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Decision Journal

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galumay:
Its time again to reinvest some dividends, we have about $5k in cash and first of all, it will go into adding to an existing position - in the past I was always keen to find a new position to put money into, I am now trying to consolidate and concentrate the portfolios so I try very hard to resist any temeptation to add new positions!

I think ADA is the most obvious home for some extra capital, it continues to be an undervalued compared to my range of IV, and I have high conviction that the business will grow. They have recently confirmed guidance for EBT to increase about 35% for the FY.

The competing homes for the capital were other businesses we hold that are apparently undervalued, such as SDI and SRV, but I have less conviction about their recovery and they are already larger postitions. The other idea would be to add to profitable postions where we saw potential for further growth despite solid gains, so KME, GCS, and SXE. It will be interesting to revist in the future and see which strategy would have been better, as smaller positions SXE and KME would have made the most sense, I probably would have opted for KME given it has had less SP growth to date.

Bought $5k ADA at $1.85

galumay:
I was considering selling AAPL, they have hit $190 and we have made nearly 100% return on them. I considered some articles suggesting AAPL had an IV of around $150 and that got me thinking that they were starting to run a fair way ahead of fair value. On reflection I realised I havent actually run a valuation on APPL so it seems a bit rash just to use someone elses valuation.

galumay:
once again considering any future investments, thoughts about buying another property again, if we bought a house in Wuyal and used all our offset plus a bit say $450k, then we rent to gov for $1000pw, pays off in under 10 years. If we had to move out of here, we cant move into IP because we wold lose tax benefit of offseting interest costs, if we lease to gov for 10 years we cant move into wuyal rd.

galumay:
Considering opening a position in LBL - Laser Bond Limited.

LBL is a very small business based in SA who specialise in hardened surfaces for high wear applications. They service agriculture, oil & gas, mining, drilling, boring, - basically any 'tool' or machinery part subject to high wear from errosion, corrosion or impact. They have a strong R&D program tied in with a university as well as larger clients. Its a profitable little business, very tightly held registry with about 70% held by founder family & director interests so its quite illiquid.

The growth potential with the business is their growing international sales and more especially a new technology services division. In this sector of the business they sell a Laser Bond facility to a foreign customer, they build, install & train then there is a 5 year service agreement for revnue based recurring income. This has potential to be a significant source of income for the business if they can successfully build on the first few clients in the division.

Management seem very focussed and 'no nonsense", typical of founder/owners IMO, the reports and announcements are refreshingly frank and with few of the bullshit bingo words and motherhood statements common in ARs.

Based on my calculation of range of IV i have them at around 30c fair value, based on the 2017 Annual report, they currently trade at 17c - after a run up from 13-14c caused by the announcement of another Technology licencing contract and a positive update on revenue for the full FY.

It should be noted that profit was significantly impacted by the first Tech services contract - it added about $1.4m to revenue and this will not appear in the 17/18 FY, but as the update of revenue for the FY noted, growth in revenue in the other divisions have more than offset this. Also the announcement of the new contract means that revenue will again be increased by this division in 2018/19 FY

The business has little debt, 25 year history of profitable operation other than a blip in 2013 when they made a loss as a result of closing their unsuccessful Qld operation, and a niche market with strong IP.

The downside is that its a very small business, with illiquid registry and the value I see may remain locked up and not apparent in the price for a long time. The risk appears assymetric to me, its quite possible that continued expansion into the international business and growth of the licensing model would see increased profits, dividends and eventually share price. On the other hand if they dont get any real traction with the international push, and the licensing model flops, then the business should be valued on its 2017 numbers anyway - which still makes the current price look cheap.

In terms of catostrophic risk, the consevative nature of the business, low debt and strength of underlying business even without growth, makes it hard to foresee an event that would cause the business to fail.

Its an easy to understand business, it has some competitive advantage with IP and niche marketing. Margins should be fairly easy to maintain as incremental price changes in the product will be easily absorbed by customers and outweighed by the overall cost benefit of the proprietry process of protection for wear surfaces.

Competitors in the industry are Hardchrome Engineering, Laser Cladding Services Australia, and Dura Metal,part of Axalta group a large USA based international coatings specialist. The first couple are small private businesses, I suspect they would only service within their own state. Dura Metal is part of a much bigger international business, but I dont really see them as a direct competitor, they are more selling complete laser cladding machines for manufacturers who want to clad in house. (although that is a potential market for LBL as well>0

Now is the time to take a position, because LBL will release results for this year in August and I expect there will be a further positive reaction.

6/9/18 I have taken a small initial position at 16.5c. I will accumulate any softness.

5/12/18 Well, a lesson in anchoring, I hesitated and didnt buy more because the price kept going up, they were quickly over 20c and having bought at less than 20c I couldnt bring myself to buy more over 20c, today they announced new sales to USA and price jumped 39% in one day - my position is up 93% in 3 months!

I have been fighting my anchoring and trying to find a way to build my position in LBL, finally they fell nearly 15% today and I was able to get an order filled, at 30c, so down from 35c last week. This parcel took our average price to 20c so still up 50% overall.

galumay:
Looking closely at another business, Joyce Corporation Ltd. A business that has been around for 132 years and readers my age will remember they sold foam mattresses etc in the past. It is now basically an investment company with a majority holding in Lloyds Auctions, owning Bedshed and Kitchen Connection as well. The business is tightly held with the top 20 shareholders owning 70% of issued shares and the CEO holding 40% on his own.

The business is profitable and pays a healthy dividend yielding about 8% and growing, its a cash cow generating relatively large free cash flow. There is some debt but its quite manageable. The business owns property that is valued conservatively on the books for about $9m. The business has about $6m cash on hand. All on a capitalisation of only $43m.

By my calculations the range of IV is somewhere around $4 and it currently trades for around $1.60.

Basically I think its just an unloved business, not understood and slipping under the radar.

Thinking about what could go wrong, the car auction business is susceptible to competition, barriers to entry are low as are switching costs. Revenues would presumably fall in a recession, but its unlikely such a conservatively geared company would suffer too much from economic head winds. A housing crash might see the Kitchen renovation business become less profitable, although its entirely possible the effect would be positive as people chose to renovate instead of selling. The bed business is not threatened by online growth, people want to 'road test' a bed before buying, but again in a severe recession it could suffer. Basically all the business units are vulnerable to negative consumer sentiment given the products they sell, so share price and dividends could suffer in a protracted downturn, but the business should be resilient enough to come out the other side of the cycle.

I cant see any catostrophic risk with such a conservative business, people are going to still buy cars at auction, sleep in beds ad cook breakfast in a kitchen!

Buying now makes sense only because the discount to value is so great, and given the trajectory of revenue, earnings, profit, cashflow and dividends, its unlikely it will continue to trade at such a discount indefinitely.

Considering selling a small parcel of NWH to fund an entry position in JYC, it is now my 2nd biggest position and selling this parcel would represent returning the original invested capital and leave the rest as pure profit.

A mixture of quick & slow thinking! I have put in an order to sell down NWH, buy some JCY but also add to my holding in KME after it fell 8% yesterday when the founder owner notified he was selling down his holding by 15% over the next 4 years. IMO that is an over reaction because its actually positive that it increases liquidity a little in a very tightly held business - he is selling 500k shares over 4 years and that only reduces his holding by 15%! bought more at 65c which is more than 5% below recent prices.
UPDATE - more fast decisions, bought more today at 62c nearly 10% below recent prices!! I won't throw any more at it, although I think it may drop some more in the short term.

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