Analyst Position (Short Term)

We are looking to back-test two different strategies, using data from the Australian stock market. This would be an ideal short-term project for someone to get their teeth stuck into - potentially ideal for a uni student looking for some extra cash and some work experience. Being Sydney based is preferable.  

Please don't hesitate to contact me if you are interested. 

Kristian 

Devine Ltd (DVN)

Following the recent announcement by DVN that majority shareholder Leighton (LEI, 50.6%) intended to sell all of it's shares, the market was further updated that both Leighton and the board of DVN now believe it is in the best interests of all shareholders to consider a sale of the business. 

This is  potentially great news for the rest of the DVN shareholders. 

I can understand LEI potentially being happy to take less than NTA on their holding so they can clean up their own balance sheet, however the board of DVN would have a difficult time convincing the rest of us this would be a great result. 

NTA at 31 December was $1.52. 

The property market has not collapsed since then, and barring any further mega write-downs like we have seen, NTA should not move too much.

So with the stock at $1.07, the potential magnitude of upside still warrants holding, in my opinion. If a sale does not eventuate, I'm left with what looks to be an improving business selling for less than physical value.

Kristian

Disclosure: own DVN

Harness Asset Management

I am really proud to have been appointed to the Investment Committee at Harness Asset Management. The fund has been established by Nigel Littlewood and we are based at Macquarie St here in Sydney. Nigel and I have known each other for over ten years having some brief dealings when Nigel was CEO of MMC Asset Management but more notably I took over Nigel's job as CEO of The Rivkin Report in 2008 when the ASX was at all time highs. He went on holiday and in my new role got a real baptism by fire thanks to the ensuing GFC. I have almost forgiven him for that. 

I left that role at the end of 2012 and started this blog at the same time with the firm view of honing my investment style and using that skill to build my family's self managed superannuation fund into a genuine wealth creation vehicle to firstly provide my parents with a great retirement income so they can do the things they want and to build the fund into a seriously big portfolio over the next 20-30 years when it will be my time to fully retire (I'm 40). I'm on track, but I still have a lifetime of things to learn. 

Because I have a lot on the line, I take my investments seriously. If I buy shares in a company, I'm legally part of owner of that company and I expect management to act both morally and in the interests of the owners of the company. If not, I'm happy to go on the offensive if the upside is warranted.  

We focus mostly on small Australian listed companies. It's quite un-original to say that the  smaller end of the market is under-researched, but it's 100% true.  

We're value investors. We're value investors because it works. Throughout history, the bulk of the outstanding investors come from the the value school. There are exceptions to this, of course. For example I went to the Monaco GP this year and plonked in front of the apartment we were staying in was a monster yacht owned by the co-CEO of Renaissance Technologies: the US hedge fund manager who employ super smart cookies sniffing out and exploiting pricing anomalies. Unfortunately we're not super smart and prefer to just buy things on the cheap and wait for the market to re-rate them. 

We're always on the sniff for bargains and love networking both here and overseas looking for insights and ideas. Please don't hesitate to contact if you have further queries or want to discuss ideas. 

Kristian 

Boom Logistics (BOL)

See here for last article. 

I'm frustrated. 

BOL announced full year results, which didn't look particularly divergent to expectations. Goodwill has been written down by $70m which is pretty massive considering intangibles at 31 December were $74.018m. But not really surprising considering the consistent underperformance of the business. The more notable parts of the announcement from an asset perspective are the write-downs in assets-held-for-sale of $4.5m and a $5m hit to 'fixed assets in WA'. Considering assets-held-for-sale at 30 June will be ~$15m, the $5m write-down is a big hit. The other write-down is against assets of ~$100m, so the ~5% hit isn't so bad. 

Full year 'Trading' EBIT is $13.8m. Considering NTA is $232m (which is net of debt), the ROA is appallingly low. Margin compression and under-utilisation are the culprits however note this can of course easily flip the other way leading to a rapid spike in ROA. Certainly the current economic value of the assets are suspect.  

So, anyway...

• NTA is 49c 
• The current price is 13.5c
• If you believe the figures, BOL is a truly eye-popping discount to NTA of 72%

And this is the frustrating part. Management have previously re-iterated the scope for a buy-back given the recognised massive discount to NTA, yet do precisely nothing about it. As highlighted in the update, they have spent $16m on new kit this year, which in itself seems pretty ballsy given every man and his dog know the mining sector is done for the time being. Why on they continue to buy new kit and not just buy-back stock is still beyond me. 

The update made no mention of the buy-back. 

Nor have insiders been buying stock. 

So no buy-back, no insiders buying the stock, hardly any professional in the market wanting to touch the stock AND management buying new kit when assets are delivering sub-par returns. It doesn't add up. 

I am either missing something here, the NTA just can't be believed and/or management are just poor capital allocators and therefore should be replaced. 

I really hope I am missing something. I'm more than happy to admit a mistake - I've plenty of those in my lifetime. 

I am writing to management asking for an update on the buy-back. I intend to be more vocal on this issue.  

Kristian 

Disclosure: own BOL

Healthscope Notes (HLNG, HLNGA)

See here for the last article.

Healthscope is re-emerging on the ASX after being under the tender loving care of private equity since 2010. As a result, HLNG/HLNGA will today (COB, Thursday 10 July) cease trading from the ASX. Note holders will have the option to redeem for cash or convert to ordinary shares. Being a previous holder of the notes, I feel somewhat familiar with the background and so spent some time considering whether to buy the notes to convert into shares or just apply for shares in the IPO.

I recently re-bought HLNG with the idea of looking for a stag profit, however on further thought I reversed that view and decided against the trade and sold them - at a very small loss. Every broker seems to be touting the reasons to apply for stock in the IPO. The rationale seems pretty reasonable: a) healthcare provider (great business, and not many listed in Australia) b) lots of stock in escrow c) lots of stock given preference to HLNG/HLNGA to convert d) cheaper than Ramsay Healthcare (RHC) and e) index funds will need to buy the stock. All this adds up to the idea the stock is in short supply relative to demand.

On reflection, these are all market based reasons for the trade. I'm not good at trying to out guess what other people in the market are doing: I want to find the $1 for 50c trades. The fundamentals are not cheap in an absolute sense, and that is after trying to be generous with future projections. The other concerning factor is who exactly is the patsy in the trade? One of the hot topics of recent years has been the danger in buying from private equity. And yet here we are with people apparently clambering over themselves to buy a stock with a PE of 20-23 because it is cheaper than RHC.

It would be irresponsible of me (not to mention illegal) to suggest Healthscope would be a good/bad stag potential. There are far better market animals than me, especially in large caps. Just look at RHC: I've watched that triple in price and I missed it the whole way! For my own portfolio and learning, I am sticking to my own style of investing and therefore leaving this one alone. Not fundamentally cheap. Buying from really smart guys. Not enough (perceived) upside at least in the short-medium term. No particular analytical edge or insight.

Kristian

Disclosure: no position in the above names