Dear friends,
Due to the better features I have moved my blog to wordpress. You can find it at asxvalue.com. All of the articles here have been replicated on the new site.
Because I've posted links to most of my articles on various stock market forums I'll keep this page around.
Monday, April 25, 2011
Wednesday, April 20, 2011
Regional Express (REX)
My biggest blunder of the year has definitely been Regional Express (REX).
The initial attraction for investing was the relatively high net profit margin of REX compared to other airlines like QAN and VBA. Running with a load factor (how full their planes are) in the 60% range and still being reasonably profitable made Regional Express worthy of further investigation.
Despite these and other promising elements, such as low earnings multiple, manageable debt, and access to low cost pilots through their in-house training school, REX has been overwhelmed by fuel costs and the downturn in regional Australian tourism to post lower profit guidance for FY11.
My doubts finally confirmed, I offloaded my stock for a 19% loss. What stings the most is that if I was more disciplined I wouldn't have gotten involved with such a dog in the first place.
Lessons learned:
1. Avoid the airline industry altogether. Mad Hedge Fund Trader does a nice job of outlining the key reasons why investing in airlines is a recipe for disaster, even though he recommends some stocks as a hedge against lower oil prices.
2. Uncertainty about future earnings
When I bought shares in REX in late 2010, the most recent shareholder presentation stated that management could not provide profit guidance - which should have been a huge red flag. I should have doubted investing in a business the management couldn't share a short-term expectation on.
3. Vulnerabilities
Even though REX was exposed to some decent upside if passenger numbers grew, and had a reasonable margin of safety thanks to their low debt and good profit margins, I didn't account for areas where the business was vulnerable to factors outside management's control. Fuel prices and the potential for instability in the middle east sending oil prices into orbit meant that REX was never a safe bet because of its downside exposure.
My approach to Value Investing is to find business which are robust to any major downside exposure and selling for a discount to fair value. REX might be cheap, but getting into a business with such huge downside exposure ran contrary to everything I supposedly stand for.
The initial attraction for investing was the relatively high net profit margin of REX compared to other airlines like QAN and VBA. Running with a load factor (how full their planes are) in the 60% range and still being reasonably profitable made Regional Express worthy of further investigation.
Despite these and other promising elements, such as low earnings multiple, manageable debt, and access to low cost pilots through their in-house training school, REX has been overwhelmed by fuel costs and the downturn in regional Australian tourism to post lower profit guidance for FY11.
My doubts finally confirmed, I offloaded my stock for a 19% loss. What stings the most is that if I was more disciplined I wouldn't have gotten involved with such a dog in the first place.
Lessons learned:
1. Avoid the airline industry altogether. Mad Hedge Fund Trader does a nice job of outlining the key reasons why investing in airlines is a recipe for disaster, even though he recommends some stocks as a hedge against lower oil prices.
2. Uncertainty about future earnings
When I bought shares in REX in late 2010, the most recent shareholder presentation stated that management could not provide profit guidance - which should have been a huge red flag. I should have doubted investing in a business the management couldn't share a short-term expectation on.
3. Vulnerabilities
Even though REX was exposed to some decent upside if passenger numbers grew, and had a reasonable margin of safety thanks to their low debt and good profit margins, I didn't account for areas where the business was vulnerable to factors outside management's control. Fuel prices and the potential for instability in the middle east sending oil prices into orbit meant that REX was never a safe bet because of its downside exposure.
My approach to Value Investing is to find business which are robust to any major downside exposure and selling for a discount to fair value. REX might be cheap, but getting into a business with such huge downside exposure ran contrary to everything I supposedly stand for.
SNL profit upgrade
Easter has come early with Supply Network who are now forecasting a year-end EBIT upgrade of 15%, from the 3.1M-3.3M range up to the 3.5m-3.8m range.
Another important factor of note is that this EBIT improvement is a result of revenue growth rather than improved profitability. If the company transformation successfully reduces overheads this should improve profitability and EBIT further for FY12.
Another important factor of note is that this EBIT improvement is a result of revenue growth rather than improved profitability. If the company transformation successfully reduces overheads this should improve profitability and EBIT further for FY12.
Saturday, April 9, 2011
HGL Limited (HNG)
Market cap: $70m
P/E: 4.86
P/Book: 0.94
Dividend Yield: 8.6%
Something like a mini-Berkshire (without the insurance "float" to source new capital), HGL is a conglomerate of diversified import businesses serving niche markets such as model cars, school hats, and special format printing. HGL make no effort to integrate their acquisitions, choosing to let senior management operate autonomously and incentivise them to build long-term performance.
HGL are value investors themselves, making acquisitions where they can purchase entire companies at the right price. HGL continue to look for quality businesses to acquire, and even list their criteria on their website.
Until very recently, HGL has held a stock portfolio in addition to its businesses. It was probably the correct move for management to liquidate this portfolio and concentrate on their importer business model: to improve core business profitability and find new acquisitions. While some of these businesses are 100% owned by HGL, a number have their ownership shared between HGL and management.
Dividends are regular and can be reinvested although no discount is offered. At a current gross of 8.6% HNG are very healthy payers, reflecting a payout of roughly 80% of earnings. The one weakness to HGL's relative cheapness is the inconsistency of earnings - HGL did not sail smoothly through the GFC, with earnings falling from 19.2 cps in 2007 to 10cps in 2009, before rebounding to 13.3cps in 2010. HGL's moat exists due to the niche nature of the products they offer. These niche areas are difficult tor larger players to service, and results in higher gross margins than you would expect for a typical importer/retailer (in excess of 40%).
Because the majority of purchases made by HGL are made in US Dollars, the current strength of the Aussie should benefit the business in the next reporting period. Long-term I expect the US Dollar to continue weakening, thanks to their terrible economic policy - resulting in continued benefit to HGL's businesses.
The current price of $1.28 puts HNG's P/E ratio at less than 5 - outstanding value for a company with negligible debt serving specialised markets, raising the barrier to entry for competitors. I've had HNG on my watchlist for some time, and I'm ready to take a long-term position over the coming weeks. The business is significantly undervalued, and I wouldn't give serious thought to selling until the share price rose to pre-GFC levels - roughly double the current price. Buying before the dividend is paid in June would also reduce capital gains if they were ever realised.
P/E: 4.86
P/Book: 0.94
Dividend Yield: 8.6%
Something like a mini-Berkshire (without the insurance "float" to source new capital), HGL is a conglomerate of diversified import businesses serving niche markets such as model cars, school hats, and special format printing. HGL make no effort to integrate their acquisitions, choosing to let senior management operate autonomously and incentivise them to build long-term performance.
HGL are value investors themselves, making acquisitions where they can purchase entire companies at the right price. HGL continue to look for quality businesses to acquire, and even list their criteria on their website.
Until very recently, HGL has held a stock portfolio in addition to its businesses. It was probably the correct move for management to liquidate this portfolio and concentrate on their importer business model: to improve core business profitability and find new acquisitions. While some of these businesses are 100% owned by HGL, a number have their ownership shared between HGL and management.
Dividends are regular and can be reinvested although no discount is offered. At a current gross of 8.6% HNG are very healthy payers, reflecting a payout of roughly 80% of earnings. The one weakness to HGL's relative cheapness is the inconsistency of earnings - HGL did not sail smoothly through the GFC, with earnings falling from 19.2 cps in 2007 to 10cps in 2009, before rebounding to 13.3cps in 2010. HGL's moat exists due to the niche nature of the products they offer. These niche areas are difficult tor larger players to service, and results in higher gross margins than you would expect for a typical importer/retailer (in excess of 40%).
Because the majority of purchases made by HGL are made in US Dollars, the current strength of the Aussie should benefit the business in the next reporting period. Long-term I expect the US Dollar to continue weakening, thanks to their terrible economic policy - resulting in continued benefit to HGL's businesses.
The current price of $1.28 puts HNG's P/E ratio at less than 5 - outstanding value for a company with negligible debt serving specialised markets, raising the barrier to entry for competitors. I've had HNG on my watchlist for some time, and I'm ready to take a long-term position over the coming weeks. The business is significantly undervalued, and I wouldn't give serious thought to selling until the share price rose to pre-GFC levels - roughly double the current price. Buying before the dividend is paid in June would also reduce capital gains if they were ever realised.
Wednesday, March 23, 2011
Cash Converters' strategic alliance with EZCORP (CCV)
Yesterday it was announced that EZCORP would be increasing their stake in CCV from 33% to 53%. This would be initiated through a 91c per share offering, pending approval from 50% of the shareholders and the Supreme Court of WA.
In addition to this controlling interest, Cash Converters and EZCORP will enter into a strategic alliance to develop more financial products, building on Cash Converters' experience as a consumer lender.
CCV and EZCORP will form a couple of JVs:
One equally owned to focus on consumer loans opportunities outside Australia, UK, and the Americas.
One owned 80% by EZCORP and 20% by CCV which will focus on consumer loans opportunities in the Americas.
Loans products will be marketed under the Cash Converters brand.
Cash Converters have been deliberately focusing on their loans business for future growth (observe the rapid takeup in the UK, where the loans business is still in the startup phase), and this new strategic alliance will focus these efforts in new markets.
As outlined in my previous article on CCV, I was awaiting an announcement from EZCORP to take over the entire company. I do not intend to sell my stake at this stage, as this strategic alliance opens huge potential in these new markets.
In addition to this controlling interest, Cash Converters and EZCORP will enter into a strategic alliance to develop more financial products, building on Cash Converters' experience as a consumer lender.
CCV and EZCORP will form a couple of JVs:
One equally owned to focus on consumer loans opportunities outside Australia, UK, and the Americas.
One owned 80% by EZCORP and 20% by CCV which will focus on consumer loans opportunities in the Americas.
Loans products will be marketed under the Cash Converters brand.
Cash Converters have been deliberately focusing on their loans business for future growth (observe the rapid takeup in the UK, where the loans business is still in the startup phase), and this new strategic alliance will focus these efforts in new markets.
As outlined in my previous article on CCV, I was awaiting an announcement from EZCORP to take over the entire company. I do not intend to sell my stake at this stage, as this strategic alliance opens huge potential in these new markets.
Thursday, March 3, 2011
BSA Limited (BSA)
Market Cap: $60m
P/E: 6.4
P/B: 0.88
Dividend Yield: 7.1%
On the surface, BSA ticks all the boxes for value investors. Selling for 6.4x earnings and 0.88x book value, BSA is sitting on $17m of cash, has less than 50% debt to equity ratio, and hasn't missed a dividend since they commenced paying in 2006. (management aims for a payout ratio of 50%).
Turning to the underlying business, I am going to frame my analysis of the business the same way management do, into 2 separate streams: Contracting Solutions and Building Services.
Contracting Solutions
BSA's legacy business is centred around the telecommunications and subscription television market. As long-term contractors to Foxtel, Silcar and Optus, BSA have a strong practice in maintenance installation and troubleshooting of telecommunications infrastructure, as well as installation and setup of pay TV services. BSA also own the Mr Antenna and Mr Alarms brands. While revenue has declined since FY09, in HY11 Contracting Solutions won the national ADSL provisioning and service assurance contract for Optus (having previously only held the East Coast contract).
Building Services
In 2007 BSA branched out from their core contracting business by acquiring the Triple M group of companies, who are focused on the HVAC and Fire Alarm markets. Further acquisitions have expanded the practice, with Building services generating $176M in revenue in FY10. Building services continued to perform well in HY11, generating $120M revenue, and the order book has grown in the 6 month period ending December 2010 from 180m to 260m. I anticipate more acquisitions of smaller HVAC and Fire Panel operators over the coming years, and the currently challenging market conditions are going to create opportunities for BSA to acquire smaller competitors at great prices, with plenty of cash on hand.
Aggregate performance for HY10 saw outstanding growth with revenue up 39% and NPAT up 72%. While much of the growth I expect to see in BSA will be through the Building Services arm, Contracting Solutions are exposed to a large potential upside in the medium term through subcontracting on the NBN project. BSA already participated in stage one, winning work in Tasmania and NSW. If the NBN goes ahead in the future, BSA will be in the right position to potentially win a large chunk of the subcontracting work.
My holding horizon for BSA is forever (barring a major change to the underlying business), and I intend to continue adding to my position given the low share price. The 5% discount for dividend reinvestment gives me another reason to buy, hold and reinvest.
P/E: 6.4
P/B: 0.88
Dividend Yield: 7.1%
On the surface, BSA ticks all the boxes for value investors. Selling for 6.4x earnings and 0.88x book value, BSA is sitting on $17m of cash, has less than 50% debt to equity ratio, and hasn't missed a dividend since they commenced paying in 2006. (management aims for a payout ratio of 50%).
Turning to the underlying business, I am going to frame my analysis of the business the same way management do, into 2 separate streams: Contracting Solutions and Building Services.
Contracting Solutions
BSA's legacy business is centred around the telecommunications and subscription television market. As long-term contractors to Foxtel, Silcar and Optus, BSA have a strong practice in maintenance installation and troubleshooting of telecommunications infrastructure, as well as installation and setup of pay TV services. BSA also own the Mr Antenna and Mr Alarms brands. While revenue has declined since FY09, in HY11 Contracting Solutions won the national ADSL provisioning and service assurance contract for Optus (having previously only held the East Coast contract).
Building Services
In 2007 BSA branched out from their core contracting business by acquiring the Triple M group of companies, who are focused on the HVAC and Fire Alarm markets. Further acquisitions have expanded the practice, with Building services generating $176M in revenue in FY10. Building services continued to perform well in HY11, generating $120M revenue, and the order book has grown in the 6 month period ending December 2010 from 180m to 260m. I anticipate more acquisitions of smaller HVAC and Fire Panel operators over the coming years, and the currently challenging market conditions are going to create opportunities for BSA to acquire smaller competitors at great prices, with plenty of cash on hand.
Aggregate performance for HY10 saw outstanding growth with revenue up 39% and NPAT up 72%. While much of the growth I expect to see in BSA will be through the Building Services arm, Contracting Solutions are exposed to a large potential upside in the medium term through subcontracting on the NBN project. BSA already participated in stage one, winning work in Tasmania and NSW. If the NBN goes ahead in the future, BSA will be in the right position to potentially win a large chunk of the subcontracting work.
My holding horizon for BSA is forever (barring a major change to the underlying business), and I intend to continue adding to my position given the low share price. The 5% discount for dividend reinvestment gives me another reason to buy, hold and reinvest.
Wednesday, March 2, 2011
BigAir Group Limited (BGL)
Market Cap: 20m
P/E: 10.9
P/B: 2.34
Dividend Yield: 0%
A niche Wimax operator, BigAir operates a national network in 7 of Australia's biggest cities. The company is geared towards delivering services to the wholesale market, leveraging the sales forces of other organisations who use BigAir services to complement their offerings. The key advantages of Wimax technology are:
1. Fast turn-on (hours vs weeks for a terrestrial connection)
2. High speeds for wireless (up to 1Gbps symmetrical)
3. Low install costs (Running fibre in built up areas costs well over $100 per metre)
Since turning cashflow positive in 2009, BigAir have been making smart acquisitions like Clever Comms (Their main competitor) and ISP operators who deliver managed internet services to the student accommodation market, such as Accessplus. While BigAir have a number of other competitors in the Wimax market, none of these operators have a national network.
For a company only selling at 11x earnings, with strong profit margins with no debt, BigAir is positioned to continue their significant growth. FY10 saw revenue growth of 17%, and NPAT growth of 50%. BGL is becoming more and more profitable, while revenue continues to grow rapidly, funding investment into more Wimax points, fuelling future growth in the business. Gross margins are in the region of 80%, now that they've binned the offnet business in favour of services delivered via their own infrastructure.
The fact that BGL currently doesn't pay a dividend isn't a major concern for me, right now the best place to invest their healthy profits appears to be back into the business. As the reinvested profits approach diminishing returns it will make sense to begin returning cash to shareholders.
BGL have just put up their mid FY11 numbers, and revenue growth has not slowed at all - maintaining their CAGR of 51%. Net operating cashflow doubled. This huge cashflow allows BigAir's growth to be fully self-funded, while making acquisitions with a mix of stock and cash. An important qualifier is while the half year numbers account for the costs of the CVA and AccessPlus acquisitions, they do not include any of the earnings. It is reasonable to expect good earnings accretion for year's end, which will result in significant profit growth for end FY12 once core network synergies have been realised.
One of BigAir's major assets is their CEO, Jason Ashton. Jason owns 10% of BigAir and successfully co-founded an ISP in 1993 which was sold 6 years later for $20M.
BigAir is a company I can see myself holding forever, provided the telecoms industry's evolution doesn't damage their market position. They're growing like mad, and it will eventually make sense to pay a dividend. In the meantime, BGL are a growth opportunity with significant potential and no major competition.
P/E: 10.9
P/B: 2.34
Dividend Yield: 0%
A niche Wimax operator, BigAir operates a national network in 7 of Australia's biggest cities. The company is geared towards delivering services to the wholesale market, leveraging the sales forces of other organisations who use BigAir services to complement their offerings. The key advantages of Wimax technology are:
1. Fast turn-on (hours vs weeks for a terrestrial connection)
2. High speeds for wireless (up to 1Gbps symmetrical)
3. Low install costs (Running fibre in built up areas costs well over $100 per metre)
Since turning cashflow positive in 2009, BigAir have been making smart acquisitions like Clever Comms (Their main competitor) and ISP operators who deliver managed internet services to the student accommodation market, such as Accessplus. While BigAir have a number of other competitors in the Wimax market, none of these operators have a national network.
For a company only selling at 11x earnings, with strong profit margins with no debt, BigAir is positioned to continue their significant growth. FY10 saw revenue growth of 17%, and NPAT growth of 50%. BGL is becoming more and more profitable, while revenue continues to grow rapidly, funding investment into more Wimax points, fuelling future growth in the business. Gross margins are in the region of 80%, now that they've binned the offnet business in favour of services delivered via their own infrastructure.
The fact that BGL currently doesn't pay a dividend isn't a major concern for me, right now the best place to invest their healthy profits appears to be back into the business. As the reinvested profits approach diminishing returns it will make sense to begin returning cash to shareholders.
BGL have just put up their mid FY11 numbers, and revenue growth has not slowed at all - maintaining their CAGR of 51%. Net operating cashflow doubled. This huge cashflow allows BigAir's growth to be fully self-funded, while making acquisitions with a mix of stock and cash. An important qualifier is while the half year numbers account for the costs of the CVA and AccessPlus acquisitions, they do not include any of the earnings. It is reasonable to expect good earnings accretion for year's end, which will result in significant profit growth for end FY12 once core network synergies have been realised.
One of BigAir's major assets is their CEO, Jason Ashton. Jason owns 10% of BigAir and successfully co-founded an ISP in 1993 which was sold 6 years later for $20M.
BigAir is a company I can see myself holding forever, provided the telecoms industry's evolution doesn't damage their market position. They're growing like mad, and it will eventually make sense to pay a dividend. In the meantime, BGL are a growth opportunity with significant potential and no major competition.
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