expire worthless, but at least they will cushion any damage should the worst is to happen.
I've also closed the AUN position today at $1.06. I just wanted to stand aside while for the crucial next week. I will put it back on if it falls to the low 90c area.

Position Closed

2/8/2011 Sell 15,000 MLM @ $0.465 = $6,975.
3/8/2011 Sell 15,000 MLM @ $0.43 = $6,450.

Realised P&L = $5,471.3 (Based on average cost ~$0.317 per share).

Rationale

I had a mental trailing stop loss at 10% and 15% for 2 portions of the position and they were hit yesterday and today. MLM's main holding, MTE, is suffering a drag down by fellow coal firm BND, which lost 35% in the last 3 days because of concerns over their asset sale process. MTE is going through the same thing and the market reacts accordingly.

With my bearish views and the global market looking a bit sick, it feels prudent to stick to the stops. The market isn't always right, but staying out of the path of a raging bear is probably wise, irrespective whether that bear is right or not!

Cash on hand $28.5k

skc said:

Cash on hand $28.5k

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Actually cash on hand ~$38K (as the AUN position was exited at breakeven).

End of Week 39 Summary

Portfolio value up 14.5%
XJO -13.48% (Last 4105.4, Starting value 4745)
XJOAI -12.03% (Last 30472, Starting value 34639.1)



Commentary

What a week! I have always been a naturally bearish person but the market managed exceed my expectation in that category.

For this thread I have decided to close the majority of positions. Actually, I have a confession - I have been closing my actual holdings over the last 2 weeks, but my posting didn't keep up. For the sake of fairness to this thread I have recorded the exits based on today's prices.

People like to say things like "But the fundamentals haven't changed". Well, the fundamentals have changed, and that fundamental is called earnings risk and earnings multiple contraction. The companies I hold might still earn 10cps, but people are no longer putting a PE of 12 on that - they are only willing to pay PE of 8 (or 3 or 4 at the depths of the GFC). Sure you can buy the cycle in hope that you will catch the earnings multiple expansion...I just don't want to hold my breath for that.

Capital preservation is key in times of uncertainty. If one wants to trade a rebound they should just long some index future with a stop loss.

2 weeks ago I also bought a number of put options on the US market. These are still open and are enjoing profits that would have exceeded the portfolio losses you see this week. That was my learning from the GFC. This time I felt ready and in control. I hope followers of this thread learned and practiced those lessons also.

Here are the positions that are closed.

Sold 8,000 AAD at $1.125. P&L = -$615.2 (including dividends)
Sold 5,000 CFE @ $0.5. P&L = $587. Total P&L = -$1724 (over 2 parcels)
Sold 22,857 IDM @ $0.215. P&L = -$369.15 (including rights issue, small option position still open)
Sold 23,000 MLM @ $0.385. P&L = $1552.86. Total P&L (including rights issue and distribution of CBX and PMQ shares) = $7,098.1
Sold 10,000 SNL @ $0.67. P&L = $1,638
Sold 50,000 EVZ @ $0.051. P&L = -$962.0
Sold 24,165 LBL @ $0.13. P&L = $833.78
Sold 25,000 MBD @ $0.13. P&L = $116 (including dividends). Total P&L = $232 (over 2 parcels)
Sold 15,000 IRI @ $0.35. P&L = $63

Normally coming into the reporting season I wouldn't mind holding profitable small caps that don't otherwise garner enough market attention... like SNL, LBL, MBD and IRI. However, they are all too illiquid and if the shet hits the fan there is no easy escape route. Again, capital preservation above all.

Cash in hand = ~$84k.

Just some quick notes on the remaining positions...

BAU - Holding at cash backing.
CAJ - No bid to exit (exactly what I meant by illiquid stock even though they are profitable).
IDMO - Market value small.
MLA - No bid to exit.
PSA - Holding at cash backing.
QML - Takeover offer at current level.
BMN - Takeover offer.
CSE - Asset sale pending.

Total at risk ~$30k.

Position Closed

9/8/2011 Sell 35,000 CSE @ $0.16.

Realised P&L = $338.

Limited upside, plenty of downside. It's not an environment to muck around with little plays like this one.

Cash on hand = $89k

Seems like your much more ready to cut positions quickly than I am, have a problem also with a lack of bids to offload some of my stock.

Need to learn how best to hedge my longs in a downtrending market, atm shorting an index etf seems to be the best option for me, though with the 20% drop another 20% is possible but it is a much more precarious position at the moment and with my trading skills I'd more than likely blow myself up trying it out.

I have always prefered something with a higher payoff possibility as that has always sat better with me even if it has a negative carry. The positive carry of shorting is appealing especially in this climate and gaps are less of a problem with the index, barring days like today but that is research for another day and I'm busy with job applications again, bloody annoying, have to do them every year.

suhm said:

Seems like your much more ready to cut positions quickly than I am, have a problem also with a lack of bids to offload some of my stock.

Need to learn how best to hedge my longs in a downtrending market, atm shorting an index etf seems to be the best option for me, though with the 20% drop another 20% is possible but it is a much more precarious position at the moment and with my trading skills I'd more than likely blow myself up trying it out.

I have always prefered something with a higher payoff possibility as that has always sat better with me even if it has a negative carry. The positive carry of shorting is appealing especially in this climate and gaps are less of a problem with the index, barring days like today but that is research for another day and I'm busy with job applications again, bloody annoying, have to do them every year.

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Yes I ran away in a hurry. Standing in front of a savage bear / runaway train / tsunami is a bad idea. On hindsight people/market was way too complacent at the beginning of the debt ceiling debacle.

I think the ability to run away quickly comes from just having a flexible view of how crazy the world can get, and trusting that you have the skill to make it back later.

skc said:

Yes I ran away in a hurry. Standing in front of a savage bear / runaway train / tsunami is a bad idea. On hindsight people/market was way too complacent at the beginning of the debt ceiling debacle.

I think the ability to run away quickly comes from just having a flexible view of how crazy the world can get, and trusting that you have the skill to make it back later.

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I agree, if in doubt get out!

Who cares if you leave some profits on the table, will be other opportunities, this game is about protecting capital imo.

Position Closed

10/8/2011 Sell 40,000 PSA @ $0.165

Realised P&L = -$1012.08.

Rationale

As at end of Jun the company had $50.5m in the bank of which $7.7m is restricted rehab money. So that is still 18.5cps. PSA produces some gas but the operation is barely cashflow positive, and the wad of money is earmarked for drilling and exploration, so none seems to be coming the way of the shareholders.

I don't know the management, I don't trust the market at the moment, and my initial entry for a quick 10% was probably flawed. Exit seems to be the right thing to do.

Cash on hand ~$96k

End of Week 40 Summary

Portfolio value up 15.0%
XJO -12.06% (Last 4172.6, Starting value 4745)
XJOAI -10.49% (Last 31006, Starting value 34639.1)



Commentary

Hands up those who thought on Monday that the market would end higher this week than it started?!

We can't keep free falling like this for too much longer...

Buying today would probably see one in profit by the end of the week. But unless those profits are taken, heavy losses by end of the month is also a likely scenario.

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https://www.aussiestockforums.com/forums/showthread.php?t=23227&p=650569&viewfull=1#post650569

The recent volatility is remarkably similar to Jan 2008. On 23 Jan 2008, the share market fell 7.05% to ~5,200 points. General market comments around the time was that economy is strong, there is a risk of US recession and there is a risk of subprime crisis. But stick to your plan and she'd be right... And for a while they were correct. Market bounced back and reached 6,000 (15%) by May 2008 (4 months). But we all know what happened there after. The market fell to 4,800 points by mid Jul, without a single panic episode. The real panic didn't start again until Oct/Nov 2008 when a new bank blew up every day, and the bottom not found until Mar 09 some 10 months later and 50% lower.

I don't think we must follow the same path. There are worries in the world economy and soverign debt systems, but I don't know if/when some of the recent rumours / worries will come true. However, in my personal opinion, good things don't usually follow crazy market gyrations. Things only gyrate a lot when it is tipped at the balance point. The future may not be determined yet in terms of which way the chips will fall, but I choose not to ignore the risk that is being signalled.

The huge market swings are ideal conditions for volatility based systems. What I do in this thread, however, is "confidence-based" (just invented that term myself). It's all well and good that XYZ is worth $1 or trading at PE of 6, but unless there is confidence by other market participants, no one will be willing to bid it up to PE of 12.

In light of this, I am going to twigg my strategy a little bit.

- There will be no new positions until I see some normality and confidence returns. How? For a start, the Dow shouldn't have a flagfall of plus/minus 400 points. With the profit season upcoming, I also want to see positive results being cheered for straight away.

- I will limit positions to the more liquid shares. Liquidity vanished for a good part of last 2 weeks. You want to exit your position but the spread is 15% and the bid only has half your volume. You don't want to bite the bullet, you keep holding and the market tanks another 8%. Liquidity will be your best friend when you want to get out in a hurry. CAJ/MLA in the portfolio are a prime examples.

- I will adopt lower exit targets. I might leave some on the table, but I rather do that than getting caught in the down move and have my profits taken from me. AAD was a lesson for me.