SKC fundamental positions

[skc]

New Position

24/11/10 Buy 12,000 IHF @ $0.85 = $10,200

Rationale

Similar trade to IIF. ING is a willing seller and someone from the industry has come along offering 94c cash to take it off their hands. NTA is 98c so they can settle at 96c...

 

[sammy84]

Can you run trailing stops on fundamental positions? Or does this go against the whole concept of fundamental entries and exits?

Would've been nice to use a trailing stop on QRN.

 

[skc]

Can you run trailing stops on fundamental positions? Or does this go against the whole concept of fundamental entries and exits?

Would've been nice to use a trailing stop on QRN.

For this thread I try to keep to a simple idea that "If I entered a position for a particular reason, I would exit when that reason is no longer valid/true, or when the target is reached".

For QRN I wanted a stag profit on the first day and I basically got it. So in that sense I had a plan, was lucky enough that it worked out at a profit.

Having said that, it is not a bad idea to use trailing stop and try to improve on the exit for fundamental positions. For instance, if I value a stock at $1.20 and it reaches my target, then run a trailing stop at 3% or something would work perfectly.

For QRN, I could have put a trailing stop, but I still wouldn't have hold it much pass the first day (as that was the plan and I want no gap risk). So may be a few extra ticks improvement was on the offer.

I might run a few positions here based on that and see how it work out.

 

[skc]

End of Week snapshot



SOO went ex-div at 0.375c (total $337.5 unfranked) this week and I simply credited the cash balance to that amount (even though it hasn't been paid yet but the amount is small enough)

Only 1 position, QRN, closed to far and evidently too early...

Portfolio +3.5%
XJO -3.2% (Last 4598, Starting value 4745)
XJOAI -3.7% (Last 33399, Start value 34639.1)

 

[skc]

New position

Buy 100,000 MFC @ $0.105 = $10,500.

Rationale

Very small company with very tangible assets around 2x current market price.
Quite a low volume company so happy to sell at ~15-16c.

 

[skc]

New Position

8/12/2010 Buy 40,000 HFA @ $0.19

Rationale

HFA recently announced that they signed a funding and distribution deal with Apollo investment management (which has ~$50B FUM). The funding is done via mandatory convertible notes which essentially eliminate HFA's corporate debt. The distribution deal will see HFA's products being sold to many more investors via Apollo's better distribution network.

Last year HFA earned EBITDA ~$24m. Current market cap ~$90m means they are trading on 3.75x EBITDA. Compare that to say PTM (which is a much more stable company) at ~14x.

The deal imo stablised the company's downside while providing upside on growing FUM which will lead to higher EBITDA. Tentative target for 15% growth in EBITDA and a multiple of 6 gives ~35c. Will cut my loss if the overall market tanks (thereby killing industry-wide growth).

 

[skc]

New Position

8/12/10 Buy 20,000 WBA @ $0.5

Rationale

They hold 28m shares in TGR worth ~$49m. They have expressed their willingness to sell. TGR has an offer on the table from private equity for $1.8-1.9. WBA market cap is only $32m.

So if deal goes through at $1.8, WBA will have $50.5m in cash (or 78.5cps) with the nuts and onions thrown in for free. If the deal falls through (and TGR was at $1.60) then WBA still has tangible assets well above their share price.

Liquidity is a major concern, but this position size is ~half of daily avg volume.

P.S. Pretty much out of cash now so will sit on all the open positions for a while.

 

[ParleVouFrancois]

Nice spotting MFC, had a look through their books and I would put money into them for a 20-50% arbitrage between the cash and BSM shares on the balance sheet (you need to take the current value of BSM's shares) then you end up with a NTA of about 25 cents per share, so I'd consider your target of 13-15 cents as pretty conservative, I'd aim for 18 cents myself, but the key point is that it's definitely undervalued.

On WBA I used to hold them based off their TGR shares as well, bought in the medium 30's and sold in the medium 40's, management don't seem to be in a hurry to deliver the value of their TGR shares to the rightful owners. Imo the 'best' way to dispose of the TGR shares would be to do an inspecie distribution, that way the same people hold the TGR shares, and if they want they can sell on market and realize value, and if not they can hold both. The WBA business itself might actually get fairly valued, as opposed to the current zombie-like rotton core of WBA being propped up by TGR shares.

Also as a side question, are you following these trades with real money, or are you just paper trading?

 

[ParleVouFrancois]

Oh and one other side question, how are you finding these undervalued companies? They are similar to the ones I tend to like (MFC especially, haven't heard of them before), and I'm always keen to learn more searching tools.

 

[skc]

Oh and one other side question, how are you finding these undervalued companies? They are similar to the ones I tend to like (MFC especially, haven't heard of them before), and I'm always keen to learn more searching tools.

I actually hold 8 out of 10 stocks.

I spend a lot of time reading news, asx announcements and forums etc.

I came across MFC when I was reading an article on BSM may be 18 months ago, had a quick look at their books and was happy to take a small initial position. When they finally made a positive announcement last week I increased my holding substantially. Was lucky enough to still buy it at a bargain price.

WBA I only came across them today, reading news about Tassal's takeover and also the thread right here on ASF. Wish I knew about them earlier so I could buy at the open for 46c.

Same way I came across SRL earlier this year - thanks to various posters on that thread.

 

[ParleVouFrancois]

Brilliant call on MFC, closed at 12.5 cents today still a bit short of your target (early days yet lad), but 2 cents out of 10.5 cents in about a week surely beats money in the bank . Made relatively risk free too because the company's NTA is around 25 cents if you bother to recalculate the BSM shares.

 

[skc]

Brilliant call on MFC, closed at 12.5 cents today still a bit short of your target (early days yet lad), but 2 cents out of 10.5 cents in about a week surely beats money in the bank . Made relatively risk free too because the company's NTA is around 25 cents if you bother to recalculate the BSM shares.

Of course I re-calculate the value of BSM shares...

The NTA is not quite 25c. They have ~$5m in cash, 26.4m BSM shares (~$10.4m @ $.395) and ~$5.4m coming in from the project sale. But they had $4.5m convertible loan.

Take 10% off the value of BSM (if you were to sell the whole lot in one go you probably need to do so at a discount), and take $1m off for general company expense for the year you are holding and waiting for the share price to move, you get total net realisable asset ~$14m, or ~19.5c per share.

So target of 17c would be satisfactory.

They do have a few projects on the boil, but they will need to spend money before they turn them into revenue producing projects.

 

[skc]

End of week summary.



Portfolio value up 5.86%
XJO +0.0% (Last 4745.9, Starting value 4745)

A few quick notes...

AXA - Has pretty much done it's job. There's still 19c or 3% on the table, but will glady exit that if there are new positions to enter.

IIF - Bid supposed to due in Mid Dec and will most likely exit when the price moves in reaction to the news. That will probably mean a couple of percent left on the table as well.

IHF - I failed to update that the bidder has come back with a 95c+ 3.825c dividend and been granted due diligence. The distribution will be paid on 31 Dec. Hopefully they can wrap this up by Feb next year to free up the capital.

MFC - Can't believe it closed at 11c today which took a good 1.5% off my portfolio value. 17c still the target as per pervious post. AGM in mid Jan hopefully some news regarding capital initiatives or in-specie distribution of BSM would be fantastic.

TRF - Very good move on this week to close the valuation gap thanks to attention on IFE. On NTA alone TRF is worth ~60c. But I will actually run a trailing stop on this stock as it depends on what IFE (and ROL) does in terms of share price.

WBA - Awesome news that they sold their TGR holding for $1.79 per share so now their value is not dependent on the private equity bid succeeding. Completely de-risked the position. The cash from sale of TGR is worth 77cps. Even better that the holding is equity accounted at $1.70 which means not much tax to be paid on the sale. Sell order is in at 75c.

 

[ParleVouFrancois]

"Of course I re-calculate the value of BSM shares..."

Sorry if I came off wrong regarding the BSM shares, I meant the general investing public, who usually can't be bothered to take a look at an annual report. Obviously you've gone through the trouble of working it all out for your fundamental positions, sometimes I post after being up for a long time and the results do vary. Was just in the middle of a "oh my god does anyone read annual reports but me anymore" moment when I typed that up .

One of the better results for holders of MFC would indeed be the in specie distribution of the BSM shares, if they distributed these then they'd still have 10 cents or so of NTA left on the balance sheet, in which this somewhat questionable (can't exactly be called class, but not all that bad really) management create some more value. Had a look at BSM and I wouldn't mind buying in at a lower price, a in specie by MFC might just be that (I'll be keeping my eye on that).

 

[skc]

"Of course I re-calculate the value of BSM shares..."

Sorry if I came off wrong regarding the BSM shares, I meant the general investing public, who usually can't be bothered to take a look at an annual report.

All good. You mentioned it a few times so I just wanted to clarify that the difference between our valuations did not come from the use of the book value of BSM.

 

[skc]

Position closed

13/12/2010 Sold 1000 AXA @ $6.26 = $6260.

Realised profit = $709.5

TRF is in a trading halt having just announced a pending cap raising. So need to free up some cash for the account. AXA was the easiest position to get out without leaving too much on the table.

 

[skc]

Position closed

16/12/2010 Sold 20,000 WBA @ $0.56

Realised profit = $1,183

WBA just couldn't wait to spend the money from her TGR share sale. They announced last night that they bought a heap of walnuts from Gunns for about $24m, or ~50% of the money they've got.

Cash backing is now ~39c which is still a huge portion of the share price, and if they were to return some of that to the holder then that will have a positive effect on the share price. However, the announcement on the walnut purchase said something like "good cash flow in the medium term" which I taken to mean not good cash flow in the short term, or that WBA will just hold onto the cash...

The original reason for entering the stock was to expect the value gap between WBA share price vs its holding in TGR share to close. It then changed to WBA share price vs cash backing when WBA sold the TGR shares. Now it's become WBA share price vs 70% cash + walnuts... which is no longer what I was buying. I have no expertise in the walnut business so I don't feel like being involved.

~12% profit in 2 weeks is more than palatable.

 

[skc]

Position closed

17/12/10 Sold 15,000 TRF @ $0.43

Realised loss = $387

TRF is probably still worth ~50c based on asset book value. But since the value comes from its holding IFE and ROL (which one cannot short) there is no way to arbitrage the gap.

IFE (which is TRF's main asset) went down heavily after the capital raising and the feasibility study was poorly received by the market. In addition, there is no indication that TRF is going to participate in the cap raising, which means their interest will be diluted.

The risk in the TRF position now doesn't justify the reward anymore imo, so decided to walk away with a small loss.

 

[skc]

New position

17/12/10 Buy 5,000 VPG @ $1.17

Yesterday the company announced that they have received a management buyout proposal for their European business. No detail has been released but it's a consortium led by senior managers in Europe and their group MD.

Putting aside the business ethics involved in any MBO situation, there is possibly some upside in the share price. Management obviously knows the company better than most so there is probably some value when they see value in making a bid. The proposal may also bring out other potential bidders.

VPG has been trading at ~40% of NTA (~$3 according to latest company presentation). Any bid will have to be pitched at 60-70% NTA. My back of envelope calculations suggest that the propoerty management business in Europe alone may be worth $80-100m. This compares with the total market cap of $120m for the company.

If they get a deal done (a big if) and use proceeds towards debt reduction, their balance sheet repair would be just about completed, and the market may reprice them at a lessor discount to NTA.

VPG runs a pretty complicated structure in Europe so even if a deal is done, the money may or may not flow back to the mothership. That's why I am keeping this position quite small.

Tentative target ~$1.60-$1.80. Will exit if the deal falls through or things are not resolved by end of Q1 2011.

 

[ParleVouFrancois]

Yeah I'd agree on TRF, shocking news with IFE, another years wait before first shipments leave the dock. Apparently we were supposed to be starting before THIS Christmas, or at the latest early next year in Jan or Feb. I've sold out also took a pretty big 20% loss, hopefully that was one of the few positions that wasn't real as it's kind've my fault for recommending them.

PVF.