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