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Decision Journal

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galumay:
I have been starting to think about expanding my company to prepare for the inevitable drop in business activity as the NBN project in Nhulunbuy nears completion. Have been doing some kite flying about business ideas with Putty and some of the ideas are,

* Expand coffee business.
pros - existing business unit
known model
scaleable
high margin
low hours
cons - really requires a dedicated business place in industrial area to scale up.

* Depot for trucking transport
pros - partnership with Putty
existing business
low hours

Cons - requires a suitable site in Industrial with room for semis and big sheds

* Equipment hire (JLG/skid steer/scissor lift/dingo etc)
pros - low hours
high returns

Cons - requires a commercial site to operate.
licencing, insurance, capital

* Flat bed tilt tray truck
pros - work available
cons - long hours, 'buying a job'

* Buy commercial property for rental income
Pros - good income, low hours, could use a small part of it myself for coffee etc.
Con - high capital

galumay:
I am considering selling some or all of my Apple shares and taking a position in another US company called Support.com (SPRT).

We put $15kAUD into Apple and it is now worth nearly $32K, so we have done very well.

The thesis behind SPRT is not my own at all, the analysis is here, https://hiddenvalue.blog/2018/02/15/heads-i-win-tails-i-dont-lose-much and in brief the implied opportunity is a doubling in share price with little risk of a significant drawdown.

So the question to work through is in the first instance is SPRT a better home for our capital than Apple? My primary concern is the downside risk, and the consequences therof. So while the liklihood of SPRT going lower is low given the situation, there is a risk that the share price will drift lower over years as the cash is slowly eaten up and the business detiorates over time. AAPL is not free of downside risk either, given the very strong run up of tech stocks in the US its not hard to see a future where AAPL has a significant and sustained drop in share price. The difference is that its very hard to imagine a future where AAPL is not a profitable business, even if its in SP decline for an extended period so there is not much catostrophic risk IMO.

On the upside its not easy to see a scenario where APPL is worth twice its current price, but on the other hand it has doubled since I bought in, so it can happen!

The upside for SPRT is high in potential, but it will require a change in market sentiment, its not enough just for the business to justify a higher share price - that just makes the stock undervalued and it can take longer than I have for the market to rerate and currectly value the business. So the potential for an increase in share price, although likely, is by no means certain.

Of course on an emotional level the attraction is simply the lure of quick profits, the chance to buy something and double my money in short time, "get rich quick" syndrome.

Also the decision to sell AAPL should also be considered in isolation of the possibility of purchasing something else, and needs to be considered in the light of tax implications too.

Ok, a bit more time to think this through and do some more analysis, looked into AAPL valuation again and decided its still comfortably at or below intrinsic value. I still see SPRT as a great opportunity so will probably move some funds sitting in cash into it.

Ended up buying $10K USD of SPRT at $2.83 ps. Continuing to hold AAPL

galumay:
I am considering buying some more ITD at current prices, either adding to the personal portfolio or putting some in the SMSF, my detailed thoughts about the business are here, click here to view

I think this is one to wait and see, I cant see the SP rallying in any hurry. That was a pretty dismal HY report and essentially the business has sold off the only currently profitable part of its business - which strengthened the balance sheet but no profit is no profit!

galumay:
So RFG released a horrendous half yearly report, the only positive being an increased revenue on PRP, but given the issues around their franchisees in the last few months I suspect that is only temporary. Massive writedowns and hundreds of store closures along with incredibly restrictive covenants on their debt leaves RFG in a very precarious position with a dubious future.

The decision I need to make is whether to sell them at any price, and take whatever loss is offered, or do I wait and see if they can turn the business around?

The risk in holding is that the business cant recover and all capital is lost, assuming it could be sold out for $1 that means the choice is between retaining $5k capital and losing the last $5k. How llkely is it that the business will fold? I think its probably something less than 40%.

If it doesnt fold what price might it recover to? I would assume survival would include a CR which will dilute shareholders, profit will drop hugely, assuming EPS dropped from around 37c to 15c (allowing for dilution included), then I can see an IV range around the $2 mark. That would indicate a 60% chance of an upside the same as the downside - $5k.

So to expected value, lets say a 20% chance the business will fail, so (20%*0)=0c + 20% chance it will survive with a value of around $1 (20%*$1)=5c and a 60% chance it will end up around $2 after a CR & recovery, so (60%*$2)=$1.20 giving me an expected value of $1.25 The implication here is that I should probably sell if the SP is over $1.25 or buy more if I have a high conviction of the business surviving, at below $1.25. It would probably make sense to add a high margin of safety to either of those decisions!

I know those figures are completely rubbery, but I am trying to get a rough feel to help with the decison.

Another thought is to invert the question and ask "under what conditions would I buy shares in RFG?". The answer would be, only when the debt was reduced to a controllable level. So the conclusion is that there is no way I would buy them at any price, therefore conventional wisdom is if one is not prepared to buy, then one should sell. Trouble is I have never been convinced the decision is as binary as that, given that the additional factor is that one already owns a position in the business.

Still thinking...!

I am still trying to form a final decision about RFG, I think it really comes down to what the value of the business might be going forward,is it more or less than the current SP? I really have to do some more number crunching. ...
Ok so given the current shares on issue, FCF would have to drop to 30% of current amount and EPS to 14% of current amount to give it an IV range around where its trading. So thats a pretty dire outlook to see the long term value as $1. The big question is the debt, its about $250m which is 2.5 times current EBITDA, and $50m more than capitalisation with an interest cover ratio of 10 on current earnings, but probably less than 5 going forward. Its the debt that makes it a hospital case, without that its just a smaller business that can recover, with it I am not sure its not terminal.

Just looking at the financials further, intangible assets are valued at nearly $700m - i suspect there are massive writedowns coming, this will hugely negatively impact on equity and make all the metrics so much worse. Time to sell, this may never recover. I think that the odds ar so heavily against recovery here, much worse than i first thought. I would put the liklihood of failure at 50% now, so (30%*0)=0c + 50% chance it will survive with a value of around $2 (50%*$1)=50c  and a 20% chance it can rebulid and grow to a $2 business (20%*$2)=0.40c giving me an expected value of $0.90

Sold for $1.065, a loss of nearly $20k. Sobering. Next to reflect where I went wrong!
Bought for $24755 sold for $5341 for a loss of $19414 or 78%, dividends of $5788 so overall a loss of 55% on invested capital or a return of -16% per year

galumay:
AX1 shares have had a strong run since the positive � year results, the price has run well ahead of my range of calculated intrinsic value which is 70c-$1 based on the last full year results. Even allowing for a strong full FY2018, I think the price is 'frothy' and I am considering selling out.

I have some lingering concerns about the retail sector as a whole and the current price of $1.25 implies some pretty heady growth in earnings over the next few years. I calculate that cash flow would need to increase by around 30% from last year to support that sort of share price and that seems a tall ask. I think its very prone to a rerating if the figures are not really good for the full year. Some of the 'froth' is probably generated because the PRP was pretty poor so it made the current numbers look bettter, (case in point, online sales up 170%).

If i am wrong it may well make new highs over the $1.60 mark, but if I am right it could fall pretty hard - its been as 76c this year.

I have let this sit for a couple of days, I come back with the desire to hold in case they run back up to the $1.90 range (anchoring of previous high and FOMO, 2 classic biases!), but my head says stick to the strategy, SP price significantly exceeds IV range with no compelling reason - SELL!

In trying to think of reasons not to sell, the only one that really sticks is that the next scheduled reporting will be the full year results, and that is several months for the SP to run further up. The risk with that thinking is an unexpected trading update with negative implications - the reaction would be likely fast and hard given the calculated over valuation. So I have talked myself out of that one too!

Thinking about expected value, maybe a 20% chance of dropping back to 80c, = 16c and a 60% chance of trading around $1.25 = 75c and a 20% chance of making new highs at $1.90 = 38c so a total expected value of $1.29, on that basis a sell looks pretty well the right decision at this time.

 Sold,26/3/18 at $1.265 invested capital, $25249, proceeds $46683 profit of $21434 or 85% plus dividends of $9806 so total return on capital invested not adjusted for holding periods and sale timing, $31240 or 124% over 3.5 years so 35% per year26/3/18

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