Galileo Japan Trust (GJT)

Since my last post on on GJT, the stock has plodded along pretty well and in all honesty has been a bit of a sleeper - not causing me massive headaches unlike some other stocks! Good management, good discount, good yield - a solid story. It's one of those stocks that when you reflect on a little bit you wish every stock in your portfolio was like that.

As a side note, one of the reasons for keeping this blog is to improve my accountability by presenting ideas in a public forum. I hope this improves my education and therefore future performance. This process has initially worked well. In September last year, I did a quick comparison of GJT v AJA. It appeared to me GJT was cheaper, however the share price of AJA has since performed much better than GJT unfortunately meaning I am wrong or there are other market dynamics at play in the short term. A much-smarter-than-me fund manager at the time who knew Japan much better actually said AJA was the better buy. So I will need to go back and do a postmortem on this one.

Anyway, GJT management have announced the sale of a relatively small property in the portfolio ($6.2m v the portfolio net assets of $229m). So it's pretty small however the property was sold at a big premium to book and the really impressive part is management have been very sensible in indicating proceeds should be returned to shareholders via a buy-back of units - which are cheap in my opinion. As Nigel and I noted in the Capital Management post, how managers allocate capital is one of the few factors that determine long term performance: it's one area we pay incredibly close attention to and its good to see GJT making seemingly a good capital allocation call.

Kristian

Disclosure: own GJT

Devine Ltd (DVN)

Amazing how quickly the tide can turn in deep-value situations. I blogged about DVN last week discussing the monster discount to NTA and the first positive news in a really long time. And now major shareholder - Leighton (they own 50.6%) are considering selling their stake, which potentially opens up the company to a full takeover bid. 

I just had lunch here in Sydney with some market colleagues discussing how tough trading takeover arbitrages have become: for me it is incredibly tough work to trying to second guess what other people are up to, compared to finding '$1 trading for 50c' trades. And so it is with DVN: I don't know what the next corporate move from here is.  

Funnily enough, a rapidly advancing share price can be a nuisance: I wanted to buy a chunk more stock following some more research, however as the share price has gone up the potential return on my research time has gone down. There are of course worse problems to have. 

Kristian 

Disclosure: own DVN

Boom Logistics (BOL)

Cranes On Sale

So far the call on BOL hasn't gone the right way. The price is still substantially below NTA: market cap of $59.4m v NTA of $245m. The gap continues to grow as the stock flounders - bit frustrating really. In my opinion, what would really help to close the gap is a solid buy-back. So instead of using cash to pay down debt and buy new cranes, it strikes me as a far better capital allocation idea to buy-back stock therefore buying assets for ~ 1/4 of the price. Maybe better still - trim back on the crane fleet and use funds to buy back shares for a superb arbitrage opportunity - just like GJT have announced. 

Kristian 

Disclosure: own BOL 

Devine Ltd (DVN)

Devine is an Australian residential and commercial property developer. Times have been pretty tough in recent years, and the stock getting back down to multi-decade lows:

The stock took a belting in October last year when it announced a likely write-down in the carrying value of its stock by ~$70m. This was huge considering total inventory at June 30 was $390.5m. I really don't want to buy in situations where NTA is still declining (unless the discount is massive) and expose my portfolio to the 'cockroach effect' - the term used to describe how companies tend to make a lot more than one downgrade/upgrade in a row: where there is one there is more. A bit like turning the kitchen light on in a apartment I rented near Bondi in the middle of the night: the little pr$cks where everywhere. And so it has been with DVN. Just reading back through recent years annual reports and updates shows plenty of negativity. The following table from the CY2013 Annual Report (page 82) succinctly summarises the situation: 

Note the rapid decline in Net tangible assets per share at 31 December to $1.52. The share price is currently $0.93. DVN has typically operated in the mid-price house range, so the tough times of recent years are to be expected: apart from the recent growth spurt in prime spots such as Sydney and Melbourne, general property prices have yet to move significantly upward in Australia. I was just in London and the exact same trend is happening there: London has moved strongly, the rest of the country lagged. Even if we don't see a big upward movement in non-prime property prices, I suspect just some non-negativity or normalisation will allow DVN and others to start shaking the blues.

Recently the first upgrade in years recently came through - a very bullish upgrade to full year earnings forecast (CY12). Since the news announcement, the stock has rallied quite a bit and some of the negativity has been removed from the stock. The trick now is to determine whether the bad news is over for DVN as the potential upside from here is quite huge should more positive news emerge. And to do that I need to actually get in the field and see how things are really going before building my stake further.

Kristian 

Disclosure: own a small position in DVN. 

VIX

VIX getting toward all time lows...

Kristian

AIMS Property Securities Fund (APW)

Apologies: I have been madly setting up a private business of late and have not been blogging much. 

I'm wrapped with the progress at APW, despite admittedly being a big critic over the last year.

The share price has been given a decent boost thanks to the court victory, which on paper is worth ~3c per share, lifting the NTA to over 15c (compared to the current price of 10c). I had no idea who would win the case: I bought APW at a massive discount to NTA when everyone hated it and assuming there was no value in the case, meaning the legal action was a free option. Free is my favourite word. The main trick has been to hold, let the story unfold and wait for the market to get more comfortable with it. Even if the court case falls over, it is still trading at a discount to NTA. 

Now just need to find some more stocks like this... 

Kristian

Disclosure: own APW

David Jones Ltd (DJS)

As you may know, DJS is currently $3.92 and there is a fairly solid bid on the table for $4. Existing shareholders at 10 April will also receive a 10c fully franked dividend. The takeover arbitrageurs recommend buying the stock for a 2.0% return (excluding the dividend) plus potentially more upside should a higher bid develop. 

So is it a buy? For me personally, I am increasingly wary of quick small profit opportunities. They usually don't work out as well as expected, are very time consuming, hugely stressful, and the opportunity cost is huge. So increasingly I'm restricting myself to deep value ideas that have substantial upside that I don't have to watch the screen daily and stress about. So with all this in mind, my benchmark is that I only buy DJS if I am not concerned  to see the deal fall over and continue to hold it as an investment with the potential for lots of upside.

Will the deal succeed? Woolworths (South Africa) wants to buy DJS through a scheme-of-arrangement meaning at least 75% of all DJS shareholders will need to vote in favour. This shouldn't be a major problem. The bigger problem will be that Woolworths shareholders are also required to separately vote on the takeover and also agree to a very big capital raising. It would be silly to think this is a certainty. So while I have no view on whether the deal will complete, it is certainly not a lay-down. And the most likely Australian buyer, Myer, has declared it won't be bidding for DJS which massively reduces the odds of a bidding war.

The extreme pessimism has dissipated from the stock reminding me of the Howard Marks quote "If I were asked to name just one way to figure out whether something is a bargain or not, it would be through assessing how much optimism is incorporate in its price".

DJS has a market capitalisation of $2.11bn and owns an unbelievably well located property portfolio with brokers valuing it anywhere from $500m to $1bn (the big variable being the development potential in the Sydney Market St property). Zero net debt. Let's keep things simple and take an average estimated value of the property at $750m. That leaves the rest of the business valued by the market at $1.36bn. Very crudely, adding some additional rent back in to the P&L produces a full year estimated NPAT of ~$100m. This gives a PE of 14. Going forward profits may move higher or lower depending on management and just how much impact the internet will have etc - I will smarter people than me decide that. The valuation isn't actually so high, but not exactly deep value.  There are other ways to look at valuation and I may be wrong of course, but for me I want simple cigar butt stories.

In short, I can't see large gains to be made from here and potentially lots of headaches so it's not the stock for me. 

Regards, 

Kristian 

Disclosure: no position in DJS