PIE Conference

The PIE conference is being held Tuesday 21 March in Auckland. The company line-up looks to be high quality and will be worth seeing the CEO's present. 

I'm going to attend, and will be in Auckland Monday 20 - Wednesday 22 March. Please let me know (via the profile page) if you would like to catch up and talk stock ideas.  

Kristian 

Calling Out For Queensland Body Corporate Managers

I'm doing some research on a company that primarily distributes through QLD Body Corporate Managers. Given I, and some colleagues, are in the process of buying shares in this company, I can't disclose the name of this company at this stage. 

This company is very rapidly growing, offering customers big savings. I'd like to speak to some QLD Body Corporate Managers to get some industry feedback. Industry feedback is a great way of verifying management and stockbroker claims.

If you are or know a BCM then I'd be appreciative if you could get in contact or pass on someone's contact details. 

Thank you, 

Kristian Dibble

Kangaroo Island Property

After touring Kangaroo Island (KI) early December last year looking at Kangaroo Island Plantations (KPT) timber plantations and proposed wharf at Smith Bay, it also appeared there may be an opportunity in property investment on the island - there are several catalysts to improve the economy and therefore house prices. 

Firstly, KPT is planning on exporting timber off the island. If this goes ahead it will create jobs. Not everyone agrees on where the timber should get off the island, but everyone agrees it needs to happen. Secondly, the airport is getting upgraded and lengthened so commercial jets can land/takeoff. This means that jets could fly direct from Sydney and Melbourne. This doesn't just mean more tourism, but people could work in Sydney for example during the week and fly to KI on the weekends. The house price differential is enormous. And recently a new resort application has been approved.

There is minimal permanent rental property on the island. We visited the Century21 office at Kingscote and there were only four properties for rent! 

So the upside case here is a jab-in-the-arm for the economy from the infrastructure projects and a 10%+ escalation in population along with minimal rental property could lead to higher rents and higher prices. 

There are some potential downsides, of course. Projects may not go ahead. Commercial jets may not fly into KI. There appears to be quite a number of unused houses on the island - there are a lot of weekenders and short term holiday letting property on the island. How much of this would convert to full time rental property if the population increases is a question I don't know the answer to. And KI will always be more expensive and isolated than the mainland: it won't appeal to everyone. 

I didn't draw any specific conclusion as to how or if property prices will move, so if you're thinking of that strategy you would want to look into this in detail yourself. The agent I spoke to was extremely helpful - contact me if you would like his details. 

Kristian 

Disclosure: own KPT

The mavericks disrupting funds management titans

The AFR has run a good article on the disruption of the funds management industry which included two close colleagues and friends - Tony Hansen (EGP Capital) and Peter Phan (Castlereagh Equity). After having known them for some years now, I can say they are both exceptionally smart and ethical individuals.

Both gentleman typically invest in smaller Australian companies and given they have a lot of their own personal wealth invested in their respective funds they have a sharpened eye for risk that many other investors simply do not.

Investors could certainly do worse than investing with them - but this of course is not to be construed as financial advice(!) 

Click the link below to read the full article:

The mavericks disrupting funds management titans

Kristian 

Kangaroo Island Plantations (KPT)

KPT has been a phenomenal investment, a great investing lesson and if plans materialise will be a positive economic boost for Kangaroo Island and South Australia. 

Kangaroo Island (KI) is located in South Australia (130km south of Adelaide) and is famous for its ecotourism including Seal Bay, marine life and a quiet get-away retreat. The tourism hot spots are located on the far western, southern and eastern sides of the island with the central and northern side typically used for agriculture. KI is quite big: 155km wide and 55km long and at times it actually feels quite remote driving through the centre. The population of over 4,000 (2006) is located mostly on the eastern side around the towns of Penneshaw and Kingscote. Sealink provides the ferry from Penneshaw to the mainland at Fleurieu Peninsula.  

It also turns out that KI has exceptional growing conditions for timber. A high, consistent rainfall combined with mild summers and low salinity allow timber to grow quickly. The faster you can grow timber, the cheaper it is to produce and KI finds itself among the lower costs timber producers in the country.

During the timber Managed Investment Scheme (MIS) heyday, various timber companies bought lots of land on KI and around the country and planted timber. These were tax and commission motivated structures that ultimately failed and the likes of Great Southern Plantations and Gunns went bankrupt. 

The main problem unique to KI is that it's an island and there has been no economical way to get the timber off the island and as the ferry service is located on the eastern side at Penneshaw, it is right smack bang in the middle of the tourist area - not exactly ideal for a logging route. 

The combination of these factors caused the prices of timber plantation on KI to crater, which in turn have created serious opportunity.

Out of the rubble, KPT emerged with 30% of the planted timber on KI, along with New Forests with 60% and individuals collectively hold the remaining 10%. I had the good opportunity to uncover this opportunity back in June 2014 when I discussed the situation at length with the great Fred Woollard from Samuel Terry Asset Management, who is the major shareholder in KPT. KPT was then $3 (a fraction of land value alone) and given it is now $27.20, it's fair to say I owe him one (I thought MNY was a good return tip, but a double is not quite as good as an 8 bagger). 

KPT has now positioned itself as the leading timber producer on KI with the recent agreement to purchase New Forests’ KI assets. This deal is phenomenal for KPT shareholders as the purchase price for the land and timber is cheap and crucially ensures KPT owns both potential sites for a second wharf.  

Getting control of both potential wharf sites is key: the government, recognising the need for a solution to export the timber to reinvigorate the economy, indicated only one approval will be given for a second site. KPT owns both Smith Bay and now Ballast Head (owned by New Forest). Smith Bay even contains a house which you can rent on Stayz.com.au. A picture of the site is shown below (note the buoy which is being used to test currents to determine wharf requirements):

So, KPT has now lodged a DA for the second wharf and if the approvals are given, the potential value accretion is enormous - despite the stock having already moved up so much. Slide 24 of the recent presentation (26/10/16) gives you some idea of what the business might be worth once the second wharf is built. As the owner of 58,000 acres of land (which ought to increase in value), a sustainable timber business generating in the order of $20m EBIT p.a. and a wharf owner, the potential upside is multiples from here. 

However, there will be another time for discussing the upside - I wanted to write this post to commend the major shareholders and management. Up until now, the board has not received much  cash remuneration but has been paid mostly in  shares (which they stand to become rich from). We've seen too many companies run by the wrong people: it's easy to get seduced (I have) by cheap stocks, but you also need the right managers with the right incentives to unlock and create value. KPT has  been exemplary in working with all stakeholders: residents, environmentalists, government and shareholders and have set the benchmark to judge other companies. 

Kristian

Disclosure - own KPT and MNY

Underestimating or Overestimating Management

Morgans (Scone) held their first 'Value in the Vines' conference: a one day conference in the Hunter Valley Crowne Plaza where CEO's presented their companies. The format I most enjoyed was the 'fireside chat' with Grant Bourke (co-founder of Domino's Pizza (DMP)) and Richard Rijs (Patties Foods) hosted by Sam Paradice. This was held after dinner and a few red wines, so the atmosphere was quite relaxed. The focus wasn't valuations and going through slide decks or EBITDA margins, but personal stories about the highs and lows of building a business. 

Both Domino's and Patties sell fairly commoditised products, yet both have had outstanding success. They cited a common thread for their success: for slightly different reasons, they both heavily emphasised the importance of people at all levels in the company. Grant Bourke gave the example of how he and Don Meij went and door knocked around a suburb to drum up business for a struggling store. That's commitment. 

It helped cystallise some thoughts on management. I have at times both underestimated and overestimated management. Unlike balance sheet items, you can't just pigeonhole people so easily - everyone is different. And on top of that you can easily make the mistake of superimposing your own thoughts and biases and see people or situations for how you think they should be seen. 

Management can be male or female, drive an expensive car or a cheap car, swear or not swear, be an introvert or extrovert, be funny or boring, educated or a school drop-out - the list goes on. But do these factors indicate whether they will be successful? 

A good example of a bias is the car they drive. Value investors tend to tut-tut expensive cars, but to many there isn't anything wrong with driving a nice car - it's a symbol of wealth and success, after all. I've heard the same comment about the clothes a CEO wears - one particular CEO who we have done very well out of this year has been criticised for dressing like a slob. He does. But he's a great manager. In another example where we have more than doubled our money in the last 12 months the feedback about the Managing Director is that he is a poor presenter. That's true. But the guy is just itching to go and make money - and doesn't really care about how he presents. 

Another mistake is to think managers will act in the best interest of their shareholders. This style of thinking is a big trap in turnarounds or bombed out situations. It is so easy to see value and think managers will get in there and realise that value. But what happens if they aren't incentivised to do that? What happens if they are on a big fat salary and downsizing the business actually works against their personal interest? 

Underestimation can be particularly annoying. Some of the CEO's out there are really smart and can keep finding ways to squeeze value - even when you can't see it. Graham Turner at Flight Centre is a great case in point: he has kept driving profits from the bricks and mortar business even though many think online is the only way to go. I'd put Stuart Brown from Blackwall (BWR and BWF) in this category. 

So it's easy to make superficial judgment calls about someone. It's easy to buy a stock when it is cheap and wonder why management doesn't do the 'obvious'. It's easy to pass on a stock because it looks fully valued but watch the price just keep going up anyway as the manager finds a new market, a new product or more costs to squeeze out. I've made both kinds of mistakes plenty of times. 

Grant Bourke and Richard Rijs suggest placing a very large focus on people. Jim Collins in Good to Great found a similar trait among higher performing CEO's: look at the who before the what. One summary word that Venture Capitalist Fred Wilson has used is 'hustle'. You want someone with hustle - the person who is driven to make things happen. Similarly, Chris Sacca (also a VC) looks for someone with inevitability. He cites Travis Kalanick from uber as a prime example. The best example of inevitability I've seen this year is Emefcy (EMC): after meeting the management and board, it just seemed certain the company would be a success - even though at that time it had no revenue (it's since risen fourfold). A larger focus on people has helped me improve considerably. There are  of course always other factors to consider - that's part of the art of weighing things up. Ideally you find outstanding management and a company with outstanding fundamentals. Unfortunately, it just doesn't happen that often. One stock I will be writing about soon had both - and the results have been spectacular. 

Kristian 

Disclosure - own BWR

Future Blog Posts

Since beginning this blog in December 2012, I have written 86, 34, 25 and 8 blog posts in 2013, 2014, 2015 and 2016 respectively. This is ironic given that during this time my skills have improved dramatically.  The improvement is a result of lots of hard work and research along with working closely with some really smart and experienced people.  One of the great things about investing is that if you have an open mind and desire to learn, you just get better and better, your networks get wider and you can deal with the highs and lows with calmness. 

2016 has been busy. On the personal side, we had our daughter and on the professional side, the primary focus has been to drive investment performance. That journey will always continue, and we are well on our way to meeting objectives.  To enhance this process, I would now like to get back to writing more frequently. There are lots of insights to discuss and I enjoy sharing my perspective.   As always, feedback is welcome and appreciated as we can always learn from one another. I will focus the dialogue on stocks where there was a good lesson or there is an interesting story - there are a lot of interesting companies and people out there having a positive impact on the community. More broadly, I will discuss tangential issues that I have found useful.  

Thank you, 

Kristian