SRS - Spicers Limited

[greggles]

Sorry, forgot to put the link in...

http://www.afr.com/markets/equity-m...s-name-their-favourite-stocks-20180515-h103pt

Thanks. I suppose it could be undervalued, but it doesn't appear to be a compelling growth proposition. They seem to be focused on cutting costs and streamlining their operations rather than growing revenue.

 

[Rainman]

Thanks. I suppose it could be undervalued, but it doesn't appear to be a compelling growth proposition.

Who cares about growth? Growth is overrated and most investors usually overpay for it.

SRS is my largest position and it has been since 0.026. There is a tonne of value here: the cash, the real estate. A return of capital or a sale of the real estate could easily cause this stock to pop.

SRS is the very definition of a low-risk, high-return bet at current levels.

 

[greggles]

Who cares about growth? Growth is overrated and most investors usually overpay for it.

Well, revenue growth is usually the driver of share price growth. Not always, but usually.

SRS is my largest position and it has been since 0.026. There is a tonne of value here: the cash, the real estate. A return of capital or a sale of the real estate could easily cause this stock to pop.

SRS is the very definition of a low-risk, high-return bet at current levels.

I hope you do well out of it. If your position is that SRS is fundamentally undervalued then the market may well come around to your way of thinking eventually. Or not. As you suggest, it may well take the sale of one or more of SRS's assets to realise that value.

 

[galumay]

SRS is the very definition of a low-risk, high-return bet at current levels.

That seems a rather optimistic analysis at face value! Growth might be overrated, but negative growth can only last a finite time. Revenue has been falling for years, cash flow and earnings are lumpy and dont really look to be going anywhere. Margins are small, ratios like ROC & ROE low. Cash levels are steadily falling also.

I admit I only gave the financials a brief look over, but it didnt make me want to dig any deeper. Not sure of the background but the shares outstanding more than tripled to over 1b shares in 2017, was there a split or a massive share issue?

Maybe I am missing the attraction beccause I didnt dig deep enough?

 

[Rainman]

... Not sure of the background but the shares outstanding more than tripled to over 1b shares in 2017, was there a split or a massive share issue?

SRS issued shares to purchase units in the PaperlinX SPS Trust that it didn't already own. This trust held the Paperlinx hybrids that had been issued before Paperlinx went under. The purchase was necessary for SRS to be able to operate without the overhang on its capital structure of these units.

I grant you that SRS is a cigar butt - a Graham-and-Dodd kind of stock. But it has a decent value-spread over the current market price. On a net current asset value basis, it is worth around 0.045 versus a current market price of 0.036. Add to that the real estate in Singapore and Tasmania and you have a security backed up by relatively easy-to-value assets.

If it drops to 0.03 or lower, I will load up again.

 

[So_Cynical]

Paperlinx - sends shudders down my spine.

 

[Triathlete]

Lincoln Stock doctor Strategic Comment Last update: 02 March 18


SRS exhibits unacceptable levels of financial risk due to a below benchmark Financial Health score. Investors need to be aware such companies pose risks and warrant a speculative investment only. Any prospective investment should be managed with tight stop losses implemented.

 

[Rainman]

Lincoln Stock doctor Strategic Comment Last update: 02 March 18...

So that passes for your analysis on an individual stock name - plug a ticker code into a computer program and repeat whatever it spits out?

Very diligent.

SRS is up nearly 20% since mid-March. Enough said.

 

[McLovin]

Who cares about growth? Growth is overrated and most investors usually overpay for it.

SRS is my largest position and it has been since 0.026. There is a tonne of value here: the cash, the real estate. A return of capital or a sale of the real estate could easily cause this stock to pop.

And what's the catalyst for that value to be realised? The company operates on razor thin margins (when it makes money) how realistic is a sale and leaseback type arrangement?

 

[Rainman]

And what's the catalyst for that value to be realised? The company operates on razor thin margins (when it makes money) how realistic is a sale and leaseback type arrangement?

SRS is a cigar butt trading at a 30% discount to net current asset value. I am not arguing that it's a great business.

I don't know what the catalyst is. In my experience, if the value is there, it will get realised in one form or another.

Also, there's an activist shop, Sandon Capital, in this name now. It might stir things up.

If management starts making dumb acquisitions or starts dissipating the asset value, then I will reassess.

 

[Triathlete]

So that passes for your analysis on an individual stock name - plug a ticker code into a computer program and repeat whatever it spits out?

Very diligent.

SRS is up nearly 20% since mid-March. Enough said.

Of course not.....As I mentioned a number of times my main game is TA.
I do use them for the FA though it is much easier for me to make my decision if the Technicals line up as well.

Just that if I was to take a position it would not be a large one and more of a spec size position that is all.

Happy for you to have made money on it that is your good...

 

[Triathlete]

SRS is up nearly 20% since mid-March

Happy that your position is up 20% although you have not made anything until you close out your position you know that and I know that....you can do your cartwheels and tell everyone how right you were then......

A lot of people were high fiving when they rode Slatter and Gordan on the way up and were still holding it on the way down....not saying you would have....

Based on your current FA"VALUE" assessment of this company at what point would you consider that it would be overvalued on their current balance sheet another 30% is fair value as above???

I just might take a position....

 

[McLovin]

SRS is a cigar butt trading at a 30% discount to net current asset value. I am not arguing that it's a great business.

I don't know what the catalyst is. In my experience, if the value is there, it will get realised in one form or another.

Also, there's an activist shop, Sandon Capital, in this name now. It might stir things up.

If management starts making dumb acquisitions or starts dissipating the asset value, then I will reassess.

IMO, the fact it's not a great business plays into how events may unfold. My first thoughts from looking at the last few years of accounts is (a) the issue of a sale and lease-back; can the business afford to rent? (b) how willing would management be, in a business with such awful economics, to give up the cash they're hoarding?

Re Sandon, what's their shareholding? I can't see a substantial shareholder notice from them and in the last AR there are 4 substantial shareholders listed and they're not one of them. If they're serious activists then they need a seat at the board, not just talking out their arses at investor conferences. On the other hand Allen Gray are also activist and they sold out last year. Maybe the too hard basket for them?

In the AFR article I linked to from Sandon they mentioned the land in Tasmania. Is this it?

The old Wesley Vale paper mill is still for sale seven years since it closed and 250 workers lost jobs at the site.

That’s despite several prospective buyers showing an interest over the years.

...

It’s believed when the mill was listed for sale in 2010 the asking price was $14 million but it could be purchased today for about $5m.

https://www.theadvocate.com.au/story/5119726/former-wesley-vale-paper-mill-still-for-sale/

What's a tonne of gold on Pluto worth?

IMHO, this is a long way from being easy runs on the board.

 

[Rainman]

IMO, the fact it's not a great business plays into how events may unfold...".

An investment in a net-net like SRS is not a bet on a turnaround. It is not even a bet on a modest improvement. It is a bet on a reversion to the mean.

What's the mean in this case? Net current asset value, i.e. net assets less all liabilities and minority interests, is around 0.05 cents. In March of this year, SRS was selling for a 50% discount to net current asset value.

The Australian market is pretty efficient. Companies selling at a 50% discount to net current asset value, irrespective of their economics, are rare in my experience. The Australian market like the U.S. market has a habit of narrowing such wide spreads. It may not narrow the spread in SRS all the way up to 0.05 cents. But if it narrows it up to 0.04 cents, I will start selling. I will be out at 0.045 cents.

Re Sandon, what's their shareholding?...

Yes, agree. There's no evidence they have a stake that's going to allow them to do much. On the other hand, there are two directors from Coastal Investment Management on the board. Coastal has just under a 14.5% shareholding, so I expect that it will want to generate value so as to be able to sell down its position in the not too distant future. Perhaps more importantly, Coastal will be against any value-destroying moves.

In the AFR article I linked to from Sandon they mentioned the land in Tasmania. Is this it?

Nice find. But let's say the land is worth only $5 million. SRS is worth 0.05 cents a share on a net current asset value basis: you're getting the land and all the other non-current assets for free.

 

[Rainman]

... I just might take a position....

I wouldn't take a position in SRS at this level. The discount from net current asset value has narrowed since March. The risk/reward is not as attractive as it was in March.

 

[Rainman]

SRS reported a decent FY 2018 given where it was trading when I first mentioned it.

It was trading at 0.036 on 1 June 2018. It's trading today at 0.044. That's a more than 20% gain in just under 3 months - 80% on an annualised basis.

Decent net-net stocks appear fairly infrequently on the ASX but when they do they're usually worth taking a closer look at because they tend to offer markrt-beating returns.

 

[Rainman]

... IMHO, this is a long way from being easy runs on the board.

In April this year, one could have purchased this name for 0.025. At that price, SRS was trading at a massive 50% discount to net current asset value. The land that it owned and all the other non-current assets one got for free.

Today SRS moved up to 0.05 cents a share and I sold out the last of my position at 0.049. There may still be money to be made on this name. But I feel the easy money has been made.

It may have been the case, McLovin, that this opportunity was, as you said in June, "a long way from being easy runs on the board".

But I wonder whether that is ever the right approach to take to a deep value opportunity such as SRS offered in April.

Isn't the more appropriate question this: Weighing risk and reward, what are the probabilities that I make money - some money - on this name versus the probabilities that I suffer a permanent impairment of capital?

Remember, even at 0.05 cents a share, SRS is just now trading at around net current asset value. Meanwhile, from 0.025 to today's close of 0.049 it has delivered an almost 100% return in less than 6 months.

 

[greggles]

Spicers Limited announced yesterday that it is to be taken over by Kokusai Pulp & Paper Co., Ltd. Existing shareholders are to be paid 7c for each ordinary SRS share held, valuing the company at A$147.6 million.

Given that the previous close for SRS was 5.3c and the last time it reached 7c was back in October 2014 (reached only briefly), this looks like a reasonable result for shareholders. Although I'm sure some may disagree.

 

[System]

On July 17th, 2019, Spicers Limited (SRS) was removed from the ASX's Official List in accordance with Listing Rule 17.11, following implementation of the scheme of arrangement between SRS and its shareholders in connection with the acquisition of all the issued capital in SRS by Kokusai Pulp & Paper Co Ltd.