Monday 23 December 2013

AIMS Property Securities Fund (APW - previously MPS)

One last post before Christmas. I have discussed APW/MPS extensively in previous posts and I expect to provide a more detailed update regarding the NTA in the new year - the NTA ought to be slowly creeping up thanks to the buy-back, St Kilda Road recapitalisation and the APN Regional Property Fund to name a few factors. 

For today, let's focus on the distribution announcement:

1. A total distribution of 0.15c will be paid, record date 31 December. 

The distribution is made up of 0.099c plus a special distribution of 0.051c. So a ~0.1c quarterly distribution equates to an annualised rate of 0.4c. Some people were expecting 1c. I thought this was un-realistic: a chunk of the underlying investments aren't paying distributions, so expecting a total distribution of ~$5m p.a. just isn't feasible at this point. If management get on with re-working the portfolio then much higher levels of distribution are possible in the future. 

The payment date is an un-necessarily distant ~21 March.

2. A Dividend Reinvestment Plan (DRP) has been activated.

This is bonkers. A DRP means new units will be issued at a 3% discount to the unit price. The unit price is already a massive discount to NTA. So the DRP is simply another capital raising at a massive discount to NTA. To make things worse, APW has no debt and has excess cash: it simply does not need the cash. 

Why management feels the need to conduct a DRP is beyond me. Why do they need to issue more scrip when at the same time they are buying-back stock? One reason might be that George Wang/AIMS want to increase their % of shareholding on the sly. The other reason might be that these guys are simply incompetent. If I'm missing something, please let me know and I will retract my words. 

I will be seeking a reason from management.  

In the meantime, please have a merry Christmas and safe new year.

Kristian

Disclosure: own APW

Please get in touch! I am always on the lookout for interesting stock ideas, with a particular emphasis on deep-value, growth companies run by outstanding management and arbitrage opportunities. 

Wednesday 18 December 2013

RHG Ltd (RHG)

RHG has been a great trade this year, yet has gone to sleep since Cadence withdrew their bid in October. The scheme meeting to vote on the remaining bid (AMAC) was held today which predictably was overwhelmingly voted in favour of. 

This means that eligible RHG shareholders will be paid 50.1c cash ~ 8 January. 

Would love to have more trades like this. 

Kristian 

Disclosure: own RHG

Please get in touch! I am always on the lookout for interesting stock ideas, with a particular emphasis on deep-value, growth companies run by outstanding management and arbitrage opportunities. 



FSA Group Ltd (FSA)

Please note this article has been written Nigel Littlewood, who is also not currently licensed to provide financial advice. Disclosure: Nigel Littlewood and Kristian own shares in FSA.

In June I wrote an introductory piece on FSA group when the stock was trading around 75c., followed by another update when the stock was ~$1. Yesterday the company provided an earnings upgrade. FSA has been the only earnings upgrade we have seen in this market of late, so it's most encouraging.

Tim Maher the CEO is now predicting full year NPAT growth between 12-18%. This is a healthy jump on the circa 10% growth rate expected a few months back. It appears the first half has been particularly strong on the back of growth in the business lending division.

So my numbers suggest the stock is trading around 12x at the current price of $1.28 and an expected NPAT of circa $12m. The market has moved from pricing this stock cheaply to a much fairer multiple and indeed priced for some growth.

I expect a dividend of 6c fully franked this financial year (might be 5c) providing a running yield of 4.7% if I’m correct.

While the easy money has been made this is (in my view) a quality small cap which, is growing. Its balance sheet is sound and management is very competent while being appropriately incentivised by large shareholdings.


In the event that FSA’s new products find traction this year the stock can grow into the future but the risk profile has changed with its more aggressive multiple.

Friday 13 December 2013

Galileo Japan Trust (GJT)

I briefly mentioned GJT in a previous post when they were working through a major re-capitalisation. I bought some units in the re-capitalisation and some more recently as the price has retreated. The current price of $1.43 implies a tax-deferred distribution yield of 10.5% p.a. It's pretty rare to see a double digit yield these days - that's over four times the RBA cash rate! 

In addition, GJT trades at a big discount to the NTA of $2.16, so potentially there is the double whammy effect of earning a big income yield and capital appreciation via a closing of the NTA gap. Imagine the NTA gap being mostly closed over the next three years to $2. The compound rate of return including distributions is 21.3% p.a.; double the long term average of the Australia stock market. This assumes constant currency and no growth in income or property values. 

It also assumes there is nothing actually wrong with the fund. That could prove to be a very big assumption. There are plenty of reasons to doubt GJT, so in no particular order, let's look at some of the potential issues. 

Currency Risk

GJT is un-hedged so investors are exposed to the Japanese Yen (JPY). There are no plans to hedge the portfolio - management noting the key reasons of not wanting capital tied up in hedging and the desire to get back to LPT '101' (Listed Property Trust - what REIT's were formally called) and offering a plain vanilla product to investors without complex hedging products.  

If JPY drops versus AUD, you lose. Vice versa. Here is a five year chart of AUDJPY:  


The AUD has appreciated approximately 50% against JPY. That was a little bit eye-brow raising. As an aside, I ran similar graphs for AUDUSD, AUDGBP and AUDEUR: 



The AUD has been a standout performer, however it started to slide against the GBP and EUR and to a lesser extent USD (although as I continue to edit this blog, the AUD has dropped about 2c v USD). Interestingly, it has held up relatively well against JPY. Key point: substantial currency movements have been known to occur. The 'steady' currency assumption is false. 

Japanese Macro Environment

Ageing population, extremely high public debt and deflation all come to mind when thinking about Japan's economy. Respected hedge fund manager Kyle Bass is famously extremely bearish on Abe's money printing policy. This is not a macro focussed blog and there are far smarter people than me commenting on the macro situation and I will not venture an opinion on this. 

Inflation can be superb for property investors: for example did you know a lot of McDonald's success is built on its property empire, created through debt and rising asset prices? Deflation however creates a huge problem for leveraged property investors: the NTA shrinks even faster than the deflation rate. GJT is 59% geared.  

Both GJT and Astro Japan Property Group (AJA) management are reporting a moderating in declining property values. There have even been the odd signs of increases in property values with the leader being A-Grade central Tokyo office property and a decrease in vacancy rates. Still, Japan has been in a bear/deflationary market for 20 years and it would be naive to think is no longer a risk just because of some tentatively positive signs. 

Square Peg, Round Hole

Last week I and some colleagues met with the managers of RNY Property Trust in New York. RNY and GJT both mostly hold non-prime real estate in foreign countries to Australia. Both vehicles aren't really a natural fit for out-of-the-way Australia, so closing the NTA gap may prove difficult unless there are more recapitalisations or asset sales, which don't appear to be on the radar following our discussions with GJT. These types of vehicles were set-up pre GFC and clearly there is a risk that locals offloaded dud assets to foreign (Australian) investors. 

And there are structural differences. GJT's debt is 59% versus the preference in Australia for gearing of 30-40%. Japanese REITs have debt levels averaging 60%. In Australia, commercial rents typically include CPI or 3-4% annual rent increases. It's done different in Japan: tenants are incredibly hard to evict and typically stay there for very long periods of time. It's not kosher for a business to change office location. Rent reviews, both up and down are done periodically causing the market to be a lot more fluid than Australia. For an Australian concerned about deflation, the structure of the Japanese market is a legitimate concern.  

Interestingly, Japanese listed REITS tend to trade at a premium to NTA.  The average yield has decreased from 6% (December 2011) to the current 3.8% p.a. So this is kind of odd with GJT trading at a big discount here in Australia.  This could open the arbitrage possibility of shifting GJT to Japan somehow. This option hasn't been ruled out. 

Further Property and Income Declines

I've already touched on this, however it's an incredibly large source of risk (and upside potential if values move up). Following the GFC, property values first started declining thanks to the cap rates increasing. Further property write-downs were then caused by shrinking income (lower income applied to the same cap rates equates to lower property valuations). The property declines have been dramatic: 2010 $58m, 2011, $41.8m. 2012 $40m, 2013 $10m. My case for investing in MPS was to buy when the write-downs had completed. Buying at a big discount to NTA when the NTA is still shrinking is not a smart move in my experience.

Income might also shrink if vacancy rates rise: GJT has an occupancy of 99%, which is significantly better than commercial space in general. I understand management have been very active in ensuring properties remain tenanted. I think this is smart: vacancies aren't a good look and give remaining tenants fire-power to negotiate down rates.

GJT v AJA 

I presented a basic comparison in my first post. One of the key differences is the debt repayment: AJA is paying down debt at a faster rate which means there is less available cash for distribution; hence why the payout ratio is 43%. GJT are not paying debt as fast and has a much higher payout ratio of 89%. There are pros and cons to each strategy. For my simple way of thinking, I like the higher payout ratio because it means I am receiving AUD much faster (lowering the risk of the investment) and as we know, dividends are such an important part of the Australian psyche, so a very healthy and sustainable yield is likely to act as a ballast for the unit price.

Summary

There are plenty of potential issues. But there is also plenty of upside. I own a small position and would love to add more if I get more comfortable risks start dissipating and/or the price moves down further.  

Kristian 

Disclosure: own GJT

Please get in touch! I am always on the lookout for interesting stock ideas, with a particular emphasis on deep-value, growth companies run by outstanding management and arbitrage opportunities. 

Friday 22 November 2013

APN Regional Property Fund (NSX: APR)

MacarthurCook Property Securities Fund (MPS) owns a stake in APR. As discussed in my last post, APR is recorded in MPS' books at 20c per unit when the actual NTA is 72c. 20c is the mark-to-market value of APR - hence why MPS use this measure. 

Anyway, I thought APR sounded very interesting: an asset with potential multiples of upside and possibly a catalyst in place: if I were running MPS, I would be all-over APN to close the gap through a buy-back, redemption, whatever. This would be a great way to help boost the MPS NTA. 

I've just done some digging around. Subsequent to the balance date of the MPS presentation (31 October), APR has jumped to 61c. APR is unbelievably illiquid: the last two trades were 14 November and then 9 January. I may have missed the boat to buy APR directly, but as a MPS shareholder I still in-directly benefit: at 61c the value of the APR stake has increased from by $1.308m from $638,000 to $1.945m. This represents a paper increase to the MPS NTA to 12.41c.      

APR has not been paying a distribution as gearing has been too high. On face value, it looks like APR has turned a corner with the sale of a property in Grafton with the proceeds being used to reduce gearing. This in-turn looks like it will allow the fund to re-start distributions. Probably the reason for the price jumping. 

I'm not sure if the stock could have even been bought at 20c, but anywhere near that it would have been an absolute screamer. Oh well. 

Kristian 

Disclosure: own MPS. No direct position in APR. 

Please get in touch! I am always on the lookout for interesting stock ideas, with a particular emphasis on deep-value, growth companies run by outstanding management and arbitrage opportunities.

MacarthurCook Property Securities Fund (MPS)

As regular readers know, I have discussed MPS at length in this blog. I have been commenting for a while we should see a re-rating of the stock should any number of catalysts materialise.

We are now seeing several catalysts in-play:

1. The NTA has increased from 11.66c (30 June) to 12.15c (31 October) or 4.2%. Life is so much easier when you buy at a massive discount and the underlying fundamentals of the business/property are getting better because we get the double uplift of a closing of the discount and an increasing underlying value. Compare this to classic value traps (I've been caught in my fair share) where the underlying value is not increasing and you just have to hope the discount to valuation closes in a reasonable period of time.

The other significant factor is that the vast majority of nasties in the portfolio have been cleaned out, so hopefully most of the potential negative news has been dealt with. The underlying property portfolio is comprised of both unlisted and listed stock. Both have their advantages and disadvantages. One of the disadvantages of the list portfolio is that some of the stocks are very illiquid: a decent pull back in the price of some of these will impact MPS' NTA.

Interestingly, this illiquidity may actually create upside in the future: the APN Regional Property Fund is listed on the NSX and MPS records its value at the trading price of 20c. The NTA is 72c. Management believe in the case of an asset realisation the actual value received will be much closer to 72c. There is no catalyst (that I am aware of) in place to close the NTA gap so don't get too excited. MPS owns $638k stock at 20c however it could be worth $2.3m if the value gap closes.  

2. MPS has started buying back it's own stock. This is good news for two reasons: it means MPS is buying an asset worth 12.15c for much less thereby increasing the value of the remaining units. And in my opinion it just as importantly sends a solid signal to the market that the action plan outlined by management is being implemented and capital management is being managed prudently. 

3. Distributions have been affirmed for the quarter ending 31 December. The amount of the distribution or payout policy has not been determined which was clearly a point of contention at the unit holder meeting on Wednesday. I too have been critical of this, however on reflection I'm not sure this is being a bit harsh; to be fair, AIMS inherited a lot of crap in the portfolio and some of the inherited underlying investments are not paying distributions or are in the process of being sold or improved. This means that MPS does not have superb cash-flow while it works through cleaning up the portfolio. Paying any distribution will be the first since 2008. I'll be happy with something.

4. Following the sale of the Rimcorp property, there is $13.2m cash on the balance sheet. Not bad considering the total market capitalisation of MPS is just under $39m. However it's not correct to exclude this in a Enterprise Value style calculation as anywhere from ~1$m to $6m will be spent on new securities in a St Kilda Road (Melbourne) property, cash will be used for further share buy-backs and possibly any property acquisitions.

5. Management will start road-showing MPS to brokers etc. This should get a bit of interest in the stock, which I have experienced first hand how this can work a treat to get the price moving.

These are the positives. There was a prickly debate at the unit holders meeting regarding fees, conflicts of interests, poor historic performance, the last capital raising, lack of clarity regarding the distribution policy, role of the board and other sore points. In my opinion some of these points were valid and some were not. For me, I am taking a more simple approach: I bought at a big discount to NTA and have been looking for catalysts to realise that value. As long as those catalysts continue to un-fold and the portfolio is managed sensibly, I will be happy.

Kristian 

Disclosure: own MPS

Please get in touch! I am always on the lookout for interesting stock ideas, with a particular emphasis on deep-value, growth companies run by outstanding management and arbitrage opportunities.


Wednesday 20 November 2013

Paperlinx Ltd (PPX) and Paperlinx Hybrids (PXUPA)

Since my last post, PPX have indicatively offered 250 PPX shares for each PXUPA. PPX is currently 5.2c, valuing the PXUPA offer at $13. The offer helped PXUPA get out of its sub $10 funk and is now also trading at $13. The offer is well below the market rumours of $20, however this is minutiae: the majority of PXUPA holders are extremely unlikely to accept the offer whether it is $13 or $20.

The Mexican stand-off will continue.

So where is this all going to end? Obviously it could end in tears if the company goes under and certainly both PPX and PXUPA are partly being priced for that scenario.

Back in 2011 there was an indicative offer of $21.85 for PXUPA and 9c for PPX from a third party. Now the offer for PXUPA is being made by PPX itself. This is potentially the canary in the coal mine: If I was running PPX and thought the business had turned the corner, I would most certainly be looking to buy PXUPA on the cheap now. When/if cash-flow starts picking up, it will be even more difficult to PXUPA holders to sell the stock cheap. Therefore for today, let's imagine the scenario of Paperlinx getting back to profitability. To make it clear: I have absolutely no idea at this stage if this scenario is likely. I just want to see how the picture looks like if this scenario occurs.

Listed below are some recent historic profitability measures:


Despite a lot of trimming, Paperlinx is still a big business. Even just a small improvement in margins or perhaps closing the European operations or whatever would see the business making some half decent money. It's not difficult to see the business making $20m+ p.a. just by tweaking Gross Margin % by a few notches (pre-distribution payment to PXUPA holders) if things come together.

Okay, so cash starts coming in and management want to start paying dividends back to shareholders. Distributions must first be paid to PXUPA holders. The distribution rate on PXUPA is the 180 Day Bank Bill Swap Rate plus 4.65% = 7.3% p.a. There are 2.85m PXUPA on issue so the cash distribution would be $20.8m p.a. Obviously if distributions are re-commenced, PXUPA would be significantly re-rated from $13. The alternate scenario is for PPX to just buy back PXUPA at more reasonable levels. On the assumption nobody participates in the current indicative offer and everyone participates in say a $70 offer at some point in the future, the cash required is ~$200m.

This would probably need to come from a capital raising. The current market capitalisation of PPX is $31.7m. So adding another $200m in market capitalisation gives a PPX market cap of $231.7m and an earnings multiple of 11.6. The numbers will look even better if some people participate in the current offer and perhaps a few can be bought back on-market at a later stage.

To reiterate, this is all speculative based on a scenario that may or may not happen.

For me, I am trying to avoid companies producing no cash, hence why I am not in either of these stocks. Things can get really ugly when cash flow dries up and there have been enough other opportunities to make money from. However you can see the potential upside in PXUPA should the company start producing cash and hence why many PXUPA holders are just choosing to hang on.

Kristian

Disclosure: no position in PPX or PXUPA

Thursday 14 November 2013

Linc Energy Ltd (LNC)

Around a half dozen readers have asked about LNC. LNC has just gained shareholder approval to switch its listing from the Australian Securities Exchange to the Singapore Exchange. Before reading on, please note the following: a) LNC will cease trading on the ASX at close of business 15 November and b) I have not done any homework on this stock or spoken to anyone at the company - I am just offering a few  random thoughts for what it's worth. 

The following is an excerpt from the company: 


The logic appears to be that LNC will be more appreciated by listing in Singapore. One immediate flaw in this strategy comes to mind: buying shares anywhere in the world is pretty easy these days. Just open an account with CMC, IG, Saxo, Interactive Brokers, not to mention the various institutional platforms. Money searches the world for value, so if LNC is truly under appreciated here in Australia, it ought only be a matter of time until investors wake up. But this could truly be a naive view and I have no facts at hand to rebut their argument. 

One reader points out that a company called Cordlife did very well after going through the same process. I have not looked into this company. 

If LNC is genuinely under appreciated in Australia, it would suggest buying LNC while it is still listed on the ASX offers an arbitrage opportunity. My problem with this idea is that even if it is true, miners are incredibly volatile: good arbitrage profits can easily get wiped out when commodity prices go south. FMS, DML, GCL come to mind in this regard. For my money, I would need to see a huge margin of safety before taking on this trade. 

Finally, in terms of what LNC actually does, a succinct write-up has been produced by Intelligent Investor: you can read their write-up here.  

I hope this is of some assistance. 

Kristian 

Disclosure: no position in LNC

Please get in touch! I am always on the lookout for interesting stock ideas, with a particular emphasis on deep-value, growth companies run by outstanding management and arbitrage opportunities. 

Wednesday 6 November 2013

What To Do In This Market

This is a really good blog outlining the returns produced in the 1970's by Buffett and Teledyne, and pointing out how bad markets are actually good long term investors.

The Brooklyn Investor: What To Do In This Market

It's well worth the read.

Enjoy.

Kristian

Monday 4 November 2013

Howard Marks and Michael Milken Interview

This is a great interview between Howard Marks (Oaktree Capital) and Michael Milken (junk bond fame). It's 56 minutes long but well worth the viewing. 


If the link doesn't work, try this: http://www.youtube.com/watch?v=4-uee9RfO6c

Here are some of the standout quotes: 

Experience is what you got when you didn't get what you wanted.

There are three stages to a bull market: the first stage when a few bright people realise that things can get better, the second stage when most people realise that improvement is actually taking place and the third stage when everybody and his brother believe that things will get better forever.

The riskiest thing in the world is the belief there is no risk ... risk is perverse ... like in '07 the belief there was no risk is what made the world risky. 

It's very important to know what you don't know ... it isn't losing where you thought you were taking risk, it's losing money when you didn't think you were taking risk that really changes behaviour. 

We don't have to make a guess about the future in order to figure out how to how to position our portfolios. The tips we get from observing the behaviour of others and inferring what it means - that's enough. 

Kristian 

Monday 28 October 2013

RHG Ltd (RHG) - almost there

Most recent post here.

CDM/Pepper have withdrawn from the race for RHG. This leaves the Resimac offer of 50.1c cash standing. This is a good outcome for RHG shareholders. They are getting straight cash for their investment, and on my numbers we are getting a very fair price. The RHG Board is recommending shareholders vote for the Resimac offer, which will be conducted through a scheme of arrangement requiring 75% of shareholders to agree. Unless CDM decides to vote against the offer, there should be no problem getting the deal over the line now. 

Anything could happen, however the chances of finishing this trade quickly with a straightforward and handsome profit have have improved remarkably.  

CDM/Karl Seigling has copped a bit of flak over this deal. I think this is unwarranted. Although it is convoluted (it took me quite a bit of time to get my head around it), the net result is that CDM has helped drive the offer higher. As a RHG shareholder I am thankful. 

Kristian   

Disclosure: own RHG

Thursday 24 October 2013

RHG Ltd (RHG)

Please click here for the last post on RHG.
  • Higher Bid from Resimac
  • NTA of CDM has increased
  • Wilson Asset Management has become substantial shareholder in RHG
In 2004 I fulfilled a lifelong ambition: to run the New York Marathon. It was an incredible experience, however I 'hit the wall' in the last 10km and slipped from an estimated completion time of 3hrs 10m to 3hrs 39m. It was agony. It was literally a matter of one step at a time. But I got there and it was well worth it. 

RHG is starting to feel like the last 10km of a marathon. Resimac has put a fresh step forward by upping it's firm cash offer from 49.5c to 50.1c. This bid has been endorsed by the RHG Board, which clearly likes the all-cash offer.

CDM has announced an estimated interim NTA of $1.42 pre-tax / $1.40 post-tax. This is up from $1.60 pre and post at the end of September. This has helped kick along the CDM price to the current price of $1.40. I have updated the previous table below for the higher CDM price:


Including franking credits the offer is worth 51.6c. Excluding franking credits it is worth 50.5c. This obviously depends on the CDM share price staying where it is.

So we are kind-of back to square one: albeit at a slightly higher level. CDM won't support the Resimac bid unless it is higher than it's own. To win, Resimac will need to increase the bid further, or it may get lucky if the CDM share price falls over and becomes inferior by default.

On top of all this the chaps at Wilson Asset Management have been buying RHG. I'm actually not sure how this impacts the position and what their plans may be. They may very well be having a sniff at potential future franking credits RHG yield and perhaps are simply following the idea of this being a fairly low risk trade. Regardless, as ordinary shareholders it is always nice to see Wilson on the register.

The annoying thing is RHG is hardly moving! It is 48.5c as I write. Obviously a lot of people just can't bothered with trade anymore.

But the marathon hasn't finished yet. I continue to hold.

Kristian

Disclosure: own RHG






Wednesday 23 October 2013

MacarthurCook Property Securities Fund (MPS) - open email to MacarthurCook

Last week (17 October) I wrote an email to Michael Goldman from MacarthurCook asking for an update on the buy-back and clarification of earnings estimate provided in a recent media interview. I have not had a reply. Since winning the unit holder vote, MacarthurCook have gone very quiet on their proposed turnaround strategy. Prior to the meeting, they were quite vocal about the actions they intended to take. It's time to start delivering.  

A copy of the email is below. I will update you when/if I hear any further news. 

(click on the image to enlarge) 

Kristian 

Disclosure: own MPS

Monday 21 October 2013

Royal Mail (LSE: RMG)

Nigel Littlewood and I spent quite a bit of time reading the prospectus ahead of the Royal Mail float. One only conclusion was possible: at the float price of 330p it was absurdly cheap. Even without fully understanding the potential for strikes, transformation costs, future CAPEX requirements and many other issues, it was clear the stock was a dead give-away. A yield of 6% (massive for a UK stock). A normalised PE (by our estimations) of 6-7. Good Balance Sheet. Great brand name. A growing business.

Royal Mail is now 523p.

Would love to have been a shareholder at the float.

Would love to have been one of the underwriters.

Would hate to be the guy who has to explain this to HMG.

Kristian

Disclosure: no position in Royal Mail

Saturday 19 October 2013

Healthscope Notes (HLNG, HLNGA)

The most widely read articles on this blog are the Healthscope Notes: HLNG and HLNGA. I think the reason for this is straightforward. There has been a very big appetite for income and therefore stocks paying large yields have been Googled. 



Based on the current prices, here are the running yields and yields to maturity for both securities: 


Here is a snapshot of the financial results: 


Other expenses include $120 in write-downs against the pathology business. So, the performance of the company has certainly improved however the sheer amount of leverage is still eye-popping: add back the $120m in write-downs to adjusted EBIT gives $236.1m - $165.6m + $120m = $190.5m. The interest bill is $185.2m. 

I disclosed I was selling out of HLNG and not participating in the new HLNGA (which were being issued at the time of writing) and made this statement in response to one of the comments: I am probably being too conservative in my view of the debt levels of Healthscope given the quality of the underlying business. 

I am probably being too conservative. However my logic is the leverage involved in order to get a maximum yield to maturity (on current prices) of 8.1% to 8.9% p.a. is too much for me, or at least to get too excited about digging more. But that's me and what I am comfortable investing and spending time understanding. You may disagree, and could well be right. 

Kristian

Disclosure: no position in any of the above names

Friday 18 October 2013

Australasian Wealth Investments Ltd (AWK)

Last year my family and I went on a safari in Kenya visiting the parks at Masai Mara (to see the Wildebeest and Zebra migration), Lake Nakuru, Amboseli and Tsavo West. While bouncing around in a Land Cruiser in the Masai Mara one morning, we came upon some lions feeding on a recently killed Wildebeest and vultures were milling around in the background waiting their turn to pick at the carcass. Blood and guts were everywhere! I had the most amazing sense of being in the middle of the 'circle of life'. If you have been there you know what I mean. If you haven't been there I strongly recommend going. It's a bucket list must. 

And so as the economy and share market gain more confidence, we are seeing a similar evolution. Old carcasses are being picked over and in some cases are being (or will be) brought back to life and being used or will be used as a corporate shell for other purposes. There is a lot of this happening at the moment. A few off the top of my head: GMI, ABQ, AIX, WWM, MMX, AWN and AWK. The beauty of trawling through cigar-butt type stocks is that it occasionally throws up a fresh - and potentially exciting - story like AWK. 

AWK is the reincarnated version of MEF: see here for the most recent post. 

That post was written in May and a lot has happened since then. I have been meaning to write this post for some time now and in the meantime the price has been volatile - but has recently moved up rapidly. What the share price will do in the short term is anyones guess and I think it's fair to say that AWK has been a traders plaything as the story gets out along with the general enthusiasm displayed toward tech/online stocks. (MBE is another great example). So please very careful with your own analysis on these types of situations. 

I have now twice met the person spearheading the company, Andrew Barnes, and have been very impressed. Mr Barnes owns a substantial portion of AWK stock. 

Simply, AWK is being modelled on the UK mega success stories Best Invest and Hargreaves Lownsdown PLC. Hargreaves is listed and has a market capitalisation of £5.2bn. These businesses are quite simple: they provide an online platform in which to research, choose and invest in a very broad range of managed funds. To kick start the strategy here in Australia, AWK has bought InvestSmart which is an existing platform for investors to invest in managed funds online. With the relentless move towards SMSFs and tighter regulation in financial services through FOFA, the view taken by AWK (which I completely agree with) is investors will opt increasingly for direct solutions over financial planners. At least, there is plenty of room for both models. InvestSmart was bought for a song from Fairfax. Revenues have been in decline at InvestSmart however this appears to be due to an underinvestment in the website and marketing. 

To augment InvestSmart, a stake in research house van Eyk has also been purchased, also for a song. The idea here is to make the research available on InvestSmart so investors can ultimately choose between say different risk profiles, asset sectors, and drill down to ratings on each managed fund. Once selected, the fund can be purchased directly through the website. 

AWK will make most of its money through taking a small clip on annual FUM of around 0.3-0.45%. So this is a FUM story and the name of the game is to build scale as quickly as possible. One very important point to note is that AWK is not in the business of building its own investment platform (such as the Macquarie Wrap). Investors will most likely invest in a managed fund via one of the wraps on the InvestSmart website. The reason for this being important to note is that AWK will not incur the substantial CAPEX requirements that goes into the investment platforms, but is merely a selling agent of existing platforms. By investing via a wrap, it is easier to switch between managed funds and other investments such as shares. In time, the InvestSmart website may provide a consolidation platform for investors investing in more than one wrap. 

A lot could go wrong. There is already some competition in the space - I understand CommSec offer a similar service. So too does 2020 DirectInvest. There is always legislation risk in financial services. As with other online sectors, gaining the critical mass of eyeballs is essential in order to develop the 'virtuous circle' effect and develop enough scale. And from my recent meetings with CEO's it is apparent there has been a dearth of investment in online in certain sectors (finance and travel especially) in Australia in recent years: this is creating massive opportunity for disruptive players however the future landscape is uncertain. To take this further, yesterday I was given a tour of Fishburners; a Sydney based collective for entrepreneurs. It's extraordinary. 

This is a very basic overview of the business. For this post I have avoided getting into the numbers too much. AWK has recently undertaken a rights issue, is cashed-up, and is in all likelihood on the prowl for further acquisitions, so the existing numbers could easily become redundant. I will endeavour to provide some more numbers in coming posts. 

Kristian

Disclosure: own AWK









Sunday 13 October 2013

Livewire launch and three stock ideas

I was fortunate to be invited to the launch of Livewire, a new Australian social media platform for investors. To help Tom McKay (MD) launch the event, a panel of stock pickers discussed some macro themes and each provided a stock idea. The discussion was very entertaining and informative - well done Tom and the panellists. 

The panel was moderated by Matthew Kidman who wrote Bulls, Bears and a Croupier, which coincidentally I am currently reading and is a great read. 

In brief, here are the stock ideas: 

Steve Johnson: RNY Property Trust (RNY). US property trust, discount to NTA play - trading at ~60% of NTA. Good management. 

Peter Morgan: Chalmers Ltd (CHR). Transport company, trading at substantial discount to $4.20 NAV. Share price $2.85.

Geoff Wilson: Graincorp Ltd (GNC). Agriculture, Believes FIRB will approve takeover.  

I hope this provides you with some good stock ideas.  

I have been invited to contribute to Livewire, which I am very much looking forward to in the future. 

Kristian 

Disclosure: no position in any of the above names. 

Wednesday 9 October 2013

RHG Ltd (RHG)

This is a follow up to previous posts. Most recent post here.

Please note I wrote this post on and off over the course of the week or so. The stock prices were correct at time of writing.

With the exception of bids for resource stocks, it is very rare to see a share price trading below a firm cash takeover price. But that is exactly what has been happening at RHG. There are two competing bidders: Resimac and the combined Pepper/Cadence (CDM). Resimac has offered 49.5c cash. Pepper/CDM have offered a part cash, part scrip deal (I will go into that shortly). RHG is currently 48c and has recently been as low as 42.5c (I missed that... talk about easy money). 

Pepper/CDM Offer

There are several components to the offer. In the table below I have tried to simplify this as best I can. For the time being I am assuming the CDM share price remains constant, even after a 5c dividend is paid on new CDM shares post the deal completing. I will re-visit this assumption shortly. This is all pre-tax analysis. The results will vary depending on your personal situation.


Let me put this in a different context. Ignoring franking credits, Pepper/CDM will pay us 36c cash. So that means buying RHG at 48c leaves an entry price of 12c. That means you are paying a $1.20 entry price for CDM shares. CDM would need to trade less than $1.20 to lose money on the deal, assuming it actually goes through. And this ignores the dividend on new CDM shares.

Right, CDM will look quite a bit different post a successful takeover.

The table below shows what CDM looks post the takeover in simple terms. I have assumed NTA remains constant at $1.36. This could be wrong!



Note Pepper will buy CDM's existing RHG shares for 50c cash. This is really important to note for two reasons: a) by doing the flip, CDM is profiting by getting the upcoming 2c fully franked RHG dividend and b) CDM will have a huge pile of cash on its balance sheet and no RHG shares.

What all this tells me is the NTA might dip very slightly post the takeover, even after the 5c dividend to be paid to new CDM shares. Hence why I assumed previously the share price may not move much, or at all. Underpinning this is the CDM dividend: last 12 months it was 11c fully franked or 15.7c including franking. Note the deal is franking credits accretive to CDM.

Yes, the share price could certainly drop with a bunch of new shareholders on the books and yes the NTA could of course drop. Most other LIC's are trading at premiums or close to. If CDM drops materially below NTA, then personally I will be buying with my ears-pinned-back.

On another note, the Takeovers Panel has rejected Resimac's complaint. I'm not surprised at all. Resimac will need to stump up a higher cash bid than Pepper/CDM's (i.e. over 50c) to have any hope. But that would be the icing on the cake.

Kristian 

Disclosure: own RHG

Monday 7 October 2013

Paperlinx Ltd (PXP) and Paperlinx Hybrids (PXUPA)

This article should be read in-conjunction with the previous post Elders Ltd (ELD) v Elders Hybrids (ELDPA): Reservoir Dogs edition

PPX has announced a fairly vague update regarding a potential acquisition of PXUPA hybrids in November. No details have been provided as to pricing, terms and whether the offer might be cash or scrip. Apparently the discussions have had strong support from PXUPA holders. 

Some people in the market think a transaction will happen with a figure of $20 per PXUPA has been touted. Result: the PXUPA price has kicked up to $12. 

This all continues to look like a minefield. It's not the first time a deal has tried to be done. The capital structure puts PPX and PXUPA holders on a collision course with each other. However for the major contrarians out there: the underlying business is worth some more analysis. The upside on PPX could be substantial if the company is ever turned around and PPX shareholders aren't massively diluted in the meantime. 

Kristian 

Disclosure: no position in any of the above. 


Saturday 5 October 2013

MacarthurCook Property Securities Fund (MPS)

Just a few points to update on this position in no particular order: 

1. Litigation

MPS has applied to head back to court after the recent ruling against it in favour of P-REIT. If leave is granted, the appeal is not expected to be heard until late 2014. If MPS is successful, the upside to shareholders is huge. I'm just treating it as a lottery ticket: not much downside, lots of upside. 

2. P-REIT (PXT)

PXT (another A-REIT) is very illiquid. The share price shot up from 13c to 20c following the legal case against it (see above) getting thrown out. PXT itself trades at quite a discount to NTA: including the potential liability for the legal claim NTA is 24c. NTA excluding the legal costs is 34c. So when the stock was at 13c, it was trading at 54% of NTA fully assuming it would lose the case and 38% of NTA ex legal costs. Talk about glass being half-full! . 

All is not lost. MPS holds a 10.9% stake in PXT valued at $3.6m as at 30 June. So with the PXT share price having increased by 25% since then, the value has increased to $4.5m albeit on very light volume.  

3. Arena REIT

Another MPS's larger holdings is the Arena REIT. The recent share price performance has been strong: it has increased from $1.02 30 June to $1.20. This has increased the value of the investment from $6.9m to $8.1m.  

3. Buy-Back

Still waiting for this to start... 

There continue to be plenty of catalysts in place to see the stock re-rated: distributions, buy-back, and maybe even an increase in NTA(?). 

Kristian 

Disclosure: own MPS

Tuesday 1 October 2013

ASX Listed Stocks Yielding Over 10% p.a.

Listed below is a simple screen for ASX listed stocks with a historic dividend yield of 10% or more: 


Slim pickings. 

This screen is limited as it does not include 'grossing-up' for franking credits. 

Note: a number of these stocks have artificially high dividend yields as they are paying lumpy dividends and/or are in wind-up mode. To my knowledge, these include AIX, HHY, IPE and RHG. I don't know about the others. Regular readers of this blog will recognise some of the names in this list, notably AIX, HHY and RHG

I hope you find some good ideas from this list. 

Kristian 

Disclosure: own RHG

Sunday 29 September 2013

Where to invest at the end of QE

This post has been borrowed from Lauren Templeton Investments; a fund manager colleague Nigel Littlewood met in Omaha this year. Their summary of the end of QE and investing in such an environment is punchy and easy to understand. Their perspective is the same as that used to justify buying QBE in Australia this year by some investors.

I hope you enjoy their commentary.

If you picked up any given text book on investment and turned to the subject index in the back to locate the discussion on “QE taper” or “fiscal cliff” you would likely come up empty. Despite the void, the market has awarded primacy to these subjects over the past year, and generally speaking, company fundamentals have taken a backseat at times. In light of the Federal Reserve’s announcement last week that it will postpone its tapering of $85 billion in monthly bond purchases, it has become clear that these government policy sideshows will likely maintain the spotlight in the markets over the near-term.

Although it can be frustrating for a fundamentally driven value investor to see the markets propelled by policy announcements, sudden reversals or fearful sell-offs among near-term speculators can be equally rewarding for the bargain hunter. Given the Fed’s cold feet, it seems likely that speculation surrounding the tapering of bond purchases and now the looming debt ceiling talks in Washington will stay with us in the near-term. We suspect that one of the likely reasons that Bernanke and Co. hesitated with the widely expected September reduction in bond purchases was owed to concerns over the likelihood of another fiscal interruption a la the possible government shutdown. Other reasons for a pause could be owed to the fact that despite no reduction in bond purchases to date in 2013, rates have already tightened significantly during mid-2013 on the basis of Fed rhetoric. Finally, we cannot dismiss the fundamental observation that since the same mid-summer interest rate episode and the resulting sell-off in emerging market currencies, many emerging market exporters have now seen their near-term prospects rise on the basis of their cheaper currencies (think competitive devaluation in global currencies). As we know, this represents a potential loss in competitiveness and market share for exporters in countries whose currencies gained by comparison (U.S. and Europe, namely), also presenting an unwelcome curve ball in the face of rather fragile developed market economic improvements. Whatever the underlying cause, it seems reasonable to anticipate additional price volatility as the current policy of bond buying is not sustainable on an indefinite basis.

Having addressed near-term events, let us take a step back, and focus on the longer-term picture. From a rational perspective, it seems most probable that the thirty plus year bull market in bond prices will continue to unwind, and that interest rates are likely to be higher in the medium-to-long term. In our experience manias end when the euphoric buying of irrational participants ceases. In 2000, it was the day traders bidding up stocks on margin, in 2006 it was real estate speculators buying second and third homes with exotic adjustable rate or negative amortization mortgages, and in 2013 it is the Federal Reserve bidding up long-term bond prices with money it simply creates. The only question remaining is the pattern of the descent; drawn out and orderly, or the opposite.

The pattern of this unwinding is frankly anyone’s guess. Many investors seek to profit from the possible decline in the bond market by selling-short long-dated treasuries with high duration, or through derivatives that profit from rising interest rates. For those investors with less stomach for the risks that accompany selling short or employing derivatives, there are other options. To begin, investors could focus on businesses that should continue to gather fundamental strength in the face of higher interest rates. One company that we have discussed in the past and continue to favor is the cash-handling and security firm, Brinks Co., based on what we believe to be its fundamental benefit from higher interest rates that reflect a higher velocity of money throughout the economy.


A second firm, and for that matter group of firms that we believe should also experience a fundamental tailwind from higher interest rates is the life insurer Metlife, as well as competing life insurers and then to a somewhat lesser degree, reinsurers. The simple reality is that the extended period of low interest rates that have been in place since the financial crisis, coupled with lower economic activity, has made business conditions difficult and valuations depressed for Metlife and peers on a historical basis.

The fundamental reason for this difficulty is owed to the life insurer’s business model. Life insurers collect insurance premiums and invest them more on a relative basis—vis a vis other insurers—into longer dated bonds and treasuries, where yields have compressed to paltry rates under the Fed’s assorted QE programs. This business model makes life insurance firms resemble the more “bank-like” of the insurers in the sense that they derive a larger portion of profit from “spread income” than other types of insurers such as property and casualty. Put another way, given the nature of their long-term policy contracts, life insurers invest their float more heavily in fixed income, and for that matter fixed income with longer-dated maturities, in order to keep an appropriate match between assets and liabilities. In turn, as interest rates increase, life insurers are by necessity buying fixed income securities that are falling in price, and logically these securities are becoming more attractive from an investment return standpoint. Philosophically speaking, and as we have noted many times over, we like this approach towards investment. To purchase securities falling in price today for the benefit of higher future returns is rational behavior, in our view. We appreciate that life insurers will be compelled to do so. Second, and perhaps more important to the share price of the life insurer, the marginal purchase of bonds with higher yields should increase future investment profits (which comprises a large share of overall profit), which in turn drives higher returns on equity, and by extension rising returns on shareholder equity should logically increase the present value of expected net equity flows. Given that investing in higher yielding securities eventually leads to higher returns on equity for the life insurer (assuming cost of funds do not rise faster, etc.), and the market perceives that future returns on equity will continue to hurdle the cost of equity on a near-to-medium term basis, then it is more likely that the share price reflects a premium to book value, versus the current discount; Metlife currently trades at 0.9x 2013 estimated book value. Over the past ten years, the shares have traded at a median price to book of 1.2x. The catalyst in our view to Metlife realizing a premium to book value in its share price relies on the firm achieving a return on equity that approaches its pre-financial crisis levels of approximately 14-16% during 2006-2007, versus the current level of 11.5%. Most importantly, we believe that higher long-term interest rates represent the primary key to unlocking a fundamental reversion to pre-crisis levels of return on equity.

Interestingly, the thesis described above has gained traction in 2013, for instance over the course of the mid-summer spike in interest rates, shares in life insurers such as Metlife rallied in step. Even so, with returns on equity still depressed versus pre-crisis averages, and a valuation that remains discounted to book value, we believe that Metlife shares continue to trade at levels materially less than intrinsic value. Additionally, during the surprise announcement from the Fed last week that tapering would be postponed for the time being, shares in Metlife fell in price. Basically, as the market focused on the policy sideshow of postponed tapering, it sold off Metlife shares in a knee-jerk reaction. We believe that observation makes our discussion particularly relevant to the current environment and the remaining uncertainty surrounding Fed tapering. In sum, we see the potential to add additional shares in light of any near-term volatility that may be created on the basis of speculation surrounding Fed policy, or even fiscal policy if a government shutdown ensues and interest rates temporarily compress in a flight to safety (or worry over a possible recession if the shutdown persisted).

We appreciate your continued interest in our firm. If you would like to learn more about the registered investment advisor Lauren Templeton Capital Management, please visit us atwww.laurentempletoninvestments.com.


Lauren C. Templeton                                               Scott Phillips