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galumay:
This is a post script to a decision to take a position in AMO, Ambertech Limitied,

Ambertech Limited, together with its subsidiaries, provides various technologies for the professional and consumer audio/visual markets in Australia and New Zealand. It operates through Professional, Lifestyle Entertainment, and New Zealand segments. The company distributes high technology equipment to professional broadcast, film, recording, and sound reinforcement industries; home theatre products to dealers; projection and display products for business and domestic applications; and custom installation components for home theatre, and commercial installations to dealers and consumers. Its home entertainment products include home cinema and theatre systems, Hi-Fi, and personal audio solutions; speakers, sound bars, and headphones; remote controls and antennas; and connectors, cables, and accessories. The company's professional performance equipment comprise live sound and video production solutions, music equipment, recording equipment and microphones, and video editing and post production systems. It also offers content creation, acquisition, deliver, processing, and asset management for broadcast and media in the areas of production systems, data management, video delivery, infrastructure hardware, cloud and IP video, post, remote operations, and workflow management. In addition, the company offers acoustic panels, amplifiers, audio preamps and matrix controllers, cameras, cases, guitars, hearing augmentation products, microphones, networking products, projectors, receivers, screens, sound level meters, speakers, speech transfer and tour guide systems, vocal and instrument processors, racks, studio and stage products, and audio video content players and recorders; and commercial and residential installation services. It operates through a network of dealers. The company was founded in 1987 and is based in Warriewood, Australia.

In essense they provide high end AV hardware & solutions to businesses like TV stations, Government and others needing such solutions. They also distribute AV hardware to companies like JB HiFi and Hardly Normal for retail customers. They also distribute a range of music related products thru their own dealers.

Historically its been a horrible business, I suspect too many parts and not enough focus on business management has led to very lumpy revenue & earnings, never really getting to the point where it looked like an investible business. For that reason when I first had a high level glance at it after Claude asked me my opinion, I dismissed it out of hand. The link below has the details of the conversation.

Previous commentary

This is a case where I learnt to change my mind when there was disconfirming evidence, so the FY 2021 annual report for AMO was released this week and the result was very strong, it implied a business trading at a PE of about 4, a divvy yield of over 11% and FCF yield of 20%. When I looked at the ROIIC for this last year it was over 100%.  This made me go back thru all the announcements for the past few years and check whether there was an actual transformation of the business or whether it was just a one of Covid type impact.

It soon became obvious that there was a clear plan from management to improve the business, and a cornerstone of this was the acquisition of Hills AV business in late 2019, this was the turning point really and although it took longer than expected to translate into results in the financials due to external impacts including covid, it was clear they had a vision and were executing it. From 2019 they were guiding for revenue of $70m in 2020, which they missed because of the external factors, and $43m in H1 2021, which they only just missed coming in at $39m and showing good profit, FCF and an increased dividend.

This is what I missed when I dismissed it after a high level look originally - because it was really only one half year that had shown any sign of promise in the last 10 years of trading!

So now for the full year of 2021, they hit $80m revenue,



On putting all this together I realised the business was still very cheap, even if they only achieved very low growth from here, the 11% dividend alone would put pressure on for a significant rerating, on the morning of the announcement they were up about 9% and I bought a parcel at 30.5c.

So what can go wrong, well the most obvious is that the business returns to its historical band of revenue, in the $50-60m range and therefore they go back to being borderline profitable and the yield becomes low to zero again. This seems unlikely to me as it was an unprecedented increase in business activity to take itt up to $80m revenue and I cant see any special circumstances - eg covid driven activity.

If the business did just have a one off boost from the addition of the Hills business and growth is flat from here, its will still be likely paying a dividend yield that is higher than average and that will provide a floor for the price in the medium term.

If its truly a transformative change and some steady growth continues, then there should be a strong multiple expansion as well as increasing dividends over time.

Probabilistically i can see if the first instance plays out the price droping back to 15c, I would rate that a 20% chance, in the second instance I would see the price maybe settling out at 35c and about a 50% chance, in the best case i think it could run to around 60c - 20% chance. I think there is a chance it
could perform so poorly that the price drops back to 5c, I would rate this a 10% chance, so price expectancy is, 3c + 17.5c + 12c + 0.5c = 33c

Thats only about 10% above my buy price, but its based on a pretty conservative outlook probabilistically.

My thesis is that at worst revenue will be maintained in the band around $80m, EPS of 6c & dividend will continue to be around 3c and that the share price will rerate to a price more in line with market valuations, my quick & dirty DCF gives a range of value around 80c and an implied return at purchase price of over 20%.

It will be a case of watching the financials very closely going forward to make sure the execution continues to add value for shareholders.

Here is the commentary on twitter after I bought the parcel, read from bottom up,

galumay:
I am considering selling our PPH Pushpay holdings, the business recently announced a significant acquisition of a video production company, RESI Media, a private US company servicing the church industry. They have agreed to pay $150m for the business, but have published no info at all about the actual value of Resi, no earnings, no cash flow, not even EBITDA, so its impossible to tell whether this is a good allocation of capital or not. I emailed PPH investor relations asking for more information on the financials of Resi, but they have responded by linking me to the existing info - which doesnt mention valuation or financials for Resi!

I think there are genuine questions about the motive for this takeover, the new CEO making a name for themselves? Pressure from bigger investors? With the CFO on the way out the door its not a great look. (thanks to @Larryjamieson on twitter for raising some of these questions.)

The continued sell down by founders is also a concern.

Current thought is not to sell as then we have cash to allocate, wait and if a better opportunity comes along move into that, otherwise it remains a low conviction hold & watch.

galumay:
Decided to sell my lowest conviction position, TNE, its mainly a valuation decision, while the ROIIC remained very strong ( a function of the very capital light model & some pretty aggressive accounting practices), the FCF yield is only 2.73% and I feel like thats inaccurate on the high side due to accounting practices. My quick & dirty DCF range is around $4.50 and the implied growth rate in the current price is around 8%!

I bought first in 2016 and my average price was $5.77, sold for average of $13.37 so a bit over 100% return over the 5 years holding so a CAGR of over 18% which is more than satisfactory and excludes dividends.

galumay:
Looking at taking a position in HLG:NZX, Hallenstein Glasson Holdings Limited, through its subsidiaries, retails men's and women's clothing in New Zealand and Australia. The company operates 114 stores, including 43 stores in New Zealand and 4 stores in Australia under the Hallenstein Brothers name; and 36 stores in New Zealand and 32 stores in Australia under the Glassons name. It also sells its products through its e-commerce platform. In addition, the company leases various retail outlets under operating lease agreements. Hallenstein Glasson Holdings Limited was founded in 1873 and is headquartered in Auckland, New Zealand.

At a bit over $7 its not super cheap, but its certainly a high quality business, the Lindy effect comes into play with a business that has been around since the 1870's! It has a reputation for both customer focus and very frugal operations. There are various stories on the history of the business, here is one - CLICK

My back of the envelope valuation in north of $12, but I am mindful that is based on very strong FCF coming out of Covid. Applying a normalised FCF from the last few years would see a value nearer $5, I feel that on balance the current price is fair value with a little optimism about the outlook. A continuation of the dividend of recent years would see a yield of 4-5%. ROIIC is very strong, around 60% ROE & ROC are both around 30% on 10y median returns.

So its an easy business to like, well managed, profitable, slow but steady growth, no debt, share count same for last 10 years, enduring, founding family hold over 20%, and directors have skin in the game, but what are the risks?

I think the biggest risk is the business growth that looks apparent through Covid is temporary in nature and revenue, profits, FCF & yield return to historical levels. In this case $7 would look pretty pricey but yield would still be satisfactory.

It would take a more severe disruption to the business to make it a bad investment decision, something like a misstep in capital allocation, an attempt to accelerate exansion into Australia or US? Or a poor acquisition/merger.

One potential red flag maybe the company's decision not to repay the wages subsidy many of its employees received through Covid, there is no requirement to repay, the money went to the employees, not the company, and they broke no rules or guidelines - but there is a moral argument the equivilent money might have been returned. article link and and HERE

The other issue I have is the lack of trasparency about performance payments for executives, although the Annual Reports reference the Renumration policy on their website, there is no policy on the website, just a statement that they have on. The only thing I can say is that the share count has been static for years so they are not issuing themselves shares!

Why wil this business be round in 10 years, as mentioned Lindy effect - its already been around 150 years, also retail clothing is one of the most online resistant retail sectors, people want to see, feel and try on clothes before buying. Also NZ based is a small barrier to entry of itself. What would it take to mean the business was not around in 10 years - really would take some sort of black swan event, unforseeable disruption, fraudulent management, total collapse of NZ economy...

I dont expect to see much growth or multiple expansion with HLG, its the type of business I would like to hold for a very long time, it generates significant cash, reinvests what it can (which is only around 25%) and pays out the rest as dividends. While management allocate capital with the conservative approach they have done so far, I will happily accumulate dips and build a larger position.

Bought 2886 at $7.08 NZD 23/11/21

galumay:
I wrote a lengthy post about the process we followed in finding our new boat, something went wrong with an attachment and I lost the whole post! I had to walk away for a couple of days, but I will have another crack at it!

We have been looking for a bigger boat for about 12 months, it grew out of a desire of mine and our friend Dave, to cruise the NT coast from Gove to Darwin, exploring all the rivers, bays, islands, reefs etc and developed into a realisation that the 3 of us wanted a bigger boat not just for this trip but to spend more time cruising our coastline over more of the year. This meant a boat big enough to do more thru the windier dry season and initially our thinking was a 12-15m monohull motor boat with an economical motor like a Gardner or John Deere. We slowly developed a set of essential criteria in terms of fuel economy, range, galley location, seperate accomodation spaces, outdoor living spaces, and so on.

We built a process of searching for boats that seemed to suit most of our criteria, and then creating lists of everything we could find wrong with each one and in particular any issues that breeched our initial criteria. This was dont to avoid the likelihood of talking ourselves into buying something because we liked a lot about it, while missing something critical that would have been a problem once we owned it. It also helped prevent FOMO and impulsive purchasing in what is a red hot sellers market.

What we discovered as we looked at boat after boat, is they all had quite a long list of things that we found problematic or in outright contradiction with our criteria. Then one day, only a month or so ago, i somehow came across a sailing catamaran for sale in Darwin, and it got me thinking about how well a sailing cat met our criteria and after a while I built up enough nerve to ask sal to hear me out and after explaining my thinking, asked her if there was anyway she would consider a sailing cat. She was like, sure, "looks great, as long as it doesnt lean over I am fine with it" so then I had the same discussion with Dave and he was "Oh yes, well I have always thought a cat would be great up here".

So we pivoted and started looking at sailing cats and one thing became really obvious quickly, our list of negatives and things we couldn't live with became very, very short - for every cat we looked at!

In the end we settled on a Foutaine Pajot Bahia 46, a 46' or 14m French built cat. She is built in 1997 and has been owned by an Aussie couple who bought her in the Caribbean and lived on her for 8 years before ending up back in Australia. I flew down to Brisbane and did a quick sea trial, and the deal was done. I feel we got her at a reasonable price in a very hot market, $310,000. Its a lot of boat for the money and one of the things that influenced our decision was that Lumiel is a production boat which does help with resale - not just value but liquidity.

Also buying in a seller's market meant we were selling our old boat in the same market, i very much doubt we would get nearly as good a price and in fact may have had great trrouble selling it in a soft or buyers market so it evens out to some extent.

So thinking about what could go wrong with this decision, the obvious one is that my belief that having a yacht will add a whole new dimension to our boating and allow us much more flexibility, may prove to be wrong if Sal and or Dave end up really hating the sailing side of it. The potential offset to that is we could just not use the sails and still have an effective motor boat.

Secondly we could find that the boat is simply too uncomfortable in dry season conditions to take on the sort of trips we plan at that time of year, I think this is unlikely but possible. The question then is would any type of boat in our price range be suitable?

Thirdly we may find the amount of work and stress of keeping a boat on a mooring in the bay in a a cyclone zone may be too much for us as we get older. There is probably a cross over on this, currently I have the time & energy, Dave has the energy, Sal not too much of either at the moment. At some point as we move past our mid 60's this may become more of an issue.

We could end up having to spend a lot more money to maintain her than we expect, this is somewhat offset by the price we paid, nearly everything else we looked at was in the high $300k's so even if we had to replace the rig, sails, an engine & sail drive we would only be at about the same cost as the more expensive boats we looked at.

Anyway, here are some pics of Lumiel, she is currently on a jetty in Birkdale Qld, Sth of Brisbane and we are looking at sailing here home in March April next year.





Also a couple of videos,

 

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