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ASX Value Stocks

Discussion in 'ASX Stock Chat' started by ReXXar, Sep 17, 2016.

  1. ReXXar

    ReXXar Well-Known Member

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    Hi,

    I thought it'd be interesting to start a thread so we can post "value" stocks here and bounce ideas off each other. No right or wrong answers since what is defined as "value" is rather vague, but it would be interesting to hear everyone's ideas.

    I'll start with first one, which is one I actually bought today, Monadelphous (MND). The enterprise value is trading is about 15% discount to market cap, with EV/EBITDA about 6 and EV/FCF about 12, it is obvious cheap in the ASX200 category. And there's good reason for being cheap, being an engineering company serving the cyclical mining sector, its revenue has declined 3 years in a row. Their engineering & construction sector has basically come to a halt from $1.8b in 2013, the new contract obtained in FY2016 was only $100m, the management seem so embarrassed by this they didn't even mention this in the last annual report, this is compensated by the maintenance division.

    Basically an out of favour stock, my favourite kind. Liquidation value excl. cash is about 30% of share price, and cash alone is 26% of share price. The company highly dependent on securing new contracts, judging by the historical relationships between new contract value and actual, the FY2017 contract value will be higher than current FY2016 of $1.4b, the lowest contract value should be circa $1.1b. I do like the management, promotion tends to be from within and they seem to have good employee relationships from what I found. The market is pricing this stock at about 3% perpetual growth at 10% cost of capital, I think they have more potential than this. They're involved in some very prominent renewable energy projects like solar and water, an area of great long-term potential, as well as winning overseas contracts and factory in China. There is a risk they MND can fail to win significant new contracts throughout FY2017 as the mining sector continues to drag, but with a fat dividend yield that's seems to be covered for next year there's some room to wait this out.The directors are buying in late August is also a promising sign. Any comments?

    I'll try to find more stocks over the weekend.
     
  2. So_Cynical

    So_Cynical The Contrarian Averager

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    Some people have rather definitive definitions of value, so right and wrong ideas you will get.

    As for MND, looked at this last week and immediately saw that i should of been looking at it 9 months ago when it was better value...timing oh so important.
     
  3. ReXXar

    ReXXar Well-Known Member

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    Hi, I'm assuming you're also a value investor? I'm just starting to build a value portfolio for the first time starting this week, are there any out of favour stocks that you think could be interesting to look at or care to discuss?

    Found an interesting one Acrux today, I think its is the only small cap biotech company that's actually turning a profit, and substantial one at that, with no debt and fat cash position with substantial free cash flow (cash per share alone is worth over 50% of the share price). Furthermore capital gains and dividends form Acrux are tax free due to a special tax structure, very rare thing.

    The only thing holding me back is the management, the old management basically milked $400m in fees it received when it got its products approved in the form of dividends, instead of ploughing back into the firm, and then basically jumped ship, very unethical. The new management seem to be completely detached from shareholder interest, listening to the last AGM call, they seem to be clueless when new products will be commercialised and basically gave a rough date of 2019, when asked about whether they do in-house research they had no idea and pretended they know by saying they will provide the figures in private to the caller, completely incompetent. While cheap, Acrux seems to be caught in a value trap for many years to come until management clean up their game and have some skins in the game. Another one caught my eye is BNO, it appears to be undervalued but the like Acrux management is a problem here.

    How you doing so far with your portfolio? Do you have any thoughts about Flight Centre? I bought this one last week, nothing special, but they appear to have rock solid business and $1 billion in cash with little debt, I think if they play cards their right when moving into the online space there could be limited downside risk. This forum is awfully quite, are there no value investors here?


     
  4. So_Cynical

    So_Cynical The Contrarian Averager

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    No

    Looking at the chart it was 10/12% cheaper 1/2 months ago...better Value.

    Quiet on the weekends, a few value people here.
     
  5. craft

    craft Can't re Member

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    What defines value?

    If it's cheapness based on future discretionary cash flow basis then "profitably" becomes a very important factor. In your MND case you, you give your assumption of growth and cost of capital but without a future profitability assumption you are failing to disclose a vital ingredient in the valuation calculation. (disclosure: I hold MND, so I don't disagree with your overall conclusion)

    My latest research candidate is PAC = "superficially" it looks cheap, if you want to dig into it we could possibly discuss. (disclosure - I only hold a feel it out quantity to date.) Its messy and has recent bad performance - but therein may lay the opportunity. Stress its just the current research topic.
     
  6. ReXXar

    ReXXar Well-Known Member

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    Hi Craft,

    Thank you for your reply! By a "value", my definition is that basically assessing what you personally think something is worth, and if there is a difference to what the market is pricing it at, then play on that difference. The bigger the difference, the bigger the margin of safety. Contrarian technical analysts are also somewhat value investors in my opinion (like So_Cynical above), since they identify something that is temporarily oversold or overbought and play on that difference, except they only use price. The only people who are not value investors imo are those why buy simply because the price has gone up, nothing wrong with this if you manage your risk well, although I think very few people can do this consistently over the long-term.

    Regarding MND, estimating future profitability is extremely difficult, even management gets it wrong. Forgot where I read it, but basically it is better to get roughly right than precisely wrong. I use that approach to earnings estimation. As mentioned, I do think FY2017 contract sales will be greater than FY2016 (MND won $1.1b in NEW contracts in FY2016, compare this to FY2015 when they won only $450m in NEW contract which directly impacted FY2016 sales). However their margins are decreasing, which is expected in an industry downtown, the question I guess is how their margin comparing to competitors, this I haven't compared, do you know their main competitors? Do you have any thoughts are estimating profitability?

    Interesting you mentioned PAC, I had a look at this one last week, at first glance the historical price action caught my eye, appears to be out of favour stock, however the price hasn't stabilised yet and continue reaching new low as of last week. From experience I think it is better to wait until the price has shown some support, i.e. trending sideways, otherwise you might catch a falling dagger.

    They have no debt on the balance sheet, BUT, they have $235m in operating lease. Operating lease is essentially a form of debt, and with only $3m in cash, they're massively over-leveraged. In fact, it occupies second bottom on my list due capital structure, only above SGH (SGH in my opinion is just a ticking time bomb). Basically I won't touch this one with ten foot pole. I would love to hear your opinion? Happy to discuss any others you think are interesting, it seems we're hunting for similar stocks. :)

     
  7. ReXXar

    ReXXar Well-Known Member

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    Hi So_Cycnical, yes you are right, both MND and FLT were better choices few months ago, I'm also disappointed didn't get on it then :(

     
  8. craft

    craft Can't re Member

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    The point of growth in the valuation estimation is that despite it being difficult you can't avoid making it to get a robust estimation of value.

    I like this sort of reverse engineering thinking however 3% growth at profitability levels above the cost of capital gives a very different valuation to growth profitability at or below cost of funds. (well at least It should)
     
  9. craft

    craft Can't re Member

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    The lease obligations are 235 thousand (not Million) so insignificant in the scheme of things. The balance sheet looks fine to me at the moment but they could soon stuff that up with acquisitions.

    PAC has massive operational leverage as be can seen from the sale or RARE which was sold at 33X the investment cost because RARE had experienced good FUM growth. But its a double edged sword and Seizert are currently experiencing material FUM decline and have carrying value on the balance sheet resulting in statutory write-downs of goodwill.

    The biggest problem I have with PAC in getting comfortable to the point that I require to make a significant investment (my game plan) is that the structure is messy and management aren't really providing the transparency to the market. Seems I'm not the only one finding this a tough nut to crack.

    http://prwire.com.au/pr/62238/how-are-the-shareholders-funds-being-accounted-for
     
  10. craft

    craft Can't re Member

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    In addition to your lease number being out a tad you shouldn't really just consider PAC’s balance sheet in isolation as they control the trust. The trust has 20Million in cash and of the 74Million listed as Non-Current financial liabilities it looks as though a fair bit is for contingency payments which may never be paid based on recent performances. Yep its messy!!!! But messy can sometimes be an opportunity to dig for things that allow you to safely walk a more profitable path than the crowd.
     
  11. Ves

    Ves Beyond Good and Evil

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    Bugger. I just spent an hour typing up a post. Got distracted by something and had to walk away. Come back and hit preview to proof read and lost it. Thought I'd hit copy/paste, but obviously hadn't.

    Crux of the post was that PAC's balance sheet is OK, but they are constrained with what they can and cannot do by the Aurora Trust. There's a knock-on effect. It also stops them from doing the sensible thing and buying back shares if management truly think they are super cheap.

    Aurora's balance sheet itself, for a Fund manager, looks really stretched. Current liability deficit of $16m above cash. How do they Fund this? Needs a bit of faith in 2017FY cash flow. If not, borrow again and hope it comes good?

    Also the reason why they needed to defer the $42m XRPU redemption it appears. I assume that this goes to the unit holders (ie. 65% to PAC). But where is it in PAC's accounts? Is it buried in the JV line item, I can't see it there. Are they not allowed to include it under the accounting standards because it's too contingent at this stage?

    Otherwise, agree it's a tangled mess of entities and opaque reporting. Yes, that can provide opportunity, but it also adds extra layers of risk, because it's very hard to get the necessary information to dig down into the Aurora Trust numbers. Management don't seem to care on this score. Red flag.

    History of value destruction through corporate activity. Also very hard to work out the money trail as part of the merger in 2014 that created the trust. Second hand info (can't confirm because earnings call not released) but seems like they are still looking to buy more stuff.

    Watch out for share holder dilution in terms of employee share schemes within the entities fully or partially owned by the Aurora Trust. See Celeste as an example. Ripped up about 10% of the equity in one hit to incentivise employees.

    Can't see a competitive advantage, in fact, where they are based in the US it's possible they are seen as "old world" and the new kids on the block (ie. Robo advice, ETFs) are disrupting the industry because their fee models are cheaper and more transparent. Not sure of the end game there, but definitely need to keep an eye on it.

    Other thing to ponder, are the investment impairments / write-downs, really one-off expenses for entities that are serial acquirers of assets? Hmmm.
     
  12. craft

    craft Can't re Member

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    Hey Ves

    Good insights - I share probably all the sentiments you expressed here - but still I'm not sure that there is not real opportunity here. I have regard for Investor Mutual the only fund I really know much about in the stable.

    They only have to repeat the RARE experience (purchased by Legg Mason!) with a minority of the funds they are invested in to provide significant value creation (if they don't simultaneously destroy wealth.)

    ps
    Wasn't Celeste where a certain HC poster used to work?

    At this stage I think the US$42M XRPU's are contingently compensation to the Northern Lights vendors- not 100% sure yet.
     
  13. McLovin

    McLovin Well-Known Member

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    My first read over the last annual report led me to believe that this was the strategy. Swing big and you only need to connect every now and then.

    What a bowl of spaghetti though. I'm with Ves. Rightly or wrongly when I see complex corporate structures I get scared, to easy to shuffle stuff around. The other question is, will it perpetually trade at a discount to where it should because of its structure?

    I actually don't mind the idea of aggregating fund managers. Alpha is hard to come by, especially as FUM grows so, to my thinking, having different FM's working on smaller funds is better than trying to scale out a single manager. Do they centralise distribution or is that done by each FM independantly?
     
  14. Ves

    Ves Beyond Good and Evil

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    I don't necessarily disagree with that, but the problem lies in sitting back waiting for that to happen (if it even does), with all the other risks sitting in the forefront of the mind.

    That in itself is not psychologically easy, especially if management aren't really that helpful!

    I realise that that is why the potential rewards are so high. Especially if you buy it far less than NTA and they strike it big.

    There's no value in the market without a degree of misunderstanding by others.

    I think I know who you mean. Come to think of it, it does ring a bell, but my memory of that discussion is that he only really hinted at it. :)

    That would make more sense. The presentation gave me the impression it was PAC and the other unit holders and if there was no cash to pay it the XRPU amount would be just written off.

    Obviously a third party changes that, and it must be paid when due.
     
  15. ReXXar

    ReXXar Well-Known Member

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    Craft, your words are wise. I can see you're a sophisticated value investor, I'm just starting out so hopefully I can learn from you.

    I was thinking about your question regarding value, it suddenly occurred to me you were talking about specifically in relation to MND. Yes, I used "reverse engineering" based on the market price rather than my own growth rates, not sure if anyone else do it this way, but it reminds me when I was backpacking in India, and when I come across something I have no idea the real value I ask the seller his offer price first. You mentioned factoring the growth rate below cost of capital, do you mean I should project a growth rate for new few years below cost of capital and then a perpetual growth rate above thereafter? Would you care to explain more or point me in some direction where I can learn more about this? I'm still not exactly sure by what you meant when you said "future profitability assumption"? Are you referring to future cash flow or margins or something else? You also hold MND, my last question is would you mind discuss how you came to the conclusion MND was undervalued?

    Regarding PAC, I literally spend less than 2 minutes before I discarded it due to the net debt, which I include off-balance sheet items, guess I did a rush job and got the numbers wrong, I didn't even notice they had a trust fund. You mentioned this one is messy, now this peaked my interest. I don’t know much about valuing fund managements, other than what common sense tell me the enterprise value has to be roughly on parity with the underlying portfolio market value. When I finish work I’ll look into PAC and see if I can understand it before commenting.


     
  16. ReXXar

    ReXXar Well-Known Member

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    OK, so I finally had a look at PAC, just read through their annual report.

    Is the structure messy? Yes and no. No because with a diagram and you can clearly trace the major events and relationships between different parties. Yes because key details are not disclosed. I basically had to keep jumping back and forth between the annual report to fill the gaps.

    PAC is dangerous because of information that should, but not provided to the market. Being a trustee of asset managers, common sense tells me the valuation is contingent upon the value of the asset managers in the Trust, since they're basically subsidiaries or JV. To do this we will need the percentage of shareholding or any equity convertible securities held by the Trustee and other info like the asset managers' fair market value. One can't get this info unless calling them. They have something like 20 asset managers.

    I had build up a list of the asset managers in the Trust from scratch throughout reading the report and the different equity stakes. What PAC should do is make a simple table of all the asset managers and shareholding. This is material information which should be disclosed. I've seen many other fund managers list all their shareholding in the portfolio by value and percentage, and I don't see why PAC should not do the same for their subsidiaries. Without this information I do not see how one can value the business properly.

    Now these managers are smart guys, I'm sure they would already know this. So that begs the real question, why they don't want to be transparent? The only answer is they have something to hide, and hiding what, I have no idea. It could be good or bad, at stage I can't work it out and so I'm staying out.

    Furthermore, had a quick scan through director's remuneration, the global CIO pays gets paid $1.6m in cash and the CEO gets $880k in cash and the $820k in "others", whatever that means.. That's hell of a pay for a ASX300 company. Basically a five-fold increase from 2015, a nice rise considering they made loss. No idea why their shareholders approved this. I have a suspicion this is one of those companies acting like a private company in the public space.

    Of course, they could reduce one of their stakes or sell one of the asset managers during the year, which may boost bottom line immensely in FY2017. However, this is speculation and one best to profit from this would be someone with inside information, once again, I wouldn't touch it with a ten foot pole.

    Any thoughts??
     
  17. InsvestoBoy

    InsvestoBoy Member

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    The people on this thread seem to be really smart and have the ability to not just read through but *understand* an annual report.

    I wish I could do that.

    Can you guys point me in the direction of some resources (books, websites, I guess?) that would help me be able to do that? How did you gain that sort of experience?

    I can do stuff like generate a DuPont ROE, adjusted book value or other quantitative stuff like that with a spreadsheet, but these days computers are doing the same thing at lightning speed when annual reports come out so it doesn't feel so useful, plus I always get the feeling like there is some edge case or pitfall for those measures that means you have to treat each company uniquely. For example, ReXXar you calculated EV/EBITDA in the first post, but the equation for that needs the market value of debt how did you calculate that for MND which doesn't have any listed debt?

    So I mostly buy index funds and LICs with low fees like ARG/AFI/MLT because I don't have those skills but I would love to know be confident enough to buy single name equities myself.
     
  18. ReXXar

    ReXXar Well-Known Member

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    I think for PAC don't need to read too much into the balance sheet, there are far more things at play here, they wrote off billions on impairments and write-offs here and there like its nothing, the interesting thing it is within their own business web. How can you write off something you purchased from yourself?? I wouldn't be surprised if they're flirting with something illegal.

    I doubt their auditors even understand what's going on, hell, few months after Deloitte audited Dick Smith and give it a clean bill of health the company went bankrupt. The only thing worse than lawyers it the big 4 accountants. Anyways, maybe I'm being over-critical. Would be interested to hear any other comments.


     
  19. ReXXar

    ReXXar Well-Known Member

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    Hi InvestoBoy, nice to meet you, I'm new to this forum too. I wouldn't call it "smart", people who are smart are those who have high IQ and quick with numbers. Anyone can read an annual report, it is an incredibly boring exercise. Most of it is useless, you have to pick out the "material" information that's important to you personally. The more you read, the more it becomes easier. Maybe the posters above can better answer your question regarding where to find resources, they have much more experience than I have.

    Although I would recommend "Why stocks go up and down" by William Pike, it takes you step by step from a small home run business to a public company and how the accounting changes along the way. Really good book before you start reading other investment books. The books goes heavily into EPS in the last few chapters, a word of caution though, don't read too much into EPS, net income can be a deceptive figure. The Net Income you see in the annual report can actually be a different figure to one submitted to the tax office.

    Regarding where I got the "debt" from enterprise value for MND, not exactly sure what you mean there's no debt, if you go to page 34 under Current Liabilities and Non-Current Liabilities just add up the "Interest bearing loans and borrowings" (7868 + 9678). I also add off-balance sheet liabilities but I haven't seen anyone else do that so maybe that's a topic for another day.

    I think it is great that you recognise your limitations, the only people who lose money in life are those who don't know the edge of their competencies. So honestly I think you're already ahead of the game than most "investors".

     
  20. InsvestoBoy

    InsvestoBoy Member

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    Thanks for your thoughts and book recommendation!

    To clarify, I didn't say there is no debt, what I meant by "doesn't have any listed debt" is that the formula for Enterprise Value says you need to include the "market value of debt", i.e. how much it is selling for on the open market.

    But if the debt is not "listed" on any exchange (unlike in the US where most companies bonds are exchange traded), how can you know the market value? But you answered the question, you're not using the market value of debt, just the book value. That is exactly an example of the pitfalls for using quantitative measures which scare me away from using them in my investing.
     
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