SKC fundamental positions

[skc]

New Position

27/01/2011 Buy 23,000 BAU @ $0.27 = $6,210

Rationale

Bauxite Resources is looking to build an alumina refinery in WA and is trying to do so through a JV with a Chinese company Yankuang Corp. The agreement executed yesterday appear to be quite a good deal for BAU.

Yankuang pays for 91% of the construction cost and receive 70% of the products, while BAU pays for 9% and gets 30%. Other benefits include assistance for obtaining finance, a 10-year off-take agreement for half of BAU's production, repayment of exploration costs, and even the BFS cost will be 90% paid for by Yankuang.

The proposed plant is 1.1Mtpa and construction is to commence within 5 years. My guess is such a plant will cost ~$1.5B which means BAU need to come up with only ~$135m. Assuming alumina price at ~$380/t, and production costs at ~$150/t, giving BAU ~$75m pa cash flow. For 20yr life this has an NPV ~$400m ($1.7 per share).

BAU has ~$50m cash, and their costs for the next 5 years (excluding construction costs) would only be $12-15m.

So I am paying ~27c for 15cps cash and $1.7 per share in project value. In order words, the project is valued by market at ~7%.

Granted the project may not go ahead, as it is subjected to many steps including BFS, EPA approval and some protest from the local community. But even if the whole project doesn't get off the ground, the cash backing will cushion the fall to ~20c.

For exit, I am happy if market (provided confidence remain high) is to price the project to anything like 25-30% + cash at hand, which gives a target ~55-60c.

Unfortunately I haven't discover this stock until now and didn't buy in when it was trading below cash backing in Sept... the risks would have been almost negligible.

 

[skc]

End of Week 12 snapshot



Portfolio value up 14.6%
XJO +0.63% (Last 4774.9, Starting value 4745)
XJOAI +0.28% (Last 34734.8, Starting value 34639.1)

Some Notes

WHC - Bids for the company are due early Feb so there might be news next week. Timing is bad as the QLD flooding probably took a few % off any offer price.

SOO - Expect quarterly cashflow statements next week to provide a view on whether they can maintain their sales and earnings trend.

HFA - Seems to enjoyed renewed interest this week and now trading at fresh 12month high. Original target is 36c... if that is reached then half position will be closed and a ~15% trailing stop applied to the remaining half.

CSR - EGM scheduled for 8 Feb to vote on the capital return and share consolidation. Will be interesting to see if the price jumps on announcement of the outcome (and thereby dis-proving the efficiency market hypothesis).

 

[stock nub]

There is a good article on BAU in the AFR weekend magazine.

It explains how the land does not require state royalties to be paid, instead they go to the land holder as some of the land was settled before state royalty agreements came about. So the locals with bauxite on their land support the company, while the locals with no bauxite do not support the companys plans. Some people in the town support the company as they think it will bring jobs to a town, which is currently struggling. Others think it will destroy the amenity of the place.

Worth having a look at.

 

[skc]

There is a good article on BAU in the AFR weekend magazine.

It explains how the land does not require state royalties to be paid, instead they go to the land holder as some of the land was settled before state royalty agreements came about. So the locals with bauxite on their land support the company, while the locals with no bauxite do not support the companys plans. Some people in the town support the company as they think it will bring jobs to a town, which is currently struggling. Others think it will destroy the amenity of the place.

Worth having a look at.

Thanks. Will look for a copy.

 

[skc]

End of Week 13 snapshot



Portfolio value up 15.5%
XJO +2.48% (Last 4862.7, Starting value 4745)
XJOAI +1.24% (Last 35067.2, Starting value 34639.1)

It's been about one quarter and account is doing a respectable 15.5%, albeit the majority of profits are still open. The market on the other hand has barely beaten term deposit.

Some Notes

SOO - Quarterly report released. Revenue of $15.689m for the quarter which is all time high (+15.4% against previous quarter of $13.591m, +185% against this time last year at $8.45m). Cash flow however is negative, probably due to high forward orders (and hence build up of inventory. With only $2.4m cash left they might have to either raising some capital or arrange some bank debt. Reporting on 24 Feb.

HFA - Provided market update on interim earning. EBITDA declined due to currency movements but underlying number is a 5% improvement. The benefits from their alliance has yet to flow through but the share price is pre-empting the benefits already. Reporting on 21 Feb.

PGA - Made solid move this week and seeing 10c which is the re-capitalisation price, so expect plenty of sellers around these levels. Reporting on 15 Feb.

VPG - No real news but strong gains in recent weeks. Reporting on 24 Feb and may provide update on corporate transactions then.

IHF - Glad I closed the position when I did. One bidder fell through and the other bidder said today they don't want to pay $1. Some desperate seller had to cash out at 86c. And the poor ING management still has to 'engage with the potential bidder' - it is pretty clear who is the more willing party here.

 

[skc]

New Position

8/2/2011 Buy 3000 MYE @ $1.45

Rationale

Mastermyne is a mining service provider focusing on coal, and was only listed back in May 2010. It is a relatively small outfit in the mining space, with market cap of ~$110m and revenue ~$98m. FY2010 EPS was 10.7c, putting the purchase price at a PE of 13.6.

MYE appear to have decent prospects going forward. Order book for FY11 is fully contracted, plus further sales pipeline of $152m for FY2011 and $204m for FY2012. Employees have increased some 50% since June 2010, and that's after a 40% rise in FY10. Historically (before listing) revenue and EBITA have both grown at 18% CAGR for the last 4 years.

If these numbers translate well into future earnings (i.e. no major screw up due to rapid expansion) then today's PE of 13.6 is good value. Something like FGE has a PE ~19 and Price/NTA ~6.2. This is not FGE yet but similar mulitples could offer a target ~$1.8-$2.2. This price will probably be realised with a few more solid HY reports, however.

 

[skc]

New position

8/2/2011 Buy 15,000 ZGL @ $0.31 = $4,650

Rationale

ZGL is a manufacturer of hydraulic machinery and precision engineering equipment company. These products are used in the marine, oil & gas and construction industries. Pretty small company at $65m market cap.

Yesterday the company released HY guidance that revenue in HY grew by 47%, while NPAT is expected to be ~S$7.8 to 8.3m ($6-$6.5m $A). Cash flow has been strong historically and in Jun 10 balance date there were ~$20m cash at hand against debt drawn at ~$14m. The firm is also undertaking an on-market buyback program.

If the HY figure translates to full year earning, then the purchase price represents a PE of ~5. And if these revenue and profit numbers can be sustained, a PE ~8 to 10 would be my exit target.

 

[sinner]

Loving this thread skc, keep it up!

I keep forgetting to look at it, and when I come back so many interesting things have happened.

Someone better edit wikipedia and put your name in here:
http://en.wikipedia.org/wiki/Alpha_(investment)

 

[skc]

Loving this thread skc, keep it up!

I keep forgetting to look at it, and when I come back so many interesting things have happened.

Someone better edit wikipedia and put your name in here:
http://en.wikipedia.org/wiki/Alpha_(investment)

Thanks, Sinner. The performance has been better than expected as I was only aiming for something like 30% a year. Early days yet the equity curve could go either way from now on!

P.S. CSR went ex-capital return today so I've adjusted the buy price to reflect the cost base. Buy price of $1.635 is now $1.1993. No silly price action from that.

 

[skc]

New Position

10/2/2011 Buy 150,000 CAJ @ 3.7c = $5,550.

Rationale

CAJ is a small scale independent diagnostic imaging outfit with 28 sites. FY09/10 was a turnaround year when the company grew revenue by 25% and posted a small NPAT of $0.7m (vs $1.3m loss the year before).

In FY10/11 management is forecasting $1.6m NPAT supposed by 9 new sites and like-for-like growth (14% from FY09 to FY10). That however may be conservative given that Sept Qtr already saw NPAT ~$0.5m.

If they can achieve $2m profit (0.66cps) and 15% growth for a few more years, the current PE of ~6 is more than cheap compared to larger listed firms operating in similar fields (PRY PE=13, SHL PE=15.6).

Exit target with PE~10 or 6.5-7c.

P.S. CAJ reports tomorrow so I am sticking my neck out here a bit on expectation of a good result.

 

[suhm]

cheers skc like the thread and sharing your ideas.

 

[skc]

End of week 14 summary



Portfolio value up 16.3%
XJO +2.86% (Last 4880.9, Starting value 4745)
XJOAI +2.58% (Last 35534.5, Starting value 34639.1)

Some notes

MFC - It's main asset is shareholding in BSM which has reached a new high. Target now ~18c.

VPG - 2 announcements this week. First regarding Sheraton Noosa being put on market. Not sure Sunshine Coast property market is that hot at the moment...Second was an update on the Australian funds management business. Basically they are divesting their co-investment in their own fund. What it comes down to is slimming the business, but the impact will obviously depends on the sale price. And the elephant in the room is still potential corporate transaction.

CSR - AGM last week and no surprises regarding capital return and 3-for-1 consolidation. Adjusted target after that would be ~$4. There was no update on trading performance in the meeting, and CSR is off-cycle so they don't report until May.

BAU - Big spike today to a high of 35c, but cooled off after response of "No. Nothing. No. N/A." to the speeding ticket. News may emerge in the coming weeks but it could well just be a technical breakout.

ZGL - Another share making good move after my entry (how many people read this )...reporting 27 Feb.

CAJ - I thought they were reporting today but they only issued an update. 6 month revenue as forecasted which is a 27% increase from pcp. NPAT also in line with guidance. Market didn't bat an eyelid however.

cheers skc like the thread and sharing your ideas.

Thank you. Having a thread like this makes me behave in a more disciplined manner so I benefit as well.

 

[suhm]

Hehe some of the ZGL volume was from me after reading your post, not nearly enough to account for the move though, good find, more companies in that sort of vein would be great for me. low PE companies, with net cash, good profit growth, good ROE and trending up are very hard to find unless you physically read every companies presentations, annual reports and keep track of them to enter at an opportune time. I like them because it usually makes for very limited downside but quite large upside with earnings expansion and pe expansion.
Only concern I have is that it seems to be a family run company and the recent buyback and the issuing of shares to senior management, the chairman and his 2 sons is increasing their hold on the company. I think between them and the chairman's brother they hold about 70% of the company.
On the plus side they do pay a dividend, I'm not sure why they do as it doesn't seem to be the most efficient way for them to get money out of the company but I'm not aware of the rules regarding foreign dividend income in Singapore but from what they wrote they don't seem to have to pay witholding tax to Australia. Their wages are also not excessively outlandish, 400+k for the chairman is on the high side but his sons get about 200k and the buyback was done at much lower prices so should help push up eps.

 

[robusta]

SOO seems like a interesting company. No debt, good ROE. Not sure if paying a dividend is the best use of capital, also wondering if they can maintain margins in very competitive solar industry.

I will be watching the 1/2 year report with interest.

 

[skc]

Hehe some of the ZGL volume was from me after reading your post, not nearly enough to account for the move though, good find, more companies in that sort of vein would be great for me. low PE companies, with net cash, good profit growth, good ROE and trending up are very hard to find unless you physically read every companies presentations, annual reports and keep track of them to enter at an opportune time. I like them because it usually makes for very limited downside but quite large upside with earnings expansion and pe expansion.
Only concern I have is that it seems to be a family run company and the recent buyback and the issuing of shares to senior management, the chairman and his 2 sons is increasing their hold on the company. I think between them and the chairman's brother they hold about 70% of the company.

On the plus side they do pay a dividend, I'm not sure why they do as it doesn't seem to be the most efficient way for them to get money out of the company but I'm not aware of the rules regarding foreign dividend income in Singapore but from what they wrote they don't seem to have to pay witholding tax to Australia. Their wages are also not excessively outlandish, 400+k for the chairman is on the high side but his sons get about 200k and the buyback was done at much lower prices so should help push up eps.

Feel free to pm me any shares that you find interesting . In the past week I've read most profit reports on small caps. Another thing I do is to look at companies that are doing buy backs - in many cases they qualify as having spare cash, high ROE and low PE, although not always high growth (as they don't know how to better spend their cash).

SOO seems like a interesting company. No debt, good ROE. Not sure if paying a dividend is the best use of capital, also wondering if they can maintain margins in very competitive solar industry.

I will be watching the 1/2 year report with interest.

I think the market is growing at such an exceptional rate - while it is competitive, margin compression usually happens in an industry where supply is growing faster than demand. I am however more concerned about SOO's cash position as stated before - and you are right that about the dividend payout (which I asked for last year).

 

[suhm]

I was updating a thread with all of my open positions and when I close them as well, not nearly as organised as yours though. Except for a few illiquid companies I don't have enough cash where accumulating a large enough position is a problem.

 

[skc]

But CIF is actually a reasonably viable business and has a significant cash holding (~$220m, 69c per share). Operating cash flow after interest cost was ~$90m (~28cps), which comfortably funds the dividend of 14cps, representing a yield of ~12%.

Now put these numbers in a different light... let's say cash in bank may earn at best 5%, so those cash would earn only ~$11m. This means the real operating business is generating ~$79m FCF (24cps), and you can buy them at ~46c (current share price $1.15 minus cash component of 69c)... or over 50% return.

CIF is not without risk of course... debt stands at $1.5B and balance sheet is complicated by a bunch of FX and interest rate derivatives. NTA is negative thanks to a lot of goodwill, but the market is almost pricing a liquidation so it's worth a caulcated speculation imo.

For exit I am looking for the 24c FCF to be valued at least 5x, or $1.20, plus cash of 69c bringing the target to ~$1.9. I am wrong if the cashflow situation changes for the worse.

HY results out on 15 Feb. LCB reported flat underlying EBITDA, while Inexus recorded a small 4% increase. Overall cashflow from operations = $47.8m excluding interest income (15cps), an improvement of 50% from pcp. Cash balance is now $237m or 75cps. Given that FCF and cash balance have both improved I am happy to continue my hold. Target ~$1.9 remains.

 

[skc]

New Position

16/2/2011 Buy 8,000 AAD @ $1.25 = $10,000.

Rationale

A good HY report today by ADD who runs theme parks, bowling alleys, healthclubs and marinas etc. Apparrently cheap leisure activities (like going to the bowling alley) are not really that affected by interest rate rises. Every business segment reported top line and EBITDA growth, and January has been strong so hopefully that will carry them through to a solid full year result. No surprises in anything like asset revaluations etc.

Reported EPS 8.63cps, up 10.9%. Assuming full year to be 2x HY figure, at $1.25 purchase price I've paid a PE ~7. Exit target I'd look for PE ~11-12, or $1.8-$2.

It's always a nice feeling to buy something on open and watch it rise through the day and be in the green from the start

 

[skc]

New Position

Buy 70,000 PGA @ $0.075 = $5250

Rationale

PGA is a collection of media/marketing companies that has really fallen on hard times. A massively discounted capital raising in August saw the stock fall from $1 before suspension to 10c and below.

Yesterday PGA announced the sale of 5 of its businesses to SLM for $75.3m. These 5 business collectively earned revenue of $29.7m and EBITDA of $8.2m, pitching the EBITDA multiple of 9.2x (or ~2.5x revenue). SLM believes with synergy cost savings they are really paying ~6-7x.

The remaining PGA businesses can expect revenue ~$350m and EBITDA ~$55-60m. Applying same multiples as above give EV ~$330 to 400m. After the sale PGA has debt $122m, which means equity value of ~$200m. Or 13c for each of the 1.55B shares on issue if the market is willing to rate PGA fairly. It's currently trading on forward EBITDA multiple of ~4x.

Risks include revenue and EBITDA weaknesses. Potential upside include further sale of businesses at similar terms. Will put in a trailing stop if that 13c target is ever reached. Will cut the loss if there are any reported weaknesses in revenue or EBITDA.

Position closed

16/2/2011 Sold 70,000 PGA @ $0.091 = $6,370.

Realised P&L = $1,108.

PGA released their HY results today with what I thought was pretty weak figures.

Revenue down 3.65%. EBITDA $32.9m, down ~13%. While the EBITDA figure is within my initial assumption of $55-60m for the year, I don't like where the numbers are heading (i.e. south). The commentary is full of 'If it wasn't for this and for that we would have done better' sort of BS. So happy to take my small win and leave the table.

Cash on hand = ~$15K

 

[skc]

Position Closed

18/2/2011 Sold 90,000 SOO @ $0.115 = $10,350.

Realised P&L = $-121.14 (including dividend $337.5).

HY results out today. The nubmers were not terrible - top line growth was solid up 25% vs last 6 months and up 71% vs pcp. Margins are facing pressures, and op cash flow was negative as pointed out earlier.

What was unforeseened however was a significant loss in FX forwards. This may be a one-off and probably non-cash, but that knocked the NPAT and EPS figures to a discimal $0.9m and 0.46cps... compared to my expectation of $2.5m and 1.25cps.

Given that I have no visibility into the nature of the FX contract (and future implications), the difficulty associated with cash flow and the overall 'tone' of the report (which sounded like 'We are going OK and she would be right'). I am happy to just essentially scratch this position. I just don't have the same conviction as I entered the position. And with a few new opportunities coming up a good chance to free up some cash.

Cash on hand ~$25K.