Stuff > General Discussion
Decision Journal
galumay:
Took a position in KOV. Still holding LPE and SXE.
Revisiting this decision in the light of thinking about taking a position in KIN (see company thread).
SXE is much better than I suggested in my previous post, its debt free, strong cash flow yield, and trading on low multiples with over 6% dividend yield, if anything should consider adding to position.
I am trying to move out of the speculative positions in the SMSF, on that basis I will probably consider seeing AER, CXZ & LPE - they should probably have been bought in the personal portfolio, if at all.
Also thought about selling BCT, a funny little business i bought on the NSX, again buying someone elses conviction, the same culprit and he was wrong again! Paid a bit over $2, they are now $1 and hardly ever trade. The thing is it pays 5% yield on the original purchase price, so it doesnt make much sense to see.
That raises the elephant in the room - should i get out or EGP CVF? The funds performance has been sub par, and well below my own performance, ever since i invested back in Dec 2017. It has returned 4.26% CAGR while my returns over the same period are double that. (and that includes the drag on overall performance from the fund, eg my returns would be even higher if I was not invested in the fund.)
I am concious of the large number of businesses in the SMSF, a total of 26 currently, I would be much more comfortable at 15 or so.
galumay:
Our SMSF has reached $1m in the value of the investments, which are 100% equities. Its funny how numbers can trigger us, having reached $1m I am now nervous about leaving 100% in equities and thinking I should realise some capital and reinvest in a less risky asset class so we have an alternative source of income if the market crashed and we had retired - which given i am 59 soon, is not a distant event.
The hard thing is to know what asset class to invest in as an alternative, cash and cash like assets are basically returning zero for the forseeable future so that is no good, property has at least as much risk as equities, which probably leaves some sort of business as an investment vehicle, but it would be a challenge finding something we could run from such a remote location and I dont want to tie too much capital up in Gove and we already have an IP here.
Gold would be one thing others might suggest, but I see it as high risk with no intrinsic value.
galumay:
Considering taking a position in DSK, Dusk. This is a company that IPO's this year and the business sells Home Fragrance Products, offering a range of dusk branded premium products at competitive prices from its physical stores and online store. dusk's products include candles, ultrasonic diffusers, reed diffusers, essential oils and fragrance related homewares.
The business has grown strongly since listing earlier this year and while an obvious beneficiary of Covid, it still looks cheap on first glance. I estimate its H1 2021 earnings will be close to 30c which at the current SP of $2.28 would be a P/E of 8. It has no debt, positive free cash flow, a strong cash balance of around 25% of capitalisation. EV/EBITDA will also be very low, probably under 5 now.
The risk to the business is probably consumer discretion, if a new brand comes along, better marketed, better pricing, and steals market engagement then the business will be easily damaged. The narrow, niche focus leaves it very exposed - if it loses the home fragrance market it really has nothing else.
Just read the reviews on productreviews.com.au, feedback is very negative, poor products, made in china, over priced.
galumay:
Looking at AFL, its a recent listing (2 years), of a dedicated Family Law Practice, they have quickly grown to have offices in all capital cities and have grown organically rather than by buying existing family law practices and rolling them up. Its been a totally fragmented sector of the Legal industry with small practices specialising in Family Law round the country. AFL appears to have been successful in unlocking the potential of a national presence and the advantages that brings with marketing and attracting practitioners. The founder applied his expertise in SEO to optimise promotion of the business via the web.
Its had very strong growth since listing and my expectation is EPS will be somewhere round 1.2c for the first half FY21, and as mush as 3c for the full year. FCF conversion is very strong, currently running about 2x EPS. EV is about $29m, I expect EBITDA to be round $4m for FY21 so it would be trading on a forward looking EV/EBITDA of 7.25.
The current price is outside of my normal comfort zone because if I value it looking back at its metrics to date, it looks quite expensive, but I think its fast growth and the early stage of the business means to value it realistically I have to have more focus on what the near term metrics will look like and how that would inform a valuation. For that reason I am considering the extrapolated EPS, FCF & Revenue from the profit guidance notifications that have been released this year.
On that basis I think the business is probably worth somewhere round 60-70c which means the current price of 50c offers a fair margin of safety. But it is definitely a more speculative position than I would normally consider. FOr this reason I dont think its a fit for the SMSF and rather I am considering lightening the position in our personal portfolio of CDA and allocating that capital to a position in AFL.
I thought another exercise as part of the decision journal that sort of expands on looking at what could go wrong is to use a pre-mortem to consider the reasons that things could go wrong. So assume the worst and then brainstorm to explain it.
I consider 3 scenarios,
a.) Company fails to maintain growth in revenue, earnings flatline.
b.) Company goes backwards, revenue drops, earnings fall
c.) Company has catostrophic failure, total loss of capital.
Potential causes -
a.) Business reaches saturation in a niche market quicker than expected, a larger listed legal firm aggressively rolls up Family Law practices and takes market share, a high profile client has a malpractice suit succeed against AFL and negative publicity impacts business, changes in the Family Law act mean many less cases available, management makes poor capital allocation choices, moving to an expensive roll up model, borrowing heavily to fund faster expansion, CR diluting existing holders, attraction & retention of quality practitioners becomes an issue.
b.) A combination of more than one of the above.
c.) A combination of many of the above and/or fraudulent and deceptive accounting by management.
Finally assessing these probalistically,
a.) 20% b.) 10% c.) 5%
d.) company grows at similar to current indicated rate. 50% e.) Company grows faster than current rate 15%
So 50c * 20%= 10c + 25c*10% = 5c + 0c + 65c*50% = 32c + 80c *15% = 12c giving a price expectancy of 60c
Not sure of how much weight is appropriate to these sort of musings re probability because its so subjective, but I think the mental exercise of trying to assign probability to events is sensible because hopefully it will highlight if there is significant catastrophic risk.
I am also aware of the shadow SGH casts over this sector, burnt a massive amount of capital in that horror show and that makes me a little gun shy.
The other consideration is to sell CDA down and just buy more JAN - is Jan a better buy than AFL at current prices??
Decided JAN wasn't at better buy than AFL at the moment
Sold AVR, Anteris - one of the worst businesses I ever bought a part of! Also sold a parcel of CDA (598 @ $12.21 to rebalance a little and bought AFL 20000 @ 50c
galumay:
Sold out of my holding in EGP-CVF, a small, underperforming fund. In the end it was not the underperformance of the fund that triggeredd the sell, although it was becoming concerning after 3 years as it represented a real loss of capital for me. Rather it was the behaviour of the fund manager, he had become increasingly irrational in his monthly updates and also his behaviour on social media. When I saw his online attacks on another investor I respect, that was the final straw. On top of being a extreme libertarian, Covidiot and apparent Trump apologist it sealed the decision for me and I sold out.
As a result I have about $100k that I have to think about allocating. There are a few options,
* Leave it in cash (returns wouldn't be all that much worse than the fund!) - Bank account - pros - optionality, liquidity. cons - v low returns,
Premortem - Inflation took off and caused significant erosion of capital. One of the other options not taken returned significantly superior returns.
* Invest in a new position - KSL DSK are 2 i have looked at recently - Pros - ability to add new positions in significant size Cons - decrease concentration, number of positions more than i am comfortable with. Reduces optionality
Premortem - New position, management failed to execute as expected, SP dropped significantly. Market fell significantly, no cash to take advantage.
* Invest across best ideas/value in existing holdings - PBT, NTD, SKE Pros - builds on existing research and analysis, leverages on conviction, maintains concentration, keeps position number within comfort zone. Cons Miss alternative investment that may be superior to existing holdings. Reduces optionality
Premortem Market fell significantly, no cash to take advantage, my thesis was incorrect and company SP collapses.
* Invest in a different asset class. -commodities, crypto, property, small business, bonds -Pros Diversification of asset classes, some optionality,
Cons No yield & extreme volatility from commodities & crypto, crypto may not actually exist, way outside my wheel house. Property & small bus, illiquid and not viable with $100k, bonds -low yield, no growth potential.
Premortem commodities - price falls significantly & no yield (worse than cash) crypto - price crashes to 0 total loss of invested capital, property - n/a bonds - yield remains near 0/goes negative.
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