Annnnnd I'm going to cheat again and link to another TMF post:
http://boards.fool.co.uk/share-idea-ekt-12236790.aspx?sort=whole#12261522
The share just seems fundamentally very mispriced. I see this as both a value and a GARP play - even if the growth doesn't materialise the share is cheap on a current PER of a bit over 6. I like the idea of having a number of small businesses each with their own niche engineering speciality - it should allow for decent margins and I'm sold on the 'story' of the potential synergy from having a number of shared functions (marketing, corporate etc) eventually benefitting the bottom line. I'm also a fan of the move to Cambridge (The so-called 'Silicon Fen') as I can see the potential of a number of smart engineers trying to devise potential new smash hit products whilst the current ones expand in the mean time - there's multiple sources of potential growth.
Another interesting source of info on EKT comes from this blog:
http://elektronplc.blogspot.com/
From someone who is clearly an insider or is very close to the company. Some interesting info especially on the new acquisition which looks like an absolute steal! The effective P/E after cash appears to be in the sub-3 range which is amazing. The chairman appears to be a professional investor himself and has significant skin in the game so has every incentive to run the company well.
A very simple investment thesis but I can see the growth story and the price is so low as to be in value territory anyway - a re-rating and growth could create a big multibagger, apparently the chairman sees 'FTSE 250' territory eventually so at least he's ambitious!
Long @ 32.3775p
Sunday, 21 August 2011
ALLG - All Leisure
Right, another TMF link as a little bit of background:
http://boards.fool.co.uk/all-leisure-allg-12309115.aspx?sort=whole#12322384
This is kind of a recovery/growth play. All Leisure are a company that operate a number of cruise trips around the world at generally premium prices. Growth in revenues have been good over the previous few years but the main issue is that margin has collapsed - from 13% in 2008 to 3.8% today. Basically every economic parameter that could go bad for this company has gone bad recently; I think this extract from their interim report pretty much sums it up:
"Against a backdrop of unprecedented natural disasters and geo-political events, and despite challenging market conditions, reduced discretionary customer spending, persistent low interest rates, increased oil prices and a weak pound, I am pleased to announce that the Group has delivered operating results ahead of those for interim 2010."
Despite this the company has been investing for growth and has used the IPO proceeds to purchase new ships - revenues have almost doubled in 4 years which is very impressive.
Simply, I'm trusting that in the long term economic conditions will improve which will help this company. The directors also have very significant skin in the game, 70% of the shares are owned by them with 60% held by the chairman so I trust them to act in a shareholder-friendly way.
Risks
The balance sheet is a bit ropey - no debt as such but negative £26m of current assets compared to an operating profit of £3m and a Z score of 1.12. I'm banking on management being able to handle this in a shareholder-friendly way (i.e. not a rights issue). The company is still valued below book value though.
Also I think some of the justification for the treating of derivatives as an 'exceptional' as quite ropey. Surely the point of the derivative is to hedge risk away, so any loss in its value should be replaced by a gain in the business?
The economy also doesn't really appear like it's going to recover any time soon, but I'm willing to wait. If margins ever return to double-digit territory and the growth continues then this share could eventually be worth 3-4x as much as it currently is.
Long ALLG @ 38.0175p
http://boards.fool.co.uk/all-leisure-allg-12309115.aspx?sort=whole#12322384
This is kind of a recovery/growth play. All Leisure are a company that operate a number of cruise trips around the world at generally premium prices. Growth in revenues have been good over the previous few years but the main issue is that margin has collapsed - from 13% in 2008 to 3.8% today. Basically every economic parameter that could go bad for this company has gone bad recently; I think this extract from their interim report pretty much sums it up:
"Against a backdrop of unprecedented natural disasters and geo-political events, and despite challenging market conditions, reduced discretionary customer spending, persistent low interest rates, increased oil prices and a weak pound, I am pleased to announce that the Group has delivered operating results ahead of those for interim 2010."
Despite this the company has been investing for growth and has used the IPO proceeds to purchase new ships - revenues have almost doubled in 4 years which is very impressive.
Simply, I'm trusting that in the long term economic conditions will improve which will help this company. The directors also have very significant skin in the game, 70% of the shares are owned by them with 60% held by the chairman so I trust them to act in a shareholder-friendly way.
Risks
The balance sheet is a bit ropey - no debt as such but negative £26m of current assets compared to an operating profit of £3m and a Z score of 1.12. I'm banking on management being able to handle this in a shareholder-friendly way (i.e. not a rights issue). The company is still valued below book value though.
Also I think some of the justification for the treating of derivatives as an 'exceptional' as quite ropey. Surely the point of the derivative is to hedge risk away, so any loss in its value should be replaced by a gain in the business?
The economy also doesn't really appear like it's going to recover any time soon, but I'm willing to wait. If margins ever return to double-digit territory and the growth continues then this share could eventually be worth 3-4x as much as it currently is.
Long ALLG @ 38.0175p
SRT - Software Radio Technology
Again, I'm going to slightly cheat and post a link to a TMF post where I've talked a little about SRT and it contains other's insightful comment:
http://boards.fool.co.uk/mello-software-radio-technology-srt-12313822.aspx?sort=whole#12335687
TLDR Version
This isn't a value play but a GARP (Growth At a Reasonable Price) play. SRT make transmitters for boats which basically provide a form of identification and tracking for other boats (to avoid collisions) and for governments (to keep an eye on who is in their waters). Government mandates are driving an increase in sales so the buyers don't really have much choice but to buy (I like it!) and SRT are currently the only company who make the RF chips required. Gross margins are huge (~50%) and the operational gearing is high so a large increase in sales potentially equals an even bigger jump in profit. Last year SRT made a profit of 2.2p per share so for my purchase price of 36.7p the P/E isn't very punchy being only 16.7 for a company which could potentially explode in profit. Equally, they could just get crushed by a larger company with big R&D muscle but in my head I can't help but see the analogy to ARM in their business model and the huge potential the company has. High risk high reward stuff.
Also, I have a lot of respect for the openness with which the CEO conducts seems investor relations. Very frank, very open. A good salesman too!
Risks
Lots!
1) A competitor eats their margins
2) Sales don't grow as expected
3) The market just doesn't exist
4) Probably a million potential ways this company could fail
5) Director sales aren't great (although the bloke does still own 15% of the company so still has big skin in the game)
Despite the risk I think the current price (even lower than when I bought it) is potentially very, very
attractive. If everything goes to plan this could be a big multibagger over the next few years. Or it could be worth nothing. Fun!
Long @ 36.7486p
http://boards.fool.co.uk/mello-software-radio-technology-srt-12313822.aspx?sort=whole#12335687
TLDR Version
This isn't a value play but a GARP (Growth At a Reasonable Price) play. SRT make transmitters for boats which basically provide a form of identification and tracking for other boats (to avoid collisions) and for governments (to keep an eye on who is in their waters). Government mandates are driving an increase in sales so the buyers don't really have much choice but to buy (I like it!) and SRT are currently the only company who make the RF chips required. Gross margins are huge (~50%) and the operational gearing is high so a large increase in sales potentially equals an even bigger jump in profit. Last year SRT made a profit of 2.2p per share so for my purchase price of 36.7p the P/E isn't very punchy being only 16.7 for a company which could potentially explode in profit. Equally, they could just get crushed by a larger company with big R&D muscle but in my head I can't help but see the analogy to ARM in their business model and the huge potential the company has. High risk high reward stuff.
Also, I have a lot of respect for the openness with which the CEO conducts seems investor relations. Very frank, very open. A good salesman too!
Risks
Lots!
1) A competitor eats their margins
2) Sales don't grow as expected
3) The market just doesn't exist
4) Probably a million potential ways this company could fail
5) Director sales aren't great (although the bloke does still own 15% of the company so still has big skin in the game)
Despite the risk I think the current price (even lower than when I bought it) is potentially very, very
attractive. If everything goes to plan this could be a big multibagger over the next few years. Or it could be worth nothing. Fun!
Long @ 36.7486p
MSFT - Microsoft
TLDR Summary
Microsoft is one of the best companies in the world right now, in my opinion, and it's trading at a bargain basement price. For a market cap of (currently) about $200bn you get about $50bn in cash and equivalents right off the bat and a company that made $23bn profit last year. Net of cash, that's a P/E of about 6.5. This is a company that has a great track record of growth, astronomical ROEs and ROIs, huge net margins and a virtual monopoly in its core area. Why is it so cheap? Two main reasons I think really - the market believes that PCs are dying and microsoft faces big challenges from Google, Apple etc and cloud computing is going to kill it. I don't buy this; I think Microsoft is too embedded for anyone to really challenge it in its core areas and these fears are ridiculously overblown, not to mention that Microsoft already has its own cloud computing solution so it isn't going down without a fight. Microsoft is a huge cash generating monster and is buying back shares like there's no tomorrow with a small dividend too. A number of hedge fund managers I respect also believe this (Einhorn, Klarman etc) and have big long positions on MSFT. My one hangup about Microsoft is the risk of it using its cash in stupid ways - like its recent acquisition of Skype at a stupid price.
I think this is actually basically everything I want to say about this investment case as I believe it's this simple - big cash cow sells dirt cheap.
Risks
1) Being a tech stock there's always the risk that Google or someone does eat its lunch, but I'm banking on that not happening.
2) Microsoft finds stupid ways to spend the cash it generates.
3) Currency risk - it's my one foreign share but I'm willing to tolerate this.
Long @ 1,493.20p
Microsoft is one of the best companies in the world right now, in my opinion, and it's trading at a bargain basement price. For a market cap of (currently) about $200bn you get about $50bn in cash and equivalents right off the bat and a company that made $23bn profit last year. Net of cash, that's a P/E of about 6.5. This is a company that has a great track record of growth, astronomical ROEs and ROIs, huge net margins and a virtual monopoly in its core area. Why is it so cheap? Two main reasons I think really - the market believes that PCs are dying and microsoft faces big challenges from Google, Apple etc and cloud computing is going to kill it. I don't buy this; I think Microsoft is too embedded for anyone to really challenge it in its core areas and these fears are ridiculously overblown, not to mention that Microsoft already has its own cloud computing solution so it isn't going down without a fight. Microsoft is a huge cash generating monster and is buying back shares like there's no tomorrow with a small dividend too. A number of hedge fund managers I respect also believe this (Einhorn, Klarman etc) and have big long positions on MSFT. My one hangup about Microsoft is the risk of it using its cash in stupid ways - like its recent acquisition of Skype at a stupid price.
I think this is actually basically everything I want to say about this investment case as I believe it's this simple - big cash cow sells dirt cheap.
Risks
1) Being a tech stock there's always the risk that Google or someone does eat its lunch, but I'm banking on that not happening.
2) Microsoft finds stupid ways to spend the cash it generates.
3) Currency risk - it's my one foreign share but I'm willing to tolerate this.
Long @ 1,493.20p
TNI - Trinity Mirror
Right, I'm going to cheat for this one... because I've already outlined my investment thesis on TMF here: http://boards.fool.co.uk/trinity-tni-half-year-results-12334968.aspx?sort=whole#12340100
So I'll predominately just copy-and-paste what I said there...
Quick Summary
TNI is a newspaper stock that is priced to roll over and die - it's on a P/E of 2. I, however, a) do not believe newspapers are in structural decline and have their niche, b) think the company's balance sheet is misunderstood and in a lot better shape than it initially appears and c) think a lot more of the company's problems are cyclical than structural. The loss of a major competitor through the News International saga can only help too - the Mirror appears to be the main beneficiary of its readers.
Longer analysis
First of all, balance sheet analysis:
I'm only interested in tangible assets so I discount all the tangible/goodwill/investment assets (arguably the investments have value but they are small so I'm ignoring for the sake of simplicity) which leaves us with:
£+399.4m PP&E
£-111.2m Net Current Assets (which includes some debt repayable very soon, in October 2011)
£-156.2m Other Debt
£+0.1m Net Derivatives + Provisions position
£-73.9m Pension deficit
= +£58.2m Net Assets
Now this immediately tells me that the company's assets currently more than cover its debts, which is always a nice thing. Of the assets, £209m is in land and buildings which could be sold and leased back if cash was needed urgently, and there's also a ~£175m bank facility which is untouched to help with debt repayment timing issues. In short, there is a low risk of this company actually going bankrupt as it has ~£385m of potentially available cash to cover its ~£260m of net debt. Arguably the land and buildings are undervalued here as they are carried at cost and as far as I can see they have been on the balance sheet for some time (at least since the 2000 annual report which is as far back as I can see) so should have appreciated somewhat but let's be conservative and keep it at cost.
Now you say, I've missed off one big liability! The net tax liability of £278m looks bad but when you examine it closer you can see it's actually ok.
From Note 21 in the 2010 annual report (I found it in the end!) we can see that £241.8m of the tax liability is due entirely to the intangibles. Divide this by 0.27 (the tax rate) and you get £895.5, which is the total amount of intangibles on the 2010 balance sheet. Hence, this tax liability isn't 'real' as such - I believe (and please correct me on this if I'm wrong as my accounting knowledge isn't great) that if the intangible assets were just written down to £0 (which is the value I'm assuming in this evaluation) that the £241.8m of tax liability would become £0, so I'm going to mentally write this off too given that I assign the intangibles no value in this analysis. Hence the actual net tax liability is:
£-62.5m
Given our £58.2m net assets from before leaves us with a grand total negative equity of only £4.3m, so the balance sheet is, in my view, almost perfectly balanced in terms of 'real' assets to 'real' liabilities.
A quick comment on the pension contribution: Having looked at the assumptions in the pension actuarial calculation they don't seem particularly excessive to me so I don't believe they'd be grossly overstating/understating the value of the assets so I'm happy to take the stated liability here as the 'true' liability. Another way to treat this would be to ignore it from the balance sheet and assume that the pension plan negatively impacts the cash flow/profitability of the business in the near future and discount the cash flows as such. In reality, this is what is happening - £35m a year is being set aside to fund this pension obligation.
OK - so given that I've covered the balance sheet and have found it to have no real net value (but no real liability either) what is the value of the cash flows the business can generate?
Before I value this I'm quickly going to state my general view of the business which is just my view and you may wish to adapt it in your valuation method. I don't think newspapers are dead, especially not in the tabloid, low-end of the market that the Mirror occupies. If you read the reports you can see that the loss of public sector advertising has been what has hurt revenues the most but in the long term when a recovery kicks in this will recover. Also, with the loss of NOTW and the gain of circulation Trinity should be able to hopefully increase the cost it charges for advertising as it now has a wider audience. In general, I see a lot of the issues that TNI faces to be cyclical and whilst I don't see great growth in the future I think the decline will stabilise and we will have a cash cow.
Having said that, I'm now going to be ultra-bearish in my cash flow calculation to allow a margin of safety through being conversative. I had a bit of a play with a DCF model and by assuming that the cash flows shrink by 8% every year for 10 years followed by a 2% growth rate terminally (an ultra harsh assumption I believe, as I say I think the decline is predominately cyclical rather than structural) I get a fair P/E multiple of a bit over 6. The FT says that the analyst average expected profit for 2011 is 24.2 eps, so ~£63m profit (and TNI say they expect results for 2011 in total to be 'in line with expectations', so I'm assuming they broadly make this target). Using my conservative multiple of 6, I value the cash flows as:
6 * £63m = £378m
Which dwarfs the 'real' negative equity of £4.3m I derived earlier. This gives us a total business value of ~£375m. If this was true, it implies an intrinsic share price value of 140p and a ~220% upside on what I believe to be a fairly conservative analysis. On top of this, the intrinsic value of the business should be increasing every year due to the benefit of an extra year of cash flows paying down debt and, eventually, returning value to shareholders in the form of dividends and maybe share buybacks. I believe this gigantic difference offers a huge margin of safety for investment, hence I am long TNI.
Other reference sources
http://boards.fool.co.uk/trinity-tni-half-year-results-12334968.aspx?sort=whole#12340100
http://boards.fool.co.uk/trinity-mirror-up-gt8-why-12302190.aspx?sort=whole#12314027
http://boards.fool.co.uk/trinity-mirror-tni-ims-rns-12256307.aspx?sort=whole#12257380
Risks
1) The decline is terminal, or at least worse than I'm expecting, and the company never recovers. Ipads/smartphones etc permanently replace newspapers.
2) The phone hacking scandal spreads to TNI with severe repercussions
Long at an average price of 48.7217
So I'll predominately just copy-and-paste what I said there...
Quick Summary
TNI is a newspaper stock that is priced to roll over and die - it's on a P/E of 2. I, however, a) do not believe newspapers are in structural decline and have their niche, b) think the company's balance sheet is misunderstood and in a lot better shape than it initially appears and c) think a lot more of the company's problems are cyclical than structural. The loss of a major competitor through the News International saga can only help too - the Mirror appears to be the main beneficiary of its readers.
Longer analysis
First of all, balance sheet analysis:
I'm only interested in tangible assets so I discount all the tangible/goodwill/investment assets (arguably the investments have value but they are small so I'm ignoring for the sake of simplicity) which leaves us with:
£+399.4m PP&E
£-111.2m Net Current Assets (which includes some debt repayable very soon, in October 2011)
£-156.2m Other Debt
£+0.1m Net Derivatives + Provisions position
£-73.9m Pension deficit
= +£58.2m Net Assets
Now this immediately tells me that the company's assets currently more than cover its debts, which is always a nice thing. Of the assets, £209m is in land and buildings which could be sold and leased back if cash was needed urgently, and there's also a ~£175m bank facility which is untouched to help with debt repayment timing issues. In short, there is a low risk of this company actually going bankrupt as it has ~£385m of potentially available cash to cover its ~£260m of net debt. Arguably the land and buildings are undervalued here as they are carried at cost and as far as I can see they have been on the balance sheet for some time (at least since the 2000 annual report which is as far back as I can see) so should have appreciated somewhat but let's be conservative and keep it at cost.
Now you say, I've missed off one big liability! The net tax liability of £278m looks bad but when you examine it closer you can see it's actually ok.
From Note 21 in the 2010 annual report (I found it in the end!) we can see that £241.8m of the tax liability is due entirely to the intangibles. Divide this by 0.27 (the tax rate) and you get £895.5, which is the total amount of intangibles on the 2010 balance sheet. Hence, this tax liability isn't 'real' as such - I believe (and please correct me on this if I'm wrong as my accounting knowledge isn't great) that if the intangible assets were just written down to £0 (which is the value I'm assuming in this evaluation) that the £241.8m of tax liability would become £0, so I'm going to mentally write this off too given that I assign the intangibles no value in this analysis. Hence the actual net tax liability is:
£-62.5m
Given our £58.2m net assets from before leaves us with a grand total negative equity of only £4.3m, so the balance sheet is, in my view, almost perfectly balanced in terms of 'real' assets to 'real' liabilities.
A quick comment on the pension contribution: Having looked at the assumptions in the pension actuarial calculation they don't seem particularly excessive to me so I don't believe they'd be grossly overstating/understating the value of the assets so I'm happy to take the stated liability here as the 'true' liability. Another way to treat this would be to ignore it from the balance sheet and assume that the pension plan negatively impacts the cash flow/profitability of the business in the near future and discount the cash flows as such. In reality, this is what is happening - £35m a year is being set aside to fund this pension obligation.
OK - so given that I've covered the balance sheet and have found it to have no real net value (but no real liability either) what is the value of the cash flows the business can generate?
Before I value this I'm quickly going to state my general view of the business which is just my view and you may wish to adapt it in your valuation method. I don't think newspapers are dead, especially not in the tabloid, low-end of the market that the Mirror occupies. If you read the reports you can see that the loss of public sector advertising has been what has hurt revenues the most but in the long term when a recovery kicks in this will recover. Also, with the loss of NOTW and the gain of circulation Trinity should be able to hopefully increase the cost it charges for advertising as it now has a wider audience. In general, I see a lot of the issues that TNI faces to be cyclical and whilst I don't see great growth in the future I think the decline will stabilise and we will have a cash cow.
Having said that, I'm now going to be ultra-bearish in my cash flow calculation to allow a margin of safety through being conversative. I had a bit of a play with a DCF model and by assuming that the cash flows shrink by 8% every year for 10 years followed by a 2% growth rate terminally (an ultra harsh assumption I believe, as I say I think the decline is predominately cyclical rather than structural) I get a fair P/E multiple of a bit over 6. The FT says that the analyst average expected profit for 2011 is 24.2 eps, so ~£63m profit (and TNI say they expect results for 2011 in total to be 'in line with expectations', so I'm assuming they broadly make this target). Using my conservative multiple of 6, I value the cash flows as:
6 * £63m = £378m
Which dwarfs the 'real' negative equity of £4.3m I derived earlier. This gives us a total business value of ~£375m. If this was true, it implies an intrinsic share price value of 140p and a ~220% upside on what I believe to be a fairly conservative analysis. On top of this, the intrinsic value of the business should be increasing every year due to the benefit of an extra year of cash flows paying down debt and, eventually, returning value to shareholders in the form of dividends and maybe share buybacks. I believe this gigantic difference offers a huge margin of safety for investment, hence I am long TNI.
Other reference sources
http://boards.fool.co.uk/trinity-tni-half-year-results-12334968.aspx?sort=whole#12340100
http://boards.fool.co.uk/trinity-mirror-up-gt8-why-12302190.aspx?sort=whole#12314027
http://boards.fool.co.uk/trinity-mirror-tni-ims-rns-12256307.aspx?sort=whole#12257380
Risks
1) The decline is terminal, or at least worse than I'm expecting, and the company never recovers. Ipads/smartphones etc permanently replace newspapers.
2) The phone hacking scandal spreads to TNI with severe repercussions
Long at an average price of 48.7217
First post!
Hello and welcome to my investing blog. I assume you're probably me, as I've decided to start this blog for my own benefit in order to keep a record of my thoughts and track my progress through managing my own investments. If you're not me then hello! How did you get here?!
In case you're wondering the blog title is a pun on the classic value investing text 'The Intelligent Investor'. It's because, right now at least, I've pretty inexperienced and expect to make a large number of dumb mistakes in my investments. All part of the fun though, right?!
Anyhow I wish I'd done this a bit sooner - I currently hold 10 individual shares and need to write up my investment thesis for each of these. Let's get to it...
In case you're wondering the blog title is a pun on the classic value investing text 'The Intelligent Investor'. It's because, right now at least, I've pretty inexperienced and expect to make a large number of dumb mistakes in my investments. All part of the fun though, right?!
Anyhow I wish I'd done this a bit sooner - I currently hold 10 individual shares and need to write up my investment thesis for each of these. Let's get to it...
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