Elon Musk

This post isn't exactly a cigar-butt idea, nor is it timely but nevertheless I thought you might find it interesting. I enjoy reading about truly successful people - and I don't mean the Bondi hipster types. Elon Musk is one such person. A true super star. He walked away with $180m from his share of PayPal and proceeded to invest in not one, but three incredibly risky but potentially humanity improving start-ups: SolarCity, Tesla, and SpaceX. 

What I find even more incredible about this story is that he stood behind the companies with his own and it got to the point where all of his PayPal money was committed to these projects and ended up having to borrow money from friends to pay rent.  That's true grit.

A good interview can be seen here (around the 9.30 mark):

https://www.youtube.com/watch?v=uegOUmgKB4E

Kristian 

Disclosure: no position in the above companies. 

Medibank Private Health Insurance

Medibank has been put up for sale by the Australian government. 

Medibank is Australia's largest private health insurer by Premium Revenue, however it has the second highest Management Expense Ratio (MER) just behind HBF (source: Morningstar). The prospectus has not been published however in my opinion some of the salient points are: 

• Potentially massive opportunity for cost-cutting in the hands of private operators
• Private health insurance is a growing and stable market
• Potential for the IPO pricing to be very reasonable

We need to wait and see what is contained in the prospectus before worrying about things too much. The main purpose of this post is to flag with interested eligible readers to pre-register their interest at the following address: 

https://www.medibankprivateshareoffer.com.au

Pre-registration closes 15 October. 

I will write some follow-up analysis when the prospectus is released. 

As an aside... 

Perhaps this is wishful thinking, but it could be a superb catalyst to help draw retail investors back to the share market. Previous floats such as Telstra and Commonwealth Bank created an army of share investors and it was a great shame to see so many people burned through the GFC process. The government gives out hand outs to entice people into the property market, so why not do the same for share investors. Handing Medibank out at a big fat discount would do the job! 

Kristian

Disclosure: no position in Medibank (but hold a policy)

VIX revisited

I did a very quick post back in June noting the very low VIX level. Since then, VIX has remained very compressed and at very low levels: 

That chart (source: Yahoo Finance) goes back to 1990 and shows that current VIX levels are bouncing along at all time lows. VIX is seen by many as the canary in the coal mine: low VIX = low volatility = high investor complacency = time to be really scared. This has plenty of people worried, including famed deep value investor Seth Klarman who in a recent letter noted the 'bubble in complacency' and cited worrying tell-tale signs of investor behaviour. 

The last time when VIX was ultra cheap for a sustained period was 2004 to early 2007 during the great stock market boom. Shortly after VIX started moving high in lock-step with the stock market wobbling then crashing. The low VIX period before that was roughly 1992 to the early 1996. VIX then moved aggressively higher, so you would guess that the stock market tanked, right? Let's take November 1995 as a data point: VIX 12, S&P500 630. Fastforward to November 1999: VIX has through some savage peaks and troughs moved to 25 and S&P500 has actually moved up to 1400. 

That's almost a two and a half-fold increase in the market (excluding dividends) during a period of rapidly increasing volatility. And that's even after the S&P500 had already risen substantially. 

These are only a few points in history, so it's difficult to make assumptions. I don't work at Renaissance after all. I do however think it's fair to say that low volatility does not automatically mean tough times ahead. Interesting, anyway.    

Kristian 

Boom Logistics (BOL)

Just a short note to say well done to Iona Mcpherson, the outgoing CFO at BOL. Incredibly tough job in an industry experiencing a cyclical down-turn. 

Kristian 

Disclosure: own BOL

RNY Property Trust (RNY): Scuttlebutt Edition

Acknowledgement: this trade idea was presented to me by various colleagues, and is very well documented by Forager Funds. I've honestly no idea who came up with this idea first - however for ethical purposes I want to disclose it is not my original idea. It does however fit my cigar-butt style, and therefore I am an owner of the stock. 

With a stock price of ~28c and NTA of AUD 51c (30 June) the discount-to-value is straightforward to see. There are however issues namely a flat suburban commercial office market in the US, no distributions (and none likely until 2016), restrictive debt covenants and CAPEX requirements  to reduce the vacancy rate. Some of my colleagues think it is a value-trap, and they are potentially correct. I have been a buyer given the big discount, and expecting the discount should close when conditions improve at the fund and a way to get some USD exposure.

I visited RNY following a visit management (RXR Realty) in Long Island November last year, and I also just visited New York / Long Island - not to meet management but to snoop around a bit more to get some scuttlebutt.

Here is some of the information I found:

As background, RNY owns commercial office properties in the suburban markets of Long Island, Connecticut, New Jersey and Westchester. The problem with this geographical spread is that it is still dormant despite inner New York such as Manhattan and Brooklyn performing well (both residential and commercial). The ripple effect for commercial offie hasn't spread out to the suburbs. This appears to be the case across the US, as it appears to be for Australia (I suspect true of many countries).

On the flip side, minimal new supply is coming on-line and developers simply don't build commercial property without securing committed sales or leases. Incentives are still aggressive - even up to 1 year in the case of 5-6 year leases. The consistent message was the commercial suburban leasing market is recovering, but ever so slowly. You're not going to make a ton of money quickly from RNY in the short term due to an influx of new tenants to soak up vacant stock.

RXR have a great reputation on Long Island according to the people I spoke to (who have been dealing with RXR for years). My own observation is that while they appear to be good operators, they have bigger fish to fry (Manhattan) for the time being and RNY is not a high priority until vacancies drastically reduce and/or the re-financing is complete (long story: debt covenants restrict distributions and spending on CAPEX which in-turn is holding back attracting good tenants - a catch 22 that is not easily solved in the short term).

The average cap rate across the RNY portfolio is 8%, however anecdotally I heard that cap rates are starting to compress to less than 8%, although I did not receive firm data to back this view up.

In summary, I didn't find information that was in conflict with RXRs position. This situation could take a while (18 months) to work out, however the share price allows for that. If we do happen to get a strengthening USD and/or improved property prices then the upside is even bigger (or reverse).

Kristian 

Disclosure: own RNY

Boom Logistics (BOL)

In my previous post I cracked it about the yet-again deferral of the share buy-back. We recently met with management to discuss the situation further. In a nutshell, the main focus is conservatism, with debt reduction being a key theme along with reducing costs. A debt facility of $105m (total debt is currently $98m, net debt $89m) needs to be paid down to $75m by January 2017. With the combination of some more asset sales and free cash-flow from operations, I think they will get there much faster than that date. 

While paying down debt does not have the same potential impact on the share price in the short term as a buy-back, shareholders can at least have some comfort that money is not being squandered or misallocated on projects that may or may not work. Every dollar of debt reduction reduces risk (and also reduces the banks bargaining power) and therefore increases the value of the equity.   

The fact they are making any money at all given they have such a big exposure to mining is probably testament to management making hard decisions and being conservative. 

However the market is wary of BOL thanks in part to missed assertions/forecasts by management. This reputation needs to be repaired, and I can only hope they don't come out and make promises in the future they don't deliver on. 

Over capacity of cranes in Australia is an ongoing issue and will take some time to fix however there appears to be a reasonable overseas market which BOL has sold some older stock into. I think it would be interesting for an entrepreneur/private equity firm to run the numbers to see if an arbitrage could be made by buying cranes in Australia and selling them overseas. BOL is an operator of cranes, not a trader, so it's not likely they will go down that track. In the meantime, life for crane operators could easily get worse before it gets better. 

While I'm sounding like a broken record about a share buy-back, the logic of my investment in BOL is straightforward and remains the same: with current management I don't think the company will go broke. And the upside is massive compared to the downside - even if you think it could go broke. Nicholas Taleb preaches the idea of embracing optionality, which is what I found at APW. BOL has does lots of problems but optionality galore. 

Kristian 

Disclosure: own BOL

Australasian Wealth Investments (AWI, nee AWK and MEF)

Previous article here.

I previously had a position in AWI some months ago and managed to lose some money on the trade, despite having identified a good opportunity before most others in the market. In my last post, I noted how AWI (which was previously an LIC called MEF) was transformed into a financial services business. The initial story was InvestSmart was bought (for a song) as a managed fund distribution platform and a stake in van Eyk Research was also purchased. Coupling the two together would be the seedling of an Australian business to one day rival businesses such as the UK Best Invest and Hargreaves Lansdown. And after meeting with management a few times, I concluded I really liked the idea, management and the (then) cheap valuation.

Amazing how things can change. 

Subsequently, a new CEO was inserted on a monster salary and the company also went on an acquisition frenzy. This not only added unnecessary cost, but very quickly, the initial strategy seemed to be blurred as new acquisitions were made on bigger multiples. It's really hard to buy businesses quickly and try and glue them together, and the businesses they bought appeared disparate to the initial vision for the business. Without going into it, van Eyk clearly has lots of problems. Buying Intelligent Investor for over 6 times earnings was probably paying twice what it is worth, especially in the context they had already launched a managed funds business and therefore people in their database that were agreeable to a managed fund product had probably already invested with them (now Forager). 

After pondering this trade, I conclude my reasons for buying were pretty solid and pretty much within my investment style. The mistake made was to hold as the leopard begun to change its spots and holding on for the 'concept', not value. That style of investing is for others, and not me. 

For me, it has become increasingly easy to decide whether to make stock decisions based not on how cool the story sounds, but simply whether it fits my value investing style. This approach saves a lot of work, imposes a good discipline, and oh - makes more money. 

Kristian

Disclosure: no position in AWI