Boom Logistics (BOL)

Value trap = value stock without a catalyst

BOL so far has been a perfect value trap, and if I didn't already appreciate what a value trap was, being a BOL investor has certainly has taught me that lesson. I apologise if anyone has followed me so far on this one and not made money. To recap on the original reason for buying (see some of the original posts here, here and here), the core idea was the huge gap between market cap and NTA. It is still monstrous: market cap $57m (12c/share) v Net Equity of  $227.5m*; a 75% discount. *Estimate based on the last management update of net debt $72.8m and gearing of 32%. Note that most of the intangibles have already been written down, so NTA is within ~1% of net equity. 

BOL has lots of exposure to mining which you don't need me to tell you is in a world of hurt. So BOL keeps the bad news flowing and has completely failed to initiate the stock buy-back and has instead kept on paying down debt, helped partly by the sale of surplus assets. 

This isn't news. The question is what to do: a company that will probably continue to experience an indefinite period of operational toughness thanks to mining, a slow Australian economy and unions sucking the life out of the business YET trades at a massive discount to NTA. 

We are missing a catalyst.

Management need to get their heads out of the sand and act. As noted in previous posts, if the NTA is anywhere near correct, then speeding up the asset sales process and simultaneously buying back it's own stock at a fraction of physical cost just has to be a smart move - it's called arbitrage! At the current prices, the arbitrage difference is 4 times, or sell something for a $1 and buy it back for 25c. Management have fobbed off the buy back until once the company has a more stable earnings outlook and current volatility in pricing pressures and activity levels have settled (page 5, half year report to 31 December). This business will always inherently be cyclical thanks being exposed to cyclical industries. But with an opportunity to buy-back the farm at 25% of the balance sheet value, who cares about stability or the earnings outlook - in fact if the earnings outlook is that bad then surely it makes even more sense to sell more assets at current prices? Surely there is plenty of risk to the downside to asset prices if the tough times continue? The argument to buy-back only gets stronger as debt levels continually reduce and management keep proving that either they can't run the business effectively or the macro headwinds are just too strong. Again, as noted in previous posts, as the market cap is so small, it won't take a massive buy back to move the price along.

Other than management, we can of course hope for a lucky break through a takeover/merger or a big uptick in the economy and crane hire business. That however we would be exactly that - a lucky break. Unfortunately I'm not the lucky type of guy. I don't know what other catalysts can get the price moving.

Shareholders have simply not been rewarded for their investment and therefore I believe it's now time for a change of management to shake things up. I hope the board agrees. 

Kristian

Disclosure: own BOL

Paperlinx (PPX and PXUPA)

I last wrote about PPX/PXUPA late 2013.

The company has since been sputtering along and as a result, the board has clearly had enough and has been busy over the last six months selling Spicers Canada, sacking CEO/MD Andrew Price and most recently deciding to close its European operations.

Paperlinx is a lot like Elders: a crappy business with a crappy capital structure. This hasn't stopped ELDPA in particular being a superb trade. I noted in August 2013 the anomaly of ELD outperforming ELDPA for several months (it made no sense to me why ELD should be worth anything while ELDPA was valued at only a little bit). Since then, ELDPA has moved up by 356% while ELD has moved up 204%.

Today we are not in a dissimilar situation with PPX and PXUPA. And with both stocks selling at pennies-in-the-dollar and the company now in drastic weight-loss mode, I think the situation is worth a closer look.

Note the performance since the shares begun trading again April 15: PPX is up 106% v PXUPA up 34%. Again, this doesn't make sense to me. PXUPA stand in front of PPX for dividends and a wind-up, however PXUPA is being valued at 9.5% of face value yet PPX doubles in value, while PXUPA 'only' goes up by 34%? Someone is wrong here. Here are the market caps of PPX and PXUPA:

PPX: 665m shares @ 3.6c = $23.9m
PXUPA: 2.85m shares @ $9.50 = $27m

The face value of PXUPA is $100 per share (or $285m) however the market cap is less than 10% of that. So with PPX at $23.9m, I guess the market is punting lottery ticket style that assuming the company survives and PXUPA holders agree to a big haircut or the company does REALLY well that PPX shares might actually be worth something.

The company has traditionally had three operations: Europe, Canada and Australasia. Canada has been sold. Europe has long been a cancer to the business, however this is now being finally cut-out with businesses either being sold-off or placed into administration. The company has noted on several occasions that ANZA is financially separate from Europe. On this basis and assuming no skeletons in the closet (a big call), the slimmed-down company ought to be okay. FY2014 underlying EBIT for ANZA was $15.3m and has actually been pretty good: underlying EBIT for the last few years are FY13 $12.6m, FY12 $14.9m and FY11 $11.1m. Corporate costs have been tracking around the same level as the profit of the ANZA business, however that of course should be slashed drastically especially as Europe winds-down.

On a simplistic basis, wiping out Europe from the balance sheet and adding the C$63m from the sale proceeds of Spicers Canada to the net assets for ANZA of $146.7m (A $225.2m and L $78.5m) adds up to $209.7m - which is still well short of the face value of PXUPA. Looking at it another way, assuming corporate costs get wiped out entirely, ~$15m EBIT can't service interest on the remaining debt and potential PXUPA interest obligations (4.65% + BBSW - ~$18m p.a.). So even on a slimmed down basis it's hard to see much equity value left for PPX at the moment. It is much easier to see a very big capital raising for PPX to help pay down debt and try and come up with a deal for PXUPA holders. Note we have seen multiple capital raisings at ELD which have only helped ELDPA. 

I recently read a good blog post from Canada demonstrating the link between a clean capital structure and share price performance. As a generalisation this makes some sense. Lots of share issues, options, use of preference shares all show either a company in lots of need for finance and/or management being a bit clever with finance and not just growing a business. Compare that to a company with a relatively low and stable number of shares on issue tightly held by management: supply and demand dictates that if the company is doing well, the small free-float will be highly sought after by the market. PPX/PXUPA doesn't fit this category! These difficult situations are just that - difficult.

However after following this situation for years, I finally mustered the confidence to buy a few PXUPA. This is probably more out of curiosity to see how this all finally pans out! 

Kristian 

Disclosure: own PXUPA