Decision Journal

[galumay]

I have been thinking about taking an initial position in Beacon Lighting, BLX. It meets the criteria I look for in a business, its got a strong ROIIC of over 40%, a re investment rate of over 35% and FCF yield of nearly 10%. Divvy yield is 4.5% I dont think its particularly expensive, at around $1.97 it is trading at a discount to my range of value of around $2.40. Reverse engineering it implies growth of only 0.4% or 16c per share FCF compared to the current 19c.

My friend Chris VanAanholt knows the management team and speaks very highly of them and their integrity and motivation.

The biggest threat to the business is probably a downturn in the housing and construction sector, something that is certainly possible in the next couple of years. With such strong metrics BLX should be able to weather any negative economic cycle in the housing sector, of course it may become considerably cheaper if that eventuates.

a further risk is that the recent strong FCF and profit metrics are a one off result of Covid and are not indicative of a structural change in the business. Contrary indicators for this thesis is fairly stable revenue growth over the last 8 years, averaging 9%, the outlier was 2021 at 14.5% and 2022 looks to be a return to baseline with 5.5% sales growth and 8% EPS growth. The two covid outliers were definitely 2020 2021. The interesting thing is they have been able to grow gross & net margins thru 2020-2022. This means they were nimble enough to adjust the business for all of the issues, covid, supply chain, inflation etc. In saying all of that, the risk is that the roll off of the beneficial effects of covid on the business have not yet flowed thru, so we dont see them in the 2022 results, but 2023 reverts to mean and we could see EPS halve along with FCF. This would see a range of value around $1.50 by my calculations.

Another potential threat to the business is management losing their direction and starting to make poor capital allocation decisions, or embark on ambitious M&A activities. This seems possible but improbable given the high % of founder ownership of the business - the Robinson family hold 55% of the business. (top 20 hold 85%)

SO thinking about it probalistically, if the worst combination hits, housing spending roll off and post covid revert to mean, 10% chance $1, just one of these 10% $1.50, neither of them but business stagnates, 25% $2.00, business continues growth trajectory due to structural change and capital allocation, 35% $2.50, this and it gets run up by new investors on the back of these results, 20% $3.50 = 10c + 15c + 50c + 87.5c + 70c = $2.32 I give a stronger weight to the more positive outcomes just because of the history of revenue and earnings growth, the ROIIC and reinvestment rates and the management team.

Also the business has been operating since 1967, so over 50 years, the Lindy effect implies its likely to keep going!

The balance sheet is strong, only a small amount of debt and cash on hand is 2x debt.

BLX also dabbles in property management, from the AR -

During FY2022, through the Large Format Property Fund, Beacon Lighting acquired a 50% interest in large format retail properties in Modbury (SA), Bathurst (NSW) and Mildura (VIC). This property portfolio complements the other four large format retail properties which were acquired in FY2021. Currently, four of the properties are fully tenanted while the other three properties require further development.

Just realised the FCF is totally distorted by AASB 16 accounting, when the lease expenses are added back into operating expences where they belong, FCF is more than halved. This totally distorts my valuation for the business and I no longer consider it to have any margin of safety at current prices, in fact its grossly over priced relative to my re-calsulated FCF.

I am revisiting this decision because I really like this business so I am going to do some more thinking about it.

Current price implies FCF growth of 6%, which seems high for a retailer, but they have managed to grow EPS at just under 20% for the last 8 years, and revenue at nearly 9.5% (that alone is very telling, growing earnings faster than revenue is very unusual.)

FCF 2020 - 6.5c
2021 - 14c
2022 - 9.5c

8 years ago it was 2c so FCF has grown at over 20% also

So is the growth sustainable or is it some distortion of Covid etc? 2020 & 2021 certainly look like outliers, EPS growth of 37% & 67%, but that doesnt tell the whole story, as revenue in those 2 years only grew by 2.4% & 14.5% respectively. Somehow they grew gross margins by about 5% from 64% to 69% which was a big contributer to the increased EPS.

The company explanation was,

"The gross profit was improved by everyday pricing, improved procurement negotiations and favorable foreign currency movements."

Update 8/1/23 Ironically while I was slowly trying to talk myself into paying up a bit more for a position in BLX, the price has risen over 15%! So now I just sit and watch.

[galumay]

Thinking about selling NTD and buying more KSL, I should have sold NTD when I first saw red flags about management's capital allocation. I held on rather than taking a small loss, now I will be taking a much bigger loss. The rationale is 2 stage, following the H1 report for NTD I am really confronted by my failure to sell and hanging on in the hope they can recover and I wont realise a loss is silly and makes me a victim of biases like anchoring and loss aversion that I should know better than. Also the removal of the dividend means its even less attractive and there are further losses other than just the capital loss.

The second stage is re-investing the remaining capital in KSL, and the rationale is that its currently the most attractive position in the portfolio to increase, its trading on a deep discount to my range of valuation and pays an incredible dividend of over 13% - with 8% being paid next month which is a helpful start of turning around the negative impact of NTD.

So there are two seperate decisions, do I sell NTD, and I think the answer is yes, and I should have done it 12 months ago. Is KSL the best value proposition in the PF currently, and therefore should I buy more? I think the answer is also yes.

Sold all NTD at 0.561632

Bought 33762 more KSL at 0.80c 28/02/2023

[galumay]

I am considering selling a small parcel of our largest holding, $AAPL, it is no doubt trading at a premium to value by my calculation, at ATHs at the same time as the AUD is historically weak, so that maximises the return. The reasoning is that we will have about $20k AUD tax losses we can offset against the capital gains from selling AAPL, and it would boost our advance cash levels for retirement funding. My thinking has changed a little as we close in on both being retired, I was always happy to be basically fully invested, but I think a cash buffer makes more sense once we need an income stream from the SMSF. I suspect the increased liklihood of a recession with a hard landing also informs my emotional reaction, as much as I eschew ignoring macro, it does make sense to have a cash buffer to reduce stress and increase resiliance.

Sold 9o AAPL at $159.10 24/03/23

[galumay]

Looking at buying a car to replace either or both of our existing cars. I have been thinking for a while about purchasing a car to replace the troopy & or hilux in the future as we move into retirement for both of us. I think we need a 4wd for towing and occasional off road work, but not something with the capability of the troopy. The Troopy is 37 years old and needs quite a lot of upkeep to keep it on the road. Its hard for Sal to drive so not an ideal only car, the hilux is 20 years old, quite rusty in parts and not 4wd so not suitable as our only car.

We dont need something yet, but I have been researching what would be suitable and settled on a twin cab, Volkswagen Amarok 4WD with the 2.0L engine. I actually found a good cheap ($25,000 for 2005 model) one in Darwin, in White, which i want for the tropics, but we decided we didn't need it yet and by the time we did it would be a couple of years older so we decided not to buy it. Then a very well specced one came up in Gove, for about $25k as well, but it was in dark blue and a 2014 model, after talking with Sal we decided once again to give it a miss, mainly because it was a dark colour.

I am now down in Melbourne seeing mum and I thought I should see what is available here, and came across a private sale of a 2019 model, in white, no bull bar and standard tyres, with 171k km. Its a lot of k's for a 4 year old car, but they are all highway miles, from daily drive geelong to melbourne.  So not really an issue and we will add very few miles. If I can get it for $25k or under its a very cheap car - price range is $28k to $32k. It also has an alloy tray which is probably a detractor from value but I actually prefer. I think if I could get it for under $25 and ship it to darwin it would be a very good buy, $2k to get it to darwin and then bring it home when I go over in August.

Really the only question is, is it worth buying sooner than we need it? The reasons to say yes are, I am actually already here to look at them, so it saves a fare to inspect a car at a later date, I already have to come to darwin in August and dont have to pay the airfare so could drive it home then, i doubt we would ever find a 4 year old car like this for $25k again, its white, has a tray and under 200k kms.

The reasons to say no are, the two cars we still have are both operational still, so wait until we actually need a new car, maybe an even better deal will come up, maybe a white one will come up at home.

I am going to have a look at it tomorrow.



Ended up buying this Amarok, it checked out with a full service record from VW, it was a one owner car, he bought it new in June 2019 on finance thru VW, no write off history and looked in very good conition as expected given the history. I was able to buy it for $24k inc GST, so the real cost was about $21800. Cost me $2750 to get it to Darwin, and as I said we are flying over in August at no cost to us, so I will drive it home then. In the end I found the price to overweigh any concerns I had about buying it now, I really doubt I would find one that was better value in the future.

The decision we now have to make is whether to sell the troopy or Sal's ute, but we will wait until we have the Amarok here to make that decision.

[galumay]

Something I have battle with for a while is trying to displace decisions with habits. The idea is that decisions are 'expensive' in terms of mental energy, time, decision quality and distraction from other tasks, so if you can replace as many decisions as possible with habits then you can make better decisions and limit them to important issues really requiring decisions. Steve Jobs making a habit of always wearing the same type of clothes is a very basic example.

My battle is interesting, I find it relatively easy to turn decisions into habits with positive things, so I have made a habit of cleaning the group head every time I pull a coffee, and keeping the workspace around the coffee machine clean, these were fairly easy and are now embedded in my habitual behaviour. Its the negative habits that are harder to make stick for me, so NOT eating between meals is my current battle, I have many times told myself I am going to make it a habit and failed many times! I have considered 2 strategies, one is to invert the negative decisions, so try to make it a habit to only eat at meal times! The second is this - write about it. 2 days ago I just posted my thoughts about negative versus positive habits (maybe better phrased as doing or not doing habits), and I have had more success with not snacking between meals than ever in the past! Its well known that making commitments in writing makes them much easier to uphold so it may be as simple as this, I figure doubling down here can only help!

[CiriColet]

Something I have battle with for a while is trying to displace decisions with habits. The idea is that decisions are 'expensive' in terms of mental energy, time, decision quality and distraction from other tasks, so if you can replace as many decisions as possible with habits then you can make better decisions and limit them to important issues really requiring decisions. Steve Jobs making a habit of always wearing the same type of clothes is a very basic example.

My battle is interesting, I find it relatively easy to turn decisions into habits with positive things, so I have made a habit of cleaning the group head every time I pull a coffee, and keeping the workspace around the coffee machine clean, these were fairly easy and are now embedded in my habitual behaviour. Its the negative habits that are harder to make stick for me, so NOT eating between meals is my current battle, I have many times told myself I am going to make it a habit and failed many times! I have considered 2 strategies, one is to invert the negative decisions, so try to make it a habit to only eat at meal times! The second is this - write about it. 2 days ago I just posted my thoughts about negative versus positive habits (maybe better phrased as doing or not doing habits), and I have had more success with not snacking between meals than ever in the past! Its well known that making commitments in writing makes them much easier to uphold so it may be as simple as this, I figure doubling down here can only help!

Hi! You have some very interesting thoughts here. I decided to dwell a bit on your forum.
I too struggle with the habit of eating between meals because it causes a spike in blood sugar.
Why do you do it?