Tuesday, January 3, 2017

2016



2016 looked like this:
 

My trailing four year pre-tax return is 32.6% which I suppose means that the market owes me two or so years of back pay. Future Bright and Flybe account for most of these payables and I'll no doubt have to wait until such time as their results become machine readable. 

In the meantime, I have acquired shares in Rentech and LSB Industries to underpin the 2016-2018 investment cycle. Over the next few days I will sketch out these two ideas and also update the Flybe idea.

Happy New Year 

128 comments:

  1. Happy new year. And be the year a profitable one for you.

    ReplyDelete
  2. Happy new year. As always, thanks for the blog.

    ReplyDelete
  3. Happy new year, Thanks so much for the blog.
    Keep up the good work !!

    ReplyDelete
  4. Hi there Red, was Avesco not in your portfolio during the course of 2016? They had a VERY good month in December. Thanks for the blog, happy new year.

    ReplyDelete
    Replies
    1. I owned it for two or three months in 2014 and wasn't clever enough to hold on to it.

      Thanks for reading, gents. Happy New Year

      Delete
  5. Love this blog - thanks so much and happy new year!

    ReplyDelete
  6. Happy New Year! May your future in 2017 be bright!
    Looking forward to your updated thoughts on LSB and Rentech.

    ReplyDelete
  7. Hi Red! Why did you choose Zargon's debentures over the common? Now that Zar is covenant free, bank debt free, with enough cash to repay $19m of the Debentures, downside looks limited and I would think the common has more upside than the debentures? Especially if a takeover is a short term possibility at this valuation level?

    ReplyDelete
  8. Well I'm mostly in the debentures as an income-earning long-crude hedge rather than as an investment in its own right.

    I think the debentures are money good and also work better than the common if WTI is less than $52 WTI or over $60 over the next couple of yeara.

    I think I'll see how the vote goes and what Trump brings before I think more seriously about the common. (TBF junior E&Ps are not really my thing so it'll take some doing before I commit to the equity).

    ReplyDelete
    Replies
    1. This makes a lot of sense, thanks Red, and yes, junior E&Ps are indeed a game of their own!
      Otherwise, did you have a look at GAIA US? When I studied this "Netflix of Yoga and conspiracy vids" play, I thought to myself, this is a quintessential "quinzedix" candidate: Tangible book value margin of safety (cash, real estate, inventory, subscribers), great underlying business economics (high ROCE and negative working capital) and strong willed owner operator with stellar track record, and levers/metrics that you can model pretty well with a bit of research. You get ultra high growth for close to nothing, a rarity in the US tech world. 3 bagger potential if management guidance is not off. Really, I think it is your turf...

      Delete
    2. You're quite right - this is worth looking at. Thanks for mentioning it to me

      Delete
    3. I've posted some basic models of the business at posts 41 and 96 of the CoBF thread. They haven't prompted much discussion or alternatives models, so I'd be interested in your thoughts on the economics of the business.

      Delete
    4. Nice, thanks. Read through the thread and some of the primary material.

      My first impressions of the "high" case =
      https://www.dropbox.com/s/smwcf36cf34v2h9/Gaia.%20basic.png?dl=0

      I've stripped out Yoga -- I don't believe in it as a defensible vertical - and have instead accounted for it via library at cost.

      For Seeking Truth I think CAC goes up and LTV goes down as subscriptions grow.

      Current price looks ok if one thinks 300K ST subscibers is a cinch and if one assumes also that the 3 year stickiness for ST subs holds up. It's all new, of course, so only time will tell.

      Delete
    5. This comment has been removed by the author.

      Delete
    6. I may be misunderstanding your spreadsheet, but how did you get to Seeking Truth CAC of $30? I think it's much higher per ST sub.

      It makes sense that the business would get the low-hanging fruit first, so CAC goes up and LTV down over time. On the other hand, perhaps word -of-mouth subs increase and they refine their methods, thereby lowering CAC. Hard to say now, and I don't know what the base rates are for this type of business.

      Ultimately, I agree that $8.60/share isn't a screaming buy unless you're convinced about Seeking Truth's growth.

      Delete
    7. ST acquisition cost = 40% x LTV = $130/sub
      Maintenance of subsciptions by adding new members = $130/3, $130/2.6, $130/2.23 etc = $43, $53, %58 etc
      Maintenance by retention of existing subs: rule of thumb = 1/5 of initial acquisition cost = $9, $11, $12 etc
      Half and half => $30

      However, I've mistakenly understated the cumulative cash burn for growth so -85 million to 750K subs in exchange for a business that would earn maybe $22MM as a standalone and maybe $30 to $35MM as a segment in an acquirer's business.

      --

      As you say, it's all a bit hazy. Easy, though, to underestimate the audience size, just as it would have been easy to underestimate the reach of, say, the National Enquirer or Zero Hedge.

      Delete
    8. If I'm following you, the second line in your spreadsheet is not a raw CAC but rather an annualized number that accounts for the fact that when LTV is 3 years, you only need to replace 1/3 of your subs every year in steady state. But why do you then reduce that number again by multiplying by 1/3 to get annual maintenance advertising spend?

      To use the assumptions you provide above and in your first column, let's assume (i) it costs $130 to get a new ST sub and 1/5 of that ($26) to "retain" an existing sub or reacquire a former sub; (ii) you're trying to calculate steady-state advertising costs at 300,000 ST subs; (iii) LTV is 3 years; and (iv) the replacements for churned off subs are 50% brand new subs and 50% retained/reacquired subs. In that scenario, you'd need to replace 100,000 churned off subs per year. Shouldn't you use raw CACs to calculate that, i.e., wouldn't the cost be 50,000*130 + 50,000*26 = $7.8 million?

      I also agree with you and Chevalier that it's easy to underestimate the market for ST content. To add to the examples, look at how many many people spend money on astrology and fortune telling.

      Delete
    9. Oof.. you're quite right: 7.8M, or 32% of revenue. That's a big difference.
      I suppose we'll see how the inputs evolve over time and whether this turns out to be a plausible business model.

      Delete
  9. www.publicpolicypolling.com/main/2013/04/conspiracy-theory-poll-results-.html
    TAM easy to underestimate... 4% of US voters (voters!) think lizard people control our societies, and 7% think Man did not land on the Moon.

    ReplyDelete
  10. Tentative GAIA Fair Value today. Net Cash $62.5m+ New tech biz stake acquired for retention $10m+ Real Estate: historical cost 2008 $19m, rent $1.9m half space so worth ~$30m today + Video library 7500 titles x~$4k= $30m: TOTAL $8.75 per share. Now remember to add the current subscribers: were 180k Q3 shd be 200k Q4. LTV say $250: thats $45m to $50m so another $3 or $3.3 =$12.06.

    ReplyDelete
    Replies
    1. That's fair. If you like this you may like Cambium Learning Grp notwithstanding the uncertainty abt the Common Core curriculum
      http://phx.corporate-ir.net/External.File?t=1&item=VHlwZT0yfFBhcmVudElEPTUyMzY0NzN8Q2hpbGRJRD02NDUwMDI=

      Delete
    2. Great! Thanks Maestro, I will have a proper look at this Cambium idea.
      Changing topic, do you sometimes buy deep value/NCAV plays? I quite like CED IM Caltagirone Editore, Italy. Second largest newspaper business in Italy (not such a bad biz out there because fragmented SMEs, still good physical readership). Ebitda positive. No debt, Net cash 1.03, Liquid assets (bloc of shares in Unicredito and Generali):.64 so Total liquid assets 1.67, trades at 0.76, I think it could be taken private by owner operator this year just like his previous discounted holding.

      Delete
    3. What do you mean by "fair value"? It looks like you're aiming for a liquidation/run-off value, but I suspect if the business model isn't viable, the film library's book value/production value isn't going to hold up. If you put the business in run-off, you also need to account for the costs of running the business to collect the LTVs you mentioned, which likely also will shorten as new content production is eliminated. They are also going to burn some cash over the next year determining whether the business model works. Long story short, if the business model doesn't work, I don't think the assets + cash will fetch $12/share in a sale.

      On the other hand, if the business model does work, the film library + (growing) sub base are likely worth much more than your numbers to a buyer. How much to pay for that chance is, I guess, in the eye of the beholder.

      For what it's worth, I also second the Cambium recommendation. It's already generating substantial cash flows and there's a good chance it will be sold in a few years when the NOLs are used up. There's also a two-year old VIC writeup on it that I found useful.

      Delete
    4. KJP, re GAIA I totally agree with your comments, not a Fair value nor a Liquidation Value estimate; I was just throwing some numbers mixing tangible and less tangible assets around really, but backed on research. May I add bull thesis feeds on CEO's track, skills, personality, guidance and vista. Looks to me he is grooming GAIA for a medium term exit. Not your average Corporate America C-suite guy for sure!

      Delete
    5. Looks like it has turned ebitda negative but persistence of the share buybacks has me interested. Grazie, I'll hae a look.
      In the spirit of reciprocity, http://www.investegate.co.uk/dolphin-capital-inv--dci-/rns/half-year-report/201609300700282781L/ is worth a look

      Delete
    6. DCI? Well I am already loaded...Light at the end of the tunnel at long last!

      Delete
    7. @Chevalier, et al. A fair number of interesting companies in Italy. I prefer Caltagirone parent to Editore just because I think more value will ultimately accrue to the former.

      Have you ever looked at Fincantieri? Spun off from Italian state under some duress, backlog of ~22 bln Euro/5+ years work dwarfs EV, with much of the debt project-specific and some seeming flexibility on the employment side (closing of 1 Brazil yard). They have global leadership in large cruise ships and what I would consider to be moderately attractive position in defense, though shipbuilding is not such a great business. Plans for lower debt and a dividend to be paid in 2017 (I contacted IR and they confirmed this was still the plan, though the recent shopping spree--Varg and STX--makes me wonder). I didn't think it was a "Red" kind of company because the levers of valuation are somewhat obscure; I've been trying to come up with a number that I feel comfortable with, and my insufficient answer at .38 and .52 was "more, probably."

      Delete
    8. Are you involved in this, ADL?
      http://conturaenergy.com/wp-content/uploads/2016/10/Contura-Energy-Inc.-Disclosure-File-7.26.16.pdf

      Delete
    9. @Red: I was vaguely aware but didn't look at it; my too-shallow take was that valuation was a little rich given prospective headwinds. Instead, I was looking at KIRY (a reluctant pass) and waiting to see where EXXI trades post-emergence. I'm not clever or hard-working enough to do as many deep dives and pass on as many things as I should; at best, a fox trying to be a hedgehog, but maybe likelier a slug.

      That said, I am taking another look at SCOO, which I owned for a little post-emergence and then sold because I was not (and am still not) certain what the actual profitability of the company can be, esp to an acquirer. There's messy post-BK adjustment, and then there's inscrutable (to me!) working capital slosh.

      Am quite keen on Cathedral Energy, which continues to restate its goal of returning to being a dividend paying entity, has perhaps set its debt issues aside, and seems to me to support its claim of modest differentiation by having somewhat higher margins then pure commodity service cos. But again, this is a shallow interpretation and likely, as they say, TMI...

      Delete
    10. Hello Red, CED (Caltagirone Editore) is under offer by the owner at EUR 1. Not a bad IRR, especially risk adjusted, but level is a disgrace (NTA 1.72!)Did you have a bite in the end? Cheers mate

      Delete
  11. That's quite a heterogenous basket of names :)

    ReplyDelete
  12. Red: Two that may interest you:

    1. Par Pacific Holdings -- This has been written up in several places, so I'll keep it short. I think (i) current prices are at a decent discount to normalized EBITDA/FCF; and (ii) if the other refinery in Hawaii shuts down, any additional throughput at the Hawaii refinery (currently ~78k barrels/day with 94k capacity) would be at very high incremental margins. Assuming Laramie stake is worth ~$150 million, NOLs are just icing on the cake at current prices.

    2. Quorum Information Technologies -- Sells dealer management software on a subscription basis (so high recurring revenue) to car dealerships, primarily in Canada. They have a pathway for continued growth through existing relationships, are already at least cash flow breakeven and overcapitalized, and only trade at a run-rate EV/Recurring Revenue of, at most 3x (depending how you look at what they call "Support Plus" or "add-on" revenue, the current multiple might be more like 2.5x). By year-end 2017, I think EV/Recurring Revenue at current market cap could be around 2.0x. There also appears to be latent price power. In short, the company appears to be creating a lot of incremental value with no cash burn and there is a runway for growth.

    ReplyDelete
    Replies
    1. Thank you, KJP, I'll have a look. PARR rings a bell from two or three years ago but I anyway need to review all the refiners and think about LEAPs and such. Quorum is new to me.

      Delete
    2. KJP, looks to me that TSO > PARR along every dimension. Might be worth a look.

      Delete
    3. Thanks for the heads up. I will take a look at Tesoro.

      Delete
  13. TSO looks very cheap. I'm not refining/marketing expert, so I feel like I must be missing something.

    Is there a disconnect between what TSO management has been claiming and the Western Refining acquisition? In the December 2015 Investor Day presentation, management targets $2.5 billion to $3 billion of refining + marketing EBITDA by 2018 using "mid-cycle" numbers (see slide 17). Some of this appears to be from marketing acquisitions (see slide 57), so let's say the organic target was $2.5 billion. In the fall of 2016 when the Western Refining deal was being negotiated, the company had an enterprise value of around $10 billion ($9.6 billion equity and $400 million net debt excluding TLLP debt). The Investor Day valuation of TSO's stake in TLLP is extravagant in my opinion, but if we cut the IDR multiple down to 20x and take the TLLP units at $50 share, you get about $3.5 billion for the TLLP stake. So, the market is valuing TSO's marketing and refining assets at $6.5 billion. If management's estimates for 2018 are anywhere near right, then the market is valuing those assets at about 2.5x "mid-cycle" EBITDA. If you really believed that, why would you use your shares as currency to buy assets for 5.7x post-synergy EBITDA?

    ReplyDelete
    Replies
    1. https://www.bloomberg.com/news/articles/2018-04-30/marathon-to-buy-andeavor-in-23-3-billion-u-s-oil-refining-deal

      Delete
  14. Well, I think if we treat both sides of the equation in the same way, i.e.
    (TSO EV minus value of TLLP) divided by 2018 refining + retail EBITDA; and
    (WNR EV minus value of WRLP) divided by 2018 refining + retail EBITDA
    then TSO is paying ~3.25x pre-synergy EBITDA (and 2.6x post-synergy EBITDA) for ENR -- give or take

    ReplyDelete
  15. Yes, you're right. It helps to compare apples to apples, unlike what I was doing.

    Do you have a view on the refiners generally?

    ReplyDelete
  16. What brokerage does one use to pick up Zargon debt. Not supported on interactive :(

    ReplyDelete
  17. Red,
    I see that options and shorts are not your main passion, but have you tested the notion of buying puts on CAT? At some point the Non-GAAP excuses should run out.
    Also, considering your industrial+far east holdings, it might serve as an indirect hedge.
    Would love to know if you have any thoughts on that.

    ReplyDelete
    Replies
    1. Hi and thanks for the suggestion

      CAT short:
      a) be right about the management accounting; and
      b) be right about the capex cycle;and
      c) be right about the earnings multiple and/OR the dividend yield the market's willing to offer; and
      d) be right about the timing

      If right about all 4, make 5x your money
      If wrong about any one of these, lose 1x your money (2x if we count opportunity cost as a real cost).

      Is that it, essentially? I know nothing at all about CAT so I'm going to rely on your guidance on this.

      Delete
  18. Your scrutiny would be appreciated, I'd be glad to write more when taking a breather from work.
    Considering the improvement in Macau (e.g., WYNN's latest results) I'm also trying to fit in a reread of your FB idea.
    For now I'll just mention that regarding earning multiple, CAT is X33 its own ftm guidance, which it consistently fails.
    And that puts instead of short would limit the potential loss, reduce opportunity costs, and solve the timing issue.
    So it might boil down to accounting.

    ReplyDelete
    Replies
    1. As I know from personal experience, puts do indeed limit your potential loss to 100% of your investment. And they solve any timing issue if the things you expect to happen happen before the put expires.

      Delete
    2. anon,

      I've just finished reading two write ups of the CAT short thesis -- one from 2013 and another posted to seeking alpha two days ago. I've also looked at a few years of filings and I now more or less understand the broad outline of the short case. No need, in other words, for you to spend precious time reproducing it for me here if your view accords with those.

      It looks like a fine idea. Thanks again for the tip.

      Delete
    3. Thanks for exempting me :) Still trying to catch up with my reading on FB. Any thoughts about the idle land investigation? It should have lasted 30 days, from Dec 21th.
      The surcharge is not significant, but the disparity between the story told by the company and the claims of the authorities could be less negligible, in terms of political implications - is CCM falling out of favour with the party? and how could that effect the business?

      grateful as always. glad to finally able to give back an idea.

      Delete
    4. The authorities want everything built at the same time for obvious reasons. The company says its plot has structural problems. These are not inconsistent positions and are easily resolved via inspection. The real issue that I have about that land is that the company should by now have sold a part interest in the project to a construction company. It is discouraging that it hasn't. Hengqin Island itself is doing well, however.

      Delete
    5. re: politics
      CCM is connected to Macanese -- not Chinese - politics. A certain number and category of projects were reserved for Macanese businesses and his standing in Macau no doubt helped the company be shortlisted -- and perhaps selected -- for these projects by the Government of Macau. Beyond and after that, however, one would expect that the relationships/understandings/frameworks that matter are institutional rather than personal -- i.e. between the GOM, the Government of Zhuhai and the Central Government.

      Delete
  19. SNC - Ever looked at this speciality insurer? Combines a insurance brokerage type of operation that generates 70% of earnings that are growing double digits, with a quasi auto insurer that generates the other 30?%. The former carries little to no liability risk and has a 25+ year track record of profitability and is essentially a 5% toll collection on the insurance premiums generated. The latter has a combined ratio of 85%, one of the best in the industry, and is a short tail, low vol operation that was profitable even during 2008 crisis. I reckon the former can get 18-20x PE and the latter atleast 15x. Together with the insurance float, the fair value would come to 2.5x the current market cap. Little debt, pays a dividend (2%) and is doing buybacks (pending 4% of mcap). A-rated insurer that listed in 2014 at $11.98 vs. $13.54 current price. Earnings up 70% since listing.

    ReplyDelete
    Replies
    1. I hadn't heard of it until you mentioned it. It looks interesting for sure. Thanks for mentioning it to me.

      Delete
  20. Hi Red,

    Just came across your blog a couple days ago and interested in learning more about the Future Bright story.

    The company seems to have reported much better initial 2016 results when compared to 2015. Am I reading into this correctly or are there special circumstances that I'm not yet seeing here as I continue my DD.

    If 2017 brings a net profit, it seems likely that the stock could rerate quickly, although I really have no experience with the Hong Kong market yet.

    ReplyDelete
  21. Hi Aurelien. Thanks for reading.

    Sccaffolding for valuation is here:
    http://quinzedix.blogspot.com/2016/01/2015.html
    I'd start with the 2nd column, "low case", and go through each line item.

    I'd caution against thinking of this as a simple proxy to GGR and/or as a swing trade. Instead, I'd fix a point on the horizon, estimate the FCF, use 30% of FCF as a proxy for the dividend, discount it back, and see if that works for you.

    ReplyDelete
    Replies
    1. Thanks. Will take a look. And what exactly is GGR?

      Delete
    2. GGR = "gross gaming revenue"
      http://www.dicj.gov.mo/web/en/information/DadosEstat_mensal/

      Delete
  22. Red, how do you value DCI now? NAV seems 30p. Is the next catalyst the selling of other 2 core holdings?

    ReplyDelete
  23. Sorry to say that I'm not sure I understand the question
    Have you read this?
    http://www.investegate.co.uk/dolphin-capital-inv--dci-/rns/posting-of-circular-and-notice-of-egm/201612020700087594Q/

    ReplyDelete
    Replies
    1. Yes, I read. I think core asset will be easier to sell and cut debt. Given BTEM is selling, I use mid point 17p as projected target in 3 years, pps <7p maybe a good entry. The bigger issue for me is the ability to sell all of the assets even taking a 50% haircut! Do you expect such large discount during analysis?

      Delete
    2. Ok thanks for clarifying. I don't think 50% is a reasonable haircut. Maybe 20% is fair all things considered.

      Delete
    3. 32% discount for pearl island might suggests that the likely range for shareholders is nearer the bottom end of the 12-22p range, that's if they can even sell them all.

      Delete
  24. Have a look at ARL AU (Ardea resources). Cobalt/Nickel/Zinc/Gold resource. US$30m market cap with insitu value of US$100 bn. Management owns a decent chunk and Cobalt is a key bottleneck for Electric vehicle batteries (demand obviously expected to soar, but supply is super concentrated with 70% coming from a tiny African country, Democratic republic of Congo, which is anything but democratic and basically bankrupt). Supply takes time to come and if this major supply gets disrupted, Cobalt prices will go parabolic (already up 56% YTD). There is already a deficit in Cobalt supply vs demand, and hedge funds have cornered 17% of physical cobalt supplies. Very cheap, net cash company. Resource is located in Australia within the super rich mineral belt of Kalgoorlie.

    ReplyDelete
  25. raging capital just bought 500k more shares of RTK.

    ReplyDelete
  26. Red - You said you will write a piece on Flybe, eagerly waiting....

    ReplyDelete
  27. Hey Red,

    I was wondering if you have ever looked at 1538.HK - Zhong Ao Home Group. Seems market is capitalizing O2O losses or believes ~5x forward core EPS is appropriate vs teens for larger peers. Seen sell side reports placing a 30% discount on it vs peers for "short listing period" or size reasons- both should be resolved in a few years as they roll up smaller players at 6x eps. VIC has a solid writeup. Kinda reminds me of the asset-EBITDA conversion play at Haichang- sell side drives the stock and creates a somewhat predictable PT ramp...

    Hope all is well.

    RubyCap

    ReplyDelete
    Replies
    1. Hi RubyCap. I'm well thanks. I've looked at Zhong Ao and decided that it's not right for me at this time. Here's a link to an overview of the theme/sector that I read at the time that I was thinking about it

      https://www.dropbox.com/s/zk9jvz0k8p3csiu/Property%20Management%20Services%20-%20Primer%20June%202016.pdf?dl=0



      Delete
    2. Appreciate the link. Also wanted to thank you for the FMC idea last year. A clean double since then. It and Olin have really carried things for me. One of these days (years?) I'll be able to reciprocate with an idea!

      Cheers,

      Rubycap

      Delete
    3. You've already been very kind in sharing ideas with me & I appreciate it

      Delete
  28. Hi Red,

    Has been any news for CVR Partners today? Or just the market follow your movements... :)

    ReplyDelete
  29. Well it's 3 weeks or so away from reporting and dividend reinstatement so I suppose it's not out of the question that it fills in the gap between now and then. My firm belief is that total return from here is likely in the 4x range between now and 2020 so I'd encourage anyone not otherwise involved in nitrogen (and not constitutionally averse to cyclical stocks) will give this one a fair look between now and the end of the month.

    ReplyDelete
    Replies
    1. Total sense. I'm anxious waiting for LSB results. Had to be the time for USA fertilizers.
      Thanks a lot.

      Delete
  30. Hi Red, are you following BXE?

    ReplyDelete
    Replies
    1. I followed it for a brief period last year but no longer. I own a couple of fertilizer stocks that will behave as though O&G derivatives over the next couple of years so BXE's of no real use to me at this point.

      Delete
  31. right, I should have figured it out.

    BTW, this is from today, OCI's trading update:

    Market Environment
    Selling prices for urea have been volatile, with signs of recovery in the beginning of the year, but declining in March due to a delay in the start of the application season in both the US and Europe, lower import demand from India and reconciliation of additional capacity. We believe current low prices are not sustainable, and below break-even costs of marginal producers in China and elsewhere.
    The medium-term outlook for the supply demand balance continues to look positive. We expect global urea capacity additions slowing to below trend demand growth over at least the next four years, even before taking into account likely further net capacity closures in China. Urea exports from China are expected to be structurally lower than the levels in 2016 going forward, with potential rebounds in exports capped by environmental curtailments and increased focus on profitability of the industry.
    Nitrate prices have also declined due to delayed demand in Europe, but have been more resilient than urea. Ammonia prices reached significantly higher levels during the first quarter compared to the previous quarter, and remained firm into the beginning of the second quarter of 2017, reflecting tighter global supply.
    Methanol prices have improved steadily since reaching a trough in the first quarter of 2016. In the second quarter of 2017, prices have corrected somewhat, largely due to the return of supply from various methanol plants following turnarounds, and reduced operating rates at some Methanol-to-Olefins (MTO) facilities in China. Nevertheless, current price levels are higher than those achieved in 2016 and continue to generate healthy returns for our operations. Global demand is expected to remain underpinned by the MTO sector, which is benefiting from improved economics and additional MTO capacity starting up.

    Thanks for the blog,
    L.

    ReplyDelete
  32. Hey red, any idea what's going on at CVR Partners? Price went to 3.4 USD today and seems very appealing unless I'm missing something. Is the base value you assigned to UAN including dividends?

    Finally, Flybe at 34 GBp seems very cheap. Someone mentioned it dropped out of an AIM index... and the non-numerate masses seem to price in losses for quite some time to come.

    Care to speculate?

    Thanks a lot for this blog. It's truly inspirational.

    ReplyDelete
  33. Any update on Texhong Textiles? Do you still own this stock? Certainly seems cheap here.

    ReplyDelete
  34. I don't own it anymore but I expect that I shall soon enough.
    http://english.vietnamnet.vn/fms/business/182524/us-fashion-industry-sours-on-sourcing-clothing-from-vietnam.html
    http://www.barrons.com/articles/best-pacific-international-crashes-28-in-past-2-days-buy-on-dip-1500269513

    ReplyDelete
  35. Hi Red.

    Texhong haven't published any news. And the shares are falling from two months ago. Why do you think this is happening. International cotton prices and best pacific results?

    ReplyDelete
  36. Missing your posts, lack of ideas or lack of time for writing? Seems tough to find value out there... Btw, always interested in reading more "investment process" posts if you are open to sharing more about your strategy for finding/researching/forecasting ideas.

    ReplyDelete
    Replies
    1. I would second this, especially the interest in learning more about your process.

      Delete
  37. Hey red, any interest in the current OSV trough? What do you think of HOS and competitors?

    Cheers,
    Peter

    ReplyDelete
    Replies
    1. Peter -- Straight bet on above-LT-trend oil prices, no? That's not really my thing. I'd like it better if there were some other business attached that was worth more than the company's debt. (plus, I don't really like how HOS present themselves in their investor materials)

      Delete
  38. Hey red,

    Any updated thoughts on future bright? Also, miss your excellent blog, ever plan to get more active here again?

    ReplyDelete
  39. Is this blog dead?

    ReplyDelete
  40. News on Flybe:

    https://www.reuters.com/article/us-stobart-flybe-deal/stobart-in-talks-about-potential-deal-with-airline-flybe-source-idUSKCN1G61W1

    Red, maybe bad news because it comes to soon. Flybe it´s one or two years to show the great potential it has. Without any shareholder of reference in Flybe it´s more dificult to obtain a good adquisition price.

    How do you see it?

    Thanks.

    ReplyDelete
    Replies
    1. From Stobart's press release that I posted in the Flybe thread it looks like it's a potential plan to evade the negative consequences if Brexit. Stobart is Irish. The idea seems to be to create a holding company such that just over 50% of Flybe shareholders will be EU nationals. If it works -- and it's not clear that it would; it's not clear that even Easyjet's attempt at preserving itself will work -- then it would take some risk off the table. In any case, I think that -- all things considered -- a 100p offer would be fair. Flybe's Chairman has a reputation and track record of being fair to shareholders in the face of takeover attempts.

      Delete
  41. Chairman's blog
    http://laffins.net/

    ReplyDelete
    Replies
    1. My assessment of him is in part based on this episode
      https://www.theguardian.com/business/2010/jan/24/laffin-mitchells-butlers-departure

      Delete
    2. Incredible history at M&B. It's looks like a hollywood film. My opinion about Laffin was almost the opposite. I didn't know anything about him, but the way the company was lossing money and the departure of the last CEO biased my opinion.

      Learning a lot from your blog. Thanks a lot.

      Delete
  42. Red,

    FBH just published an update for the 2017 year. The results seem extremely poor and they are to far from the margins they achieved in 2011, 12, 13,.. They were strugling with the low visitors and GGR in 2015, 16,... but the results didn´t come last year with the recovery of macay GGR and visitors and food souvenir business still burnings cash. They have good investments assets but it´s look like core business can´t become what it was.

    What is your outlook for 2018, 2019?

    Thanks.

    ReplyDelete
  43. This is the source of the GGR data that everyone uses
    http://www.dicj.gov.mo/web/en/information/DadosEstat_mensal/index.html

    Lets do this instead:
    What is Hengqin worth?
    What is Yellow House worth?
    Is the food & catering operation worth less than zero?

    You tell me and we'll take it from there.

    ReplyDelete
  44. Red,

    I think Yellow House could be worth as book value, more or less HK$530 million.

    To value Hengqin is very difficult for me:

    We could say food plaza is going to have 100 restaurantes paying more or less HK$4 million each one at year for rent (asumming that each restaurant pays HK$400.000 monthly), that´s HK$400 million, with ocupancy rate at 75% it´s equal to HK$300, less 10% maintenance spends HK$270, at 5% income yield = HK$ 5,4 Billions, less HK$1 billion contruction works... we have HK$ 4.4 billions. For sure it´s an irreal value, I haven´t enough information for value this asset properly.

    Catering & food could value HK$30 million anual income x 10 TIMES = HK$300 million.

    How could I value Hengqin more accurate?

    ReplyDelete
    Replies
    1. Or you could calculate this way:
      Yellow House sq ft = 21,986
      Yellow House rent = 30 million
      Yellow House book value = 19x rent

      Hengqin = 139,625 sq ft
      Hengqin rent at 85% of Yellow House rate = 1365/sq ft = 162 million
      Hengqin value = 19x rent = 3.077 billion
      less construction cost of 250 million = 2.5 billion

      or you could look at Hengqin residential prices today (p 21)
      https://www.dropbox.com/s/vv7b1ie4f87uynh/Hengqin%20Market%20Rates%20Jan%202018.pdf?dl=0

      50,000 sq m x 36,000 RMB/sq M x 1.2 exchange rate = 3.24 billion
      less 250M construction cost = 3 billion

      So approx 2.5B to 3B value for Hengqin. Does that value appreciate over time? Quite likely.

      3.5B (Hengqin) + 0.58 (Yellow House) = >4B of investment property = >$5.75/share


      --

      30 million in food and catering earnings means that you think that the restaurants that existed in 2014 have permanently lost 80% of their earnings power and/or that the 20+ new-and-still-open restaurants are worthless or have negative value. Embedded in that, I suppose, is the belief that GGR and visitations are in long term secular decline. How have you come to that conclusion?

      Delete
  45. I read somewhere, HK$250 MILLION was the price of the land, paid 2 years ago. And the construction cost I thought it would be around HK$ 1 billion.

    The restaurants bussiness... they are passing throw tough times and I really don't know If they can turn around the business.

    Maybe they have to change the business and become an investment business.

    Thanks for explaining.

    P.D I think Seedorf hasn't watched any depor matches this season. He's completely lost.

    ReplyDelete
    Replies
    1. I don't agree wih any of your assumptions about the restaurant business: I don't see it as a "turnaround", in the sense that that there's something to fix or to do. I don't think there's any evidence of that -- at all.

      Do let me know if you see any evidence that the restaurants are in trouble.

      ---

      Clarence looked lost on the touchline in the 3-0 game

      Delete
  46. Hi Red,

    Do you have any new thoughts on HA? Seems really undervalued but risks have gone up, wondering how you see it?

    ReplyDelete
    Replies
    1. Hi -- It's on my watchlist for sure. As it stands I think one can make a strong case that this is an $80+ stock in a couple of years. The risk, however, is that US airlines are now beneficiaries of the tax cut legislation and that may spur an aggressive industry-wide expansion of capacity. I know that LUV thinks it can take on HA's inter-island operation but I haven't combed through the thoughts of the other players. I hope this helps.

      Delete
    2. Markets are funny. Was market really shocked by LUV announcement? Q1 numbers were amazing, this is really cheap.

      Delete
    3. The numbers will get better as they phase in the neos. Potential entry of LUV has been the issue for the last three or four years and LUV now says, "hey we might get involved in the inter-island business, too". So every time they announce that investors get the willies and leave. Sorry, just saw this now.

      Delete
    4. I think AZUL is good value here. THree year outlook of plus 60% ASM, minus 3 BRL cents in CASM ==> $60/ADR at 3.50 BRLUSD

      Delete
  47. Hi Red,

    I want to ask you if you know Staffline. Recent drop in the shares but outlook very positive. Endurable bizz in the crisis and target of growing 20% anual till 2022. Trading at PER 8. It´s look like fantastic opportunity and maybe triple in 4 yours.

    Thanks.

    ReplyDelete
  48. Hi Red,

    Enjoyed reading AZUL annual report. Very good information there. Management seem very professional. Fantastic oulook in spite of FX exchange.

    ReplyDelete
    Replies
    1. Neeleman founded Jetblue and Westjet. He made a mistake with E195s, just like Flybe but he has since corrected it. Best way to approach it is to start with Azul's stake in TAP and cash-minus-10-weeks-revenue and then look at the implied EV/EBITDAR ratio where EV inludes rent x 7.

      Delete
    2. Oops - also set aside the points program at the same EV/Sales ratio as Smiles SA

      Delete
  49. Red,

    Didn´t understand "cash-minus-10-weeks-revenue", could you explain it a little more?

    Thanks.

    ReplyDelete
  50. Airlines generally need to hold cash equivalent to 10 weeks of revenue for working capital purposes. So that cash is not excess; it is an integral part of the assets needed to operate the business. Any cash above that level could be considered excess and can be subtracted from gross debt to arrive at an EV calculation

    ReplyDelete
  51. https://www.businesswire.com/news/home/20180627006349/en/

    ReplyDelete
  52. Just Hainan needs to sell,isn't it?

    ReplyDelete
  53. Hi Red,

    About FBH results: For H1 2018 Gross operating profit, excluding food souvenir and gain/losses in investment properties, was 80M (15.7% margin and growing 30% from 2017) but just administrative expenses were 80M and finance cost 5,5 and growing. I can see lot of value in properties, but in restaurants, catering, and food souvenirs they are losing money despite the strong rise in GGR and visitor inflow from 2015/16.

    Would you mind to give me your perspective in the restaurants, catering, and food souvenirs?

    Thanks.

    ReplyDelete
  54. Mind sharing the quick pitch on the new Brazil names? Do you see any as long-term holds or more tactical trades? Qualicorp looks HQ. More familiar with Vulcabras - making a bet on normalization of results after trucker's strike? Negatives I've seen are dependence on the tax incentives (such a large portion of value) and getting comfortable with current steady-state margins after such a long period of subpar performance.

    Btw, have you been looking in Turkey at all? Seems like an area you might be interested in, given all of the turmoil.

    ReplyDelete
  55. Sure:

    Vulcabras is a turnaround that had turned. The combination of USDBRL at 1.50 plus Nike's push into the Brazil market ahead of the 2014 World Cup hurt volumes and selling prices. Plus they branched out into unprofitable products and took on too many staff. The core of the business is selling R$70 sneakers to the (lower/middle) middle class. That seems to me to be a business that should grow at the same rate as GDP for the foreseeable future. Weak BRL should hurt importers more than it does Vulcabras. The company employs a lot of people so I think those state level tax incentives aren't, I don't think, likely to go away easily, especially given the regional multiplier effects of those jobs and their role in Brazilian electoral outcomes.

    Low case:
    Revenue 1100
    EBITDA margin: 17.5%
    Unlevered FCF: 133

    High case
    Revenue 1350
    EBITDA margin: 28%
    uFCF: 318

    So somewhere between 10% and 30% FCF yield to EV. Give it enough time and it should settle down at the higher end of that range. No debt and governance seems okay to me based on management's past behaviors -- operationally and via the recap and secondary -- so the company should have time. The secondary was populatd by foreign investors who have, I suspect, recently fled the scene.


    Qualicorp is trickier. Lost gobs of customers this last quarter, a trend that began in Q4 of 17. I think I understand the value proposition of the business model so I'm mostly involved for that reason.

    If Azul doesn't make it no other Brazilian airline will make it. It's not going to do well if USDBRL plateaus at 5 - the so-called "Haddad dollar". But 5 will see GOL in a tailspin and, in that instance, I'm sort of counting on being to substitute into SMLE3 to salvage the investment.

    Small positions, so I'm mostly watching for now. We'll have a better idea of what's what after October.

    --

    I haven't looked at Turkey in 5 years.

    ReplyDelete
  56. ps at 5, Fibria (or Fibria + Suzano) will be a monster. Good way to hedge.

    ReplyDelete
  57. Vulcabras - appreciate the explanation. Curious how you back into the high end numbers? GRND3 has low 20s EBITDA% and they seem to be one of the best run in the sector. In fact, one of their presentations shows GRND3 vs. global footwear peers, and they already have highest margins in the world. I realize 28% margins is the bull case, but that seems like a big leap from 23.5% in 2017, past history, or sector peers? On your uFCF calculation, are you setting taxes to effectively zero or rather trying to NPV the tax benefits in your EV? But in any case, VULC3 trades for a big discount to peers, not exactly sure why.

    Qualicorp - like the business model but the regulatory risk seemed hard to quantify for me at least (as a non-local).

    ReplyDelete
    Replies
    1. It's a number of smallish items. Azaleia's still underwater; labor productivity is suboptimal; the resale of 3rd party items should shrink further as a share of revenue; the BRL denominated ASP of international sales should go up; etc. That's, I think, half the delta.

      The athletic shoes retail for $R200 so there's a significant shere of pricing power that Vulcabras is ceding at the wholesale level. As it improves its JIT process it should be able to claw some of that back. That's the other half.

      You'll have noticed that Grendene is owned and run by the same family. That's essentially why it survived.

      I don't think that margin comps are especially useful in evaluating differentiated goods. Bata India is a great footwear business, for example, and its EBITDA margins are in the low teens.

      Delete
  58. https://www.bloomberg.com/amp/news/articles/2018-08-30/slower-china-economy-not-for-clothes-mad-shoppers-buying-more?__twitter_impression=true

    ReplyDelete
  59. https://www.airlive.net/flybe-to-put-itself-for-sale-via-the-london-stock-exchange
    Will you cut loss here? Would you mind sharing what you learned?

    ReplyDelete
    Replies
    1. There's a lengthy discussion in the comments section under this post. Start at the very end and read back in time.

      Delete
    2. http://quinzedix.blogspot.com/2015/11/normal-0-false-false-false-en-us-x-none.html?showComment=1542312043265#c9029159558837604895

      Delete
  60. Hi red, very helpful commentary on FB. Why do you think FB new restaurants inflate Adminstrative Expense? Still struggling a little bit to reconcile large difference between segment gross operating profit (for example 80MM in food & beverage in 1H18) and segment losses of -24.9MM. Think this makes sense, just asking your interpretation of details.

    ReplyDelete
    Replies
    1. I've uploaded this
      https://www.dropbox.com/s/diesjeihjn8rabp/FB%20simple%20Nov%202018.xlsx?dl=0

      I'm now comfortable with admin expense growth. There was a period when it was growing out of proportion to GFA growth but it has since reverted back to what one would expect

      Delete
    2. Red,

      first of all thanks for your continued writing on Future Bright. As I`ve enjoyed your writings, I`d like to share my opinion as well, so please find below a few general observations as well as some anecdotal evidence from a recent Macau visit (October 2018):

      Costs always seem to be rising at least as fast as revenues. Economies of scale are nowhere to be found so far.
      The latest report doesn`t contain any update on the central food processing kitchen that was supposed te be finished some time ago and was to supposed to reduce costs materially. What happened to it?
      A strategic approach to restaurant openings is nowhere to be found. New restaurants seem to be completely hit and miss. I fail to believe that this trial-and-error approach ist the best possible way to run the business.
      How no tenant for the Yellow House can be found is beyond me. This must be the most precious piece of real estate in all Macau. On the lower level, there is one Yeng Kee bakery and one Pacific Coffee, both were infrequently visited during the one hour time frame I spent there, even though there were literally thousands of tourists around
      The Yeng Kee brand seems inferior to the established brands. Every single Koh Kei shop I saw had multiple times the amount of customers that any Yeng Kee shop had.
      The turnaround on the Hengqin project is startling. They`ve done a 180° turn in a few months without explaining any of their motives.

      Overall I`d really like to believe in the FB story, but management has lost a lot of trust in my opinion and is acting fairly incompetent. What´s your take on the developments of the last 2 years?

      Thanks!

      Delete
  61. I appreciate your comments. I think I agree with almost all of your observations.

    The performance of souvenirs business is disappointing. Selling a mass market brand in upscale properties was, in retrospect at least, not the right thing to do. The mix of outlets has shifted recently and time will tell whether that that will make a difference. (My guess is that it likely won't but we'll see.)

    Yellow House should have been leased out by now. I understand not leasing it out at the bottom of the cycle in 2017 but I do think that it should have been rented out this year.

    The hit-or-miss approach to new restaurants:

    Huafa was clearly a mistake. I suspect that the other Shenzhen restaurants will also turn out to be mistakes. The Macau restaurants work because they have captive tourist traffic flows (casinos, airport, shopping centers)and branding is therefore not important. The mainland restaurants, however, are intended to appeal to people who live in those places. Those people have habits and choices. Heavy marketing spend is therefore necessary. And yet there isn't any marketing expenditure associated with these restaurants. That seems like a hopeless strategy, a priori.

    The HK restaurants, on the other hand, are (currently) the franchise concepts. I think there's enough evidence in the financial statements and in the same store performance data to indicate that these will turn out okay in the aggregate. (Tang Palace is co-franchisee of one of the Japanese concepts and it looks to me that that concept has worked well enough Shanghai and elsewhere). On the other hand, I have my doubts about the "Mad About Garlic" concept -- it seems to have done well enough in Korea but I think it may end up not translating well in HK.

    Scale economies: At the food cost level we should have started seeing scale economies as a consequence of the central kitchen, maybe a 1% to 2% resuction in cost of sales. I haven't seen that yet (after adjusting for the changing mix in cuisines). The company has been slow to build central kitchen. Has it also been slow to put it into operation? I don't know but I suspect it is possible.

    Overall I agree with your assessment of management competence. I sense that maybe you think they might be ethically suspect too. If so, I don't see that. Their performance disclosures have become more detailed and more meaningful over time, for example. Cash flows match up with items that auditors can count and cross-check. Management fee income, dormitory rentals, etc are still flowing into the company. Etc.

    I think the overarching issue is that the company has an easy, toll-road catering business built on the strength of his relationships with the Ho clan and on his position as a legislator/regulator. It has since ventured out into trying to also run a competitive restaurant and souvenirs business. I tend to be disappointed/frustrated when there's a big difference between what I would do in management's shoes and what they actually do. Therefore my biggest disappointment is that the haven't leveraged their core competence by entering into catering for casino staff. That would also be a toll-road type business built on his relationships with the Ho clan and his position as a legislator/regulator. Is that because the central kitchen has been so slow to start up? I don't know.

    Nevertheless, all things considered, I don't see any reasonable justification for a valuation below $3/share. Value Hengqin and Yellow House at book, put a negative 50 million value on souvenirs, and remove Mainland China from the restaurant business: sub $1 don't capture the value of the equity and $3 would be pessimistic. Lisboa Palace coming up, etc.

    Future Bright is the position I hold that I think least about, for what it is worth. At this price I'm comfortable waiting for things to shake out.

    ReplyDelete
    Replies
    1. Thanks very much for the detailed reply, it is much appreciated!

      Very good observations regarding the restaurants, I hadn`t thought about it in that much detail.

      My comments on management were mainly in regards to their business acumen and overall strategy, I haven`t seen anything that looks like they are ethically suspect. In a place like Macao, you can never be sure, though :)

      Hengqin is a sort of wild card in my opinion. Changing the strategy after just laying the groundwork feels odd. Possible motivations:
      - Due to their guanxi / connections, they got the land dirt-cheap and never intended to fulfill their development plan but just wanted to gain from real estate speculation
      - They found out during the course of the project they are in way over their head and don`t have the size or capital means to finish it
      In any case, the sales price achieved should give us an idea on the motivations. I rather hope it`s a lot higher than the purchasing price, otherwise it was just a big distraction in a time when management would have been well advised to focus on the core business.

      Again, thanks for your insights on this stock! Let`s hope your valuation will come to fruition some day soon.

      Delete
    2. Hengqin: I agree re: guanxi. I think, though, that the intent from the beginning was to either flip it or enter into a JV with a developer. The developer pays for the construction cost in exchange for, say, a 50% stake in the entity. I still think that is the most likely path forward. The cyclical downturn may have slowed down that process. in any case resolution of that should be a "catalyst" for the stock.

      Delete