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Decision Journal

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galumay:
In the spirit of the above, and in retrospect, I shall apply this to my decision to increase my holding in LPE yesterday,

What does the company do?
- installs a single electricity meter on the front of multi dwelling complexes and through its purchasing power is able to offer discount electricity to tenants and residents

How does it make money?

LPE makes about 20% margin on sales of electricity.

Why will it go wrong?

Biggest risk is probably new competitors or power companies trying to squeeze margins

Who are the competitors?

None I could find

Why is now the time to buy?

EPGCVF have just bought a significant extra position, off market from the founding directors, so increased institutional attention (albeit small end of town) recent market softness has pushed shares under 2c, has just become cash flow positive and secured finance (rather than picking shareholder's pockets, always a sign of a maturing business.)
-

galumay:
REH have made an offer to acquire MORSCO a similar business based in the US, so plumbing supplies, waterworks and HVAC (heating and cooling equip). The offer is nearly $2b and as a result REH are doing a capital raising to retail and institutional investors as well as raising debt of about $1b.

We will be able to buy 1 share for every 11 we already hold with a chance to increase that by about 40% to maintain holding size after dilution. The issue price will be $9.30 which is a discount of about 13% to last close.

For me there are 2 main questions, do we want to continue to hold REH post acquisition and do we want to take up the offer at $9.30.

Reasons not to continue to hold include the belief that not many ASX companies pull off large acquisitions in the US, the potential that the market will have reservations and the share price may drop and remain depressed for a significant period of time, and finally the acquisition may detract from REH existing business and damage the stellar results over the previous years - and given the high prices REH has commanded due to its record any sort of reduction in growth could cause a serious re-rate.

Reasons not to take up the issue even at the discount are that the market may present an opportunity to buy at less than $9.30 as concerns about the acquitsition may cause the SP to drop below $9.30 anyway, also if the decision is to sell our position then it makes no sense to buy more at a higher price than our original entry of $9.

Alternatively, if REH can make the acquisition work then it will likely drive further growth on a bgger scale and the share price could rise strongly over the next 2-5 years, in this case the ability to buy further shares at a discount of such size should not be missed.

It really comes down to a question of my confidence in REH being able to make the acquisition work as per their narrative.

Other concerns, MORSCO have been owned by private equity for about the last 5 years, PE wants its pound of flesh for their dirty work, thats a serious concern. Multiple of 15 X EBITDA is an expensive acquisiton by any terms, debt stretches the balance sheet in what has been a very carefully managed business.

Obviously the market and institutional investors dont share my concerns! Price has shot up to $12 and the instiutional placement was strongly supported, and in fact the size of the offering was increased. Aso the price ended up being $10.30 - a fair indication of how strong the support was. These factors seem to indicate participating in the SPP makes sense, even if we sell out post issue.

galumay:
...and today AHZ have announced another Capital Raising - after promising shareholders it wouldn't be necessary. It leaves me deeply conflicted, I have held such confidence in the long term prospects of this business, but this feels like the straw to break the camels back, further dilution, more lies from management, maybe its time to re-assess whether its not better to cut the losses and find a better home for the capital.

Having a quick scan, every time I have taken part in an AHZ issue, within 6 months I could have bought the shares cheaper on market. Something to keep in mind. They have had some form of CR EVERY single one of the 5 years I have held.


I will wait until the details emerge and give it proper consideration.

In no great surprise to me, the AHZ share price has fallen hard from around 38c back to just under 30c - meaning you could buy on market for less than the SPP (30c). I will be sitting this SPP out, I have lost my strength of conviction about this business, and particularly lost faith in management's ability. 

galumay:
As much as I see the value in a deision journal, and I really think its helped me make better decisions, I realised today that there are times where its imperative to make quick decisions where time is of the essence and an opportunity may be lost if the process is too drawnout.

Obviously the hope is that some of the lessons learnt from writing a journal such as this will flow into quick decisions as well, inversion, baysian probability, expectancy etc.

Todays example was that I saw a hilux ute for sale at $3750, we have saved nearly $3000 towards a replacement car for Sal as her old hilux ute has a pretty serious death rattle in the engine and needs quite a bit of work done on it. The problem was that when I rang the guy selling the car, he already had someone who was coming to look at it and had received a lot of calls from interested people.

I went and took it for a test drive, and took it to our mechanic to have him look over it for anything that really jumped out. He said everything looked good with it and that it drove well. I knew I had got in for a test drive before the first person who had rung about it, but obviously he would get first refusal at the asking price. I decided on the spot that we should buy it, cars like this in this condition dont come up often and the price was more than fair. (on checking the cheapest similar car I could find in australia was $5000 and most were nearer $9-10K.) I figured we would likely sell Sals old ute for what we paid for it, $1500, so we would get into the new one for under $2500.

Having decided I wanted the car, I then made another decision, I knew that if the other party offered the asking price, they would get it on the basis of first in, best dressed. So I made the decision to offer $4000 or $250 over the asking price. I figured $250 was nothing really to secure the car if I really wanted it and I suspected that such a strong offer, with a '4' in front instead of a '3' would make it very likely the owner would sell to me despite me being 2nd in line and I thought it unlikely the other party would want to offer more.

It proved to be correct and we got the car. Had I taken time to deliberate, and write down a case for and against the decision we would certainly have missed out.

What I could have done better was apply some of the models that I have practicised in the decision journal into the 'on the run' decision.

So, invert, "What happens if we dont buy this car". Well, we have our budgeted cash still to buy something else. We might not need to bbuy anything else as the old car might have kept running for another how ever many years.

So, probability, The car has already lasted 3 years  without dying, probability is likely better than 50% it would go another 3 years. But it does need a new exhaust and the brakes are sounding like they need money spent on them too. The probability of the motor dying may only be less than 50%, but the consequence would be that there was no residual value, so say 50% * $1000 for a sale later = $500 plus 50%*$0 if it dies, =$500 + $0 = $500. That implies if we can sell it for anymore than $500 we are better to sell it now.

Also probability of finding another car for round our budget if the current one dies down the track is quite low. I reckon maybe 6 or so a year come up, so in any given month only a 50% chance. I think we could say a 50% chance of buying something at $4000 =$2000 plus the 50% chance we would have to pay more like $10K which is the next sort of price bracket for utes = $5000, so an expectancy of $7000. This implies buying at $4k now and still having a saleable car for $1K+ is the better option.

What could go wrong, we could sell the old car and then the new one could have some unexpected mechanical fault that turned out to be expensive. We could find we cant get any decent offers for the old one, something much better could come along for a similar price. None of these seem to be worse consequneces that the possibility of the old one dying, being worth nothing and no cheap replacements available.

Update - we sold the old ute for $1600, which is $100 more than we paid for it 3 years ago! Mind you if running costs were included it would be a different story, none the less its no mean feat to sell a car for more than you paid for it and now we have done that twice in a row. The result is that it only cost us $2400 to move into the new Hilux, which is a satisfactory outcome in my view.

galumay:
TNE released their first half results and promptly dropped nearly 10%, I think that the business is priced to perfection so any concerns in announcements lead to a pretty harsh rerating, in saying that I couldnt see much at a first glance, UK a bit soft and high receivables are a bit of a concern. Thinking about averaging down with some cash.

What can go wrong? If they miss the profit guidance of +10-15%

I think I paid too much for them originally at $5.45, the question is are they cheap at $4.46?

Even averaging down it only drops the average price to $5.29 so i suspect there are better homes for the capital.

Waiting for the full year results is probably the best course of action

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