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galumay:
Thinking about buying some more $CDA, its fallen from around $18 to $7 over the last few months. I am trying to work out what the thesis is for selling the business at $7, in other words, what am i missing that others see? 

The recent H1 report for 2022 did offer some concern as operating cash flow was actually negative for the first time in over 10 years, it didn't even go negative when the company was in dire straits in 2013 and I bought in under $1. The company explanation for the -'ve OCF is -

� Increased debtors driven by higher Communications sales in November and December 2021
� Investment in inventory, reduced freight costs and mitigate supply chain risks
� Payables high at June 2021 due to prepayments from customers to secure supply
 They claim,

� As working capital normalises over the second half the cashflows will follow

The $65m extra working capital and hence -'ve OCF is my biggest concern along with the $48m debt but I actually doubt either of these are the reason for the steep drop in price. Few investors get as far down as the cash flow statement so hard to see that being a big impact, and most wouldn't care about a debt ratio that low so its also unlikely to be that.

So the question remains, what am I missing that others see?

Are they just panicked sellers that bought in around $18 and can no longer bear the losses? Possible, but I am unconvinced.

I just feel like I am missing something!

My guess is a combination of fears, a potential collapse in the detector sales due to recession, loss of markets in countries like russia for all products, weak gold prices and a general sell off in the market.

Its now fallen to $6 and the temptation to buy some more is strong. After the FY2022 results came out FCF for the year was 25c, largely because of the negative cash flow in the first half. The last time the FCF was this low in 2018 the share price was around $3.50, but the big difference here is that it looks more like a one off and the normalised FCF going forward is probably going to be much higher given the impact of H1.

So FY OCF was around $52m, but H1 was -$13m so 2nd half was about $65m, H2 typically higher, so maybe normalised FCF was around $90-100m so lets say around 50c per share. That gives me a range of value around the $7 mark.

The question remains, is it the perceived fall in FCF that is driving the price or am I missing something else? Debt and departing CEO probably part of the story. Debt is hardly stressful, its well under my conservative debt to equity ratio and is at about 2% interest.

When I reverse engineer my DCF for CDA I get an implied FCF of 45c - while that is nearly double the number for 2022, I think its very unlikely it will be that low in 2023. It also implies growth of 6% - which seems high, but if the FCF for 2022 of 25c is the outlier I think it is, then that number will quickly shrink. Finally the implied MoS is only a bit over 7% - again a function of the FCF of 25c, but that is the point of reverse engineering the numbers. Could I live with paying a price that only gave me a MoS of 7%?

Really the whole question comes down to the probability that 2022 was an outlier and the business will return to something like normal state over the next 5 years or so. Was 2022 a structural shift in the long term financials of the business or was it an aberration borne of all the usual suspects, Covid, frieght, supply issues, inflation, etc How much is temporary and how much permanent?

Given that I am a long term investor I am fairly confident that the business will continue to do well enough over the next 5-10 years, even if there is further short term pain to come. At sub $6 I think there is enough MoS and I think the mid term downside is very low. My pre mortem is that the H1 results showed continued +'ve FCF, a soft recovery in growth and a moderate re-rate of the business by the market while maintaining the divvy yield. A worse outcome than this, black swan, -'ve FCF, falling revenue and a further drop in SP is about a 20% I think, i see a business like it was in 2018 - maybe a 10c divvy. A better than expected outcome with a return to strong growth and an improvement in all financials is probably about a 20% chance. Somewhere in between the 2 about a 60% chance.

Obviously the yield is important as a long term holder, probably more so than the share price, so I am probably comfortable if it drops back to around 20c per share, but much lower than that for an extended period would be sub optimal.

Bought more in personal pf at $5.68 and took a position in the SMSF at $5.68 26/09/2022

galumay:
The recent drawdown in stock markets around the world has seriously impacted the potential, unrealised capital gains from our portfolios. I haven't quantified the impact as its purely theoretical, but it would be significant were we to sell out of our fractional ownership of businesses.

Its the first real drawdown that we have seen since starting serious investing so its a good check on my emotional response - its easy to say that as a long term investor, short term volatility doesnt worry me, but until you live thru a significant drawdown/crash, that is just an assumption.

I am pleased to confirm that there has been no sense of alarm or rush to action on my part. My initial instinct was to consider investing cash on hand into the best businesses we hold already, that were cheapest after the drawdown, but I have not acted on that instinct. Part of the reason for not acting is that having a significant cash buffer makes it easier to not worry about the drawdown at all, we will continue to grow the cash holdings with dividends going forward and as I am now over 60 I can access the cash balance in the SMSF anytime I need to for living expenses etc.

If I became fully invested again, then needed any extra cash, I would have to sell something to release cash, which might be uncomfortable if the market stays depressed for the medium term.

I would like to think that my whole investing strategy and philiosophy has been developed to deal with just such a situation as we appear to be facing now, falling markets, inflation rising, recession looming, negativity and bearish commentary all about.
The strategy of buying fractional ownership in businesses that if we had sufficient capital, we would seek to own outright, should, if I do a reasonable job of picking the businesses, in the long term deliver sufficient absolute returns.

Based on my assessment of the quality of the business, lack of debt, healthy balance sheet, profitable, high FCF generation, long term dividend payment, generating superior ROIIC, lengthy operating history, founder involvement, I would certainly hope to whether the storms of economic cycles. As someone who believes the future is unknowable, especially in terms of both micro and macro economics, I fall back on trying to construct resilient portfolios that can weather the storms that may come and go in our investing journey.

We will end up with our best year ever in terms of real, cash return on our investments, the only really measurable benchmark. Our gross dividends will end up over 8.5% on invested capital (Original capital, plus contributions, plus dividends), and prior to the markets tanking was 5% on unrealised market value. If the negative trend in markets continues thru to end of financial year, this will obviously become a higher number as the dividends are already all paid, its just the unrealised market value that will change now.

So my response to date has been to do nothing! I am neither a buyer or a seller, there is some possibility this inactivity is a bit of rabbit in the headlights - scared to invest in case things get much worse, but I dont thin thats the case, after all cash is only less than 10% of our capital anyway. I guess I could use the line of credit on our house to go all in and try to make big returns, but that is not my style. I am happy with the amount of capital we have invested and the returns we should see from those businesses over the long term. Of course it would always be nice to make lots more money, but I am very grateful for the luck that got us from our starting point about 7 years ago to where we are now and I dont expect to see that growth again in the next 7 years.

I wont be surprised if cash returns deteriorate next FY if economic conditions do worsen, but thats the swings and round abouts of investing, no doubt we have enjoyed excess earnings in the very odd Covid world, as always its the long term absolute performance that matters, not the year on year volatility.

nb Here is a much better written post from Chris Mayer of Woodluck House that really resonated with my poorly articulated thoughts above. CLICK HERE

Interesting, I finally realised my recent mood and background 'heaviness', anxiety and concern was a manifestation of all the negativity - inflation/bear market/recession/rising interest rates etc. My re-focus was simply asking myself, am I do what I really want to (yes), so at 60, does it really matter if we run out of capital a bit sooner? No, so stop worrying, choose to be happy and get on with it!

galumay:
trying to decide whether to go with 2 new fixed props on the boat or just replace the missing folding prop, cost of a new folding gori is probably over $3k and 2 fixed props is $1500 so half the cost.

disadvantage of fixed props is the noise when free wheeling and the loss of sailing speed due to drag.

disadvantage of folding is cost, maintenance and loss of performance under power.

the noise is worse as speed increases, but can be mitigated by putting in gear, but then drag is increased. Question is whether extra drag matters once you are sailing that fast. Drag is increased maybe as much as 3x when locked in gear, but on its own that is meaningless, without knowing how much drag reduces potential speed we dont know if 3x more is significant or not. Anectdotal evidence is locked 3 blade props would cost about 0.5k at normal sailing speed.

loss of speed and sailing performance will be most noticable at low wind speeds, probably particularly when it is below 10k.

On the other hand the disadvantages of the folding props, cost is significant, if the fixed would do the job without too much noise or performance hit then saving over $1500 is significant. The potential loss of motoring performance is probably similar to the sailing one for fixed - maybe 1/2k less at cruising speed. Could be significant in terms of motoring against tidal streams and heavy seas?

If we go with the cheaper fixed props and they work out then we have saved a lot of money, they may also prove to be better overall for our usage and conditions. If they are worse than i expect and we find the speed penalty and noise untenable, then we can still go back to folding by spending the $3k and getting one more folding prop.

If we go with replacing the missing folding prop, it will cost us double the amount, and we will never know whether we might have been better off with the fixed props.


Another factor is that if we go with a second folding prop and another one gets damaged or lost, its another $3k compared to under $1000

I spoke with Jaques who owns a Bahia and asked him about the noise and impact on sailing,

"When you refer to �  noise � I am not sure of what you are talking about , under sail or under engine power , should not be any noise that I can think off under sail as long as you engage reverse on the control which will stop them free spinning !
Mine has two three blades fixed prop fitted at the factory , I have had feathering props on my previous FP , a Lavezzi and sailed in convoy with another Lavezzi which had the original 2 blades fixed props , if I recall correctly , over a 24 hours sail passage I travelled 9.2 nm more than he did , so NO I cannot justify the investment on speed gain , further more while berthing stern in the feathering props were pretty useless when it came to torque
The folding props require regular maintenance, early this year while cruising Tasmania we met a couple on another Bahia high was equipped with feathering props , we wearable o compare speed under engine while motoring up the Dentrecastaux Chanel , @ 1500 rpm Kitten was giving me 7.2 knots SOG , his 6.4 knots ! and once we hit the tidal current getting into Barnes bay he lost another 05. Knot .
So instead of buying 2 x $3,295.00 feathering props when I purchased Kitten  I spent the money on an asym�trique spinnaker in a sock which gives me great boat speed 👍👌👏 under mild win speed conditions."


so my decision is to go with the 2 new fixed props, my gut feeling is the sailing performance wont be impacted to the point that we regret the decision, the motoring performance will be better and the noise will be controllable.

galumay:
The downturn in the markets has kept me sitting in the sidelines this year, I have naturally become more inactive as time passes anyway but I suspect there has been some trepidation on my part to allocate capital in the current climate. Its difficult to know whether that is the case or not. There is also a train of thought I have had that I want a cash buffer so if I need capital for any reason its accessible without forced selling. This is informed by my having retired for superannuation purposes, so I can drawdown on the fund at any time now. With interest rates rising and carrying a bit of debt from buying the boat, I think I have made a move to being slightly more conservative.

I think that writing the annual report for the SMSF this week made me think about the fact that maybe I was losing touch a bit with the investing process due to my inactivity. That has at least prompted me to briefly look at a couple of ideas that popped up in my universe (they went no where!), and also consider which business would be best to increase position size in within our portfolio.

SXE and AMO are the two most obvious candidates, they have the best metrics, are well below my calculated range of intrinsic value and are both smaller positions in the SMSF. At this stage that's the extent of my decision making - I am the "if I was going to allocate some capital, it would be to one of those 2 businesses."

*I realised I was leaning towards AMO because its a smaller position, that is not very clever! The capital should be allocated to the best opportunity regardless of size.

** Again the benefit of decision journals and slowing the 'doing' down, thinking about it today, both SXE & AMO are about the same price as I paid for the existing parcels, they 'feel' cheap because they have then gone up quite a lot and now fallen quite a lot!

galumay:
I am thinking about taking a position in JB Hifi, this is not a particularly cheap business normally, but there has been considerable negative sentiment this year and the price looks pretty reasonable to me. Its trading on a PE of about 10, i calculate a range of intrinsic value of around $60 on last years results. The results released this week show a small improvement in metrics,



ROIIC is not able to be calculated because the debt reduction has meant there has been negative capital employed. ROIC & ROE are both very high, FCF is strong, yield is over 5%.

I am not sure why the market is discounting the price to this extent, I guess the concern must be that inflation or recession will cause a downturn in the business and impact profits and yield?

My intuition is that its not often the opportunity to buy a business as good as JB Hifi at a real discount to value comes along.

In terms of alternatives I think the nearest is to instead take a position in CDA for the SMSF, but its not quite the same discount or margin of safety. SXE is another possibility, its discount and MoS is even greater so perhaps a more attractive option? On checking AMO has the greatest so that is probably where any extra capital should be directed. Now I notice JYC is way out there, I already own a lot, but its the cheapest by most metrics.

So really the only reason to add JBH is if I think overall its more likely to be a better business in the long term than any of the alternative homes for the capital. Off the cuff, i suspect its a better business than AMO with more growth prospects, not sure its any better than CDA, SXE or JYC though.

I went for a walk on the beach and thought about it, which gave me another approach, was JBH worth buying just for the high yield, given that we really have sufficient capital so the yield becomes very important. But on checking the yield on NTD is currently higher than the JBH yield - that may change, JBH might increase, or more likely NTD drops, but its not a persuasive reason to sell one to buy the other. (given that NTD is now my lowest conviction holding).

Given that I think my decision is to do nothing, JBH was $44.15 today for a 6.6% yield, NTD was 93c for a 8.6%yield others mentioned - CDA $8.70, AMO 36c, JYC $2.51, SXE 72c

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