SKC fundamental positions

End of Week 50 Summary

Portfolio value up 18.2%
XJO -12.7% (Last 4141.9, Starting value 4745)
XJOAI -9.72% (Last 31271, Starting value 34639)

Outperformance = 31%

Some notes

BAU - Not a great deal happening. This position is pretty dead and should be closed. But since it is trading at cash backing may be there will be some interest on it at some stage to allow me a better exit.

MII - The transaction moving along nicely. FIRB approval received, scheme meeting convened, scheme booklet registered and share price moved to 13.5c accordingly. Not much point for new buyers now but holding to 14c should still make sense.

DKN - Received the takeover consideration today. IB was quite up to speed on that.

The overall market is still a difficult place for long-only medium term holders as it swings wildly between hourly headlines and rumours out of Europe. The Europe situation is still not getting resolved as no one is addressing the actual problems. They just banned naked CDS on sovereign debt... sort of like throwing away the thermometer to cure a fever. The last few major US economic data were not as bad, but the expectations were pretty low. There will always be concerns with China's hard landing but the data hasn't actually indicate that either.

If there is reasonable progress on Europe over the weekend, it might not be completely foolish to put on a few positions...

Thanks for going to so much trouble skc. I will do my own research into these and any others you care to mention.

Best wishes

Rick

New Position

28/10/2011 Buy 12,000 CLH @ $0.775= $9,300.

Rationale

Collection House Limited (CLH) is an Australian receivable management provider,
operating in Australia and New Zealand. CLH's core businesses include: Debt
Purchasing; Commission Collections; Receivable Management; and Specialist
Services. In 2010, CLH and its two subsidiaries, Lion Finance Pty. Ltd. (Lion
Finance) and Midstate Credit Management Services Pty. Ltd. (Midstate), have
obtained Australian Credit Licenses under the National Consumer Credit
Protection Act and the National Credit Code. (From WebIress).

Today CLH announced their FY12 earning forecast. Full year NPAT forecast is $11-11.5m (~11-11.5cps), up from 10c last year. Q1 in particular was a bumper quarter, with EPS ~3.6c. Given that CLH didn't really have much reasonality in earnings in the past, the full year forecast may be conservative compared with the Q1 numbers.

The purchase price of 77.5c represents a PE ~7 to the forecast. There's 3.1c fully franked dividend coming on 7 Nov (full year yield ~11.4% gross). Hisotrical payout ratio is 60% so the dividend should rise if the full year forecast is achieved.

With a growing EPS and dividends, a PE of 10+ wouldn't be a stretch (with the right overall market sentiment of course), which brings the tentative target to ~$1.15.

Cash on hand = ~$70k (will sell down MII at 13.5c if more cash needs to be released).

Why do you prefer this over say CCP for example..

It also has a low PE, from memory its single digit.

VSntchr said:

Why do you prefer this over say CCP for example..

It also has a low PE, from memory its single digit.

Click to expand...

Yes CCP is pretty much the same thing with PE~8.3 on forecast EPS ~46-51c (~+10%) and dividend yield ~5% (7.1% gross). CLH has slightly lower PE, similar growth, and higher divdiend. While these numbers are slightly in favour of CLH they are close enough.

But the intangible is that CCP announced their forecast back in early Aug when the market was not in the mood to mark them up. Whereas CLH announced the update today that might garner some positive attention and demand in a more positive market.

Imgaine like 2 people stranded on an island with similar intelligence and physical attributes. One fired his flare 2 months ago on a cloudy day in non-fishing season. The other fired his flare today on a clear night during fishing season (so a fleet of fishing boats might be around the bay - yes it's a very elaborate analogy). So I pick that there's a higher chance that the second person will be rescued first.

My investment horizon is short (haven't held anything over a year) and I like to see share prices move the moment I pick it up. Time can be the worst enemy sometimes... stock positions are called "exposure" for good reasons.

skc said:

Yes CCP is pretty much the same thing with PE~8.3 on forecast EPS ~46-51c (~+10%) and dividend yield ~5% (7.1% gross). CLH has slightly lower PE, similar growth, and higher divdiend. While these numbers are slightly in favour of CLH they are close enough.

But the intangible is that CCP announced their forecast back in early Aug when the market was not in the mood to mark them up. Whereas CLH announced the update today that might garner some positive attention and demand in a more positive market.

Imgaine like 2 people stranded on an island with similar intelligence and physical attributes. One fired his flare 2 months ago on a cloudy day in non-fishing season. The other fired his flare today on a clear night during fishing season (so a fleet of fishing boats might be around the bay - yes it's a very elaborate analogy). So I pick that there's a higher chance that the second person will be rescued first.

My investment horizon is short (haven't held anything over a year) and I like to see share prices move the moment I pick it up. Time can be the worst enemy sometimes... stock positions are called "exposure" for good reasons.

Click to expand...

Thank you for such a detailed and enlightening response with regard to your view and strategy.
Good luck with the position!

CLH has more debt on their books though compared with CCP, was comparing the 2 today as well since they released their results. It seems they upgraded their forecast for profit based on the increase in Q1 profits only with the rest of the quarters static so earnings could increase.

Not quite ready to build up positions yet, I let a couple of stocks get away from me in this rally because I don't really see what has changed, europe and the US are still a basket case and China to follow soon.

suhm said:

CLH has more debt on their books though compared with CCP, was comparing the 2 today as well since they released their results. It seems they upgraded their forecast for profit based on the increase in Q1 profits only with the rest of the quarters static so earnings could increase.

Not quite ready to build up positions yet, I let a couple of stocks get away from me in this rally because I don't really see what has changed, europe and the US are still a basket case and China to follow soon.

Click to expand...

And CLH in a halt pending capital raising. I am guessing they are raising money to buy more receivables rather than retire existing debt... but probably a bit of both.

Let's see how much they decide to raise, at what price and for what reason... it's not a terribly good environment to be doing capital raising.

why bother with CLH, I reckon CCP is a far superior business and you get them for the same price ....

Remember you want to own superior business at a fair price ...not inferior business cheap.

because superior business time is on your side

End of Week 55 Summary

Portfolio value up 16.7%
XJO -16.04% (Last 3984, Starting value 4745)
XJOAI -12.60% (Last 30273, Starting value 34639)

Outperformance = 32.7%



Some notes

BAU - A new low of 13c this week. The company has $50m or 21.5cps in cash backing, some resources in the ground and a partnership with a Chinese company. Cash burn is ~$2m per quarter so it can survive a good 5 or 6 years. The intrinsic optionality value means that there is still value, although it also has value in reducing the tax payable when I do sell it.

CLH - Went ex-div (paying out ~$3m) and then went and raised $5.8m from instos at 70.1c, a small discount to last traded price of 74c. They originally planned to raise $5m but the demand was good so that is encouraging.

The announcement simply said "Funds will be applied to the purchase of debt ledgers and to maintain the debt ratio at a prudent level". So it was a bit about expanding the business and a bit about deleveraging.

The market didn't hate it and the stock is pretty much trading where it was last week, despite the weakness in the overall market.

MII - Scheme is voted through. Chinese gov't has given the approval. Just need court approval and it's a done deal at 14c.

CSV - Held its AGM this week. It's been 2 months since the announced takeover proposal and several parties are undertaking due diligence. Nothing is guaranteed as per usual but an outcome before Xmas would be good.

The external variables are such a mess at the moment. Nothing that the European leaders did has generated sustainable return of confidence. The Italian and Spainish governments are on the verge of requiring bailout (from who?!) and complete the PIIGS acronum. It's amazing how something that appeared to be troublesome so early on (I first heard PIIGS back in ~2007) took 4+ years to reach breaking point.

It seems to me there are only two end games here. One is for a breakup of the EU, the PIIGS default/restructure/substitute their Euro debt with domestic currency debt, and massive losses to the European banks. This will no doubt cause huge pain to the financial markets and will have flow-on effect to the real economy. All shares will see their GFC lows challenged, some won't survive but it will also present opportunity to buy the survivors.

The other end game is to simply turn on the ECB printing press. I am sure there will be an initial rally but I am not so sure that will make me invest long term confidently.

I wish we can return to a time when investing involves only simple market and company risks, but now it feels like everything involves systemic risks. Or may be I am just pessimistic because I still have funds tied up with MF Global

Well done again SKC! As Sinner says, SKC is alpha! My first comment on this thread but just wanted to say I have learnt a lot from your willingness to share and enjoy following it. Glad you have continued beyond the initial 52 weeks as well..

SKC
Sensational effort given the market over the last 12 mths.
Anything that can make a quid is a tough gig these days

Any thoughts on a merger arbitrage position in Flinders Mines skc? If you could get it at 27.5c then still about 8% on the table - although granted that the offer is by scheme of arrangement and will not be finalised for a while. Also the possibility of a counter-bid by Rio or FMG.

Huskar said:

Well done again SKC! As Sinner says, SKC is alpha! My first comment on this thread but just wanted to say I have learnt a lot from your willingness to share and enjoy following it. Glad you have continued beyond the initial 52 weeks as well..

Click to expand...

tech/a said:

SKC
Sensational effort given the market over the last 12 mths.
Anything that can make a quid is a tough gig these days

Click to expand...

Thanks for sharing the love.

Huskar said:

Any thoughts on a merger arbitrage position in Flinders Mines skc? If you could get it at 27.5c then still about 8% on the table - although granted that the offer is by scheme of arrangement and will not be finalised for a while. Also the possibility of a counter-bid by Rio or FMG.

Click to expand...

It's on my watch list. The process will take ~4 months so time value of money alone means you need to discount 2.5%. At 27.5c you get 2.5c so a 9% return over 4 months is not bad. But is the total real return of 6.5% enough to compensate the risk of the deal not going through? I don't know much about the Russian bidder to know how well/not well they usually carry through with their deal making. Hence no position from me yet.

Not familiar with FMS so can't comment on the chance of counter-bid.

BTW Personally wouldn't call it a merger arbitrage... you are taking an educated guess on the merger going through. You are not arbitraging anything.

I think this is evidence that using fundamental analysis can beat the market.

I am a complete novice but is your total return for 52 weeks thus far 17%?

Michael

MichaelSy said:

I think this is evidence that using fundamental analysis can beat the market.

Michael

Click to expand...

Nearly any form of decent analysis can beat the market imo if applied consistently, the key to SKC's success is his risk and trade management which is something that is normally missing from fundamental portfolio's I have seen.

Most other fundamental portfolio's seem to assume their valuations are correct and the market is wrong and therefore pay little regard to risk and trade management and therefore get burnt in bad market conditions.

skc said:

New Position

Buy 150,000 MII @ $0.125 = $18,750.

Click to expand...

Position Closed

30/11/2011 Sold 150,000 MII @ $0.14 = $21,000.

Realised P&L = $2,235.

MII's scheme is all go and the share is delisted today... so just marking the book for this journal. The position worked out as expected with 11.9% profit in around 2 months.

Cash in hand ~$91k.

tech/a said:

SKC
Sensational effort given the market over the last 12 mths.
Anything that can make a quid is a tough gig these days

Click to expand...

I second that wholeheartedly.
Thanks also to bothe of you for contributing your thoughts and expert analysis here it's greatly appreciated.

skc said:

New Position

7/10/2011 Buy 13574 CSV @ $1.105 = $15,000.

Rationale

CSV is usually called an IT company but a large part of it is really just in the business of distributing and fixing photocopiers.

Last week CSV announced that they have been approached with a non-binding proposal from unknown bidder for $1.20 for the whole company, and today they announced that they have attracted interests from more secret admirers. The board has adviced to take no action but is engaging with the suitors. Share price jumped from 70c to $1 after the initial news.

The deal is at an early stage and plenty can go wrong, but I've looked at CSV before as a standalone investment proposition and the numbers are not that bad.

Last year NPAT was $40.4m (up 26%) or 14.3cps which puts the $1.20 price at PE ~8.4 (not expensive imo). CSV did a cap raising back in Apr 2011 at $1.10 which brought their debt down to $47m. Operating cash flow was $14m boosted by some better receivables / inventory management. So their balance sheet looks reasonable for the nature of its business.

They have been a bit unloved for some time however, as CSV is heavily reliant on their distribution / service agreement with Canon, has a messy court case with Fuji Xerox, and probably some other smelly fleas that I've yet to discover.

With EBITDA ~$69m and debt of $47m, a reasonable deal say at 6-8x EBITDA would be $1.3 to $1.8 per share. Given the overall market I would take anything above $1.30. I also reserve the right to get cold feet and exit for no reason...

Click to expand...

Deals fallen through. Share price crashing 40%...

But I am going to keep this and look to sell around mid 70s for the purpose of this portfolio.

One might even argue that it is a good fundamental buy at 60c...

P.S. Not a real position. I needed to shuffle some cash so it was out of my portfolio. Phew...

Looks intriguing especially if it breaks below 50, could be smashed into oblivion. The last quarter of cashflow looked great but unsustainable, there seems to be a lot of fluctuation in that figure. Going from the comments the next quarter may not look so great which could provide an opportunity as cashflow.

Debt looks manageable, not sure about the long term prospects of the business but definitely looks like it might be worth a look when the dust settles.