MacMahon Holdings (MAH.ASX)

A couple of companies I own stock in reported over the last week or so, so I thought I’d do a quick post on a pretty straightforward one – MacMahon Holdings.

Here’s the annual report. It’s a mining services company, so you’d expect it to be pretty cheap.

Current market cap is $102m. Net cash is $74m.

So you’re buying all the equipment and contracts etc. for $28m. The company has PPE of $141m, after $202m of impairment charges this year.

So you’re buying PPE at about 20% of its reported value after a pretty huge writedown.

“Underlying profit” for FY2015 was $10m.

Cheap enough for me, but it could be a rough ride for a year or two.

Edited to add: Insiders bought 3.2m shares over the last year, although in total this is probably only about $200k worth.

2015 HY performance

Average performance in the first half of 2015. 0.1% increase for my USA portfolio. My return was much higher in NZD terms, but that is not counted for my benchmarking purposes.

My NZ/Aus portfolio was up 2.7%.

In other news, I sat CFA Level 3 and found it quite tough. We’ll see results in August.

Someone should give this guy some money to start a fund already.

2014 Performance Update

This took too long to get around to doing. But I’ve got a new baby and am studying for Level 3 CFA as well as working full time.

Anyway, here are the numbers:

As you can see, a disappointing 2014, and total underperformance since 2012. Cash balances in my NZ portfolio dragged me down, and great recent performance from Tower (TWR) isn’t in the data yet.

My USA portfolio is just mislabelled now, as the largest position is in GVAL, a global value ETF and a poor performer in 2014 (but well performing in 2015 so far).

I am disappointed in the underperformance relative to the benchmark, but obviously very happy with the absolute performance. To me, it reinforces how difficult it is to both outperform with security selections, and to time the market. I don’t actively try to time the market, but cash balances are a function of how many good opportunities I see, and so I implicitly am timing the market relative to a passive portfolio that is 100% invested.

I have moved a lot of my portfolio to value-tilted ETFs. If I see particular opportunities I will still post, but as I noted above, I’m pretty busy these days. I’ll continue to update performance numbers to see if my value ETFs + individual stocks outperform the broader market.

Edit: Originally I understated my 2014 NZ performance because I misread my spreadsheet and substituted second half 2014 performance for total 2014 performance. The numbers above are now corrected.

2014 first-half performance

New Zealand/Australian

With dividends, my New Zealand/Australian portfolio was up 9.7% for first half of 2014. The New Zealand index was up 7.9%.  My best performers were Telecom and Chorus.

USA

My USA portfolio was up 4.8%. The S&P500 was up 8%. My best performer was Apple.

I’m happy with the performance, given that the figures above include not insignificant cash balances in a rising market. It’s also not quite right to call my USA portfolio a “USA portfolio”, as now the largest position is in the Global Value ETF (GVAL)

Here’s a table showing my very modest outperformance since inception:

If you’re looking for real outperformance, check out my (as always) favourite blogger: alphavulture!

 

 

 

 

 

 

 

 

Portfolio changes

CFA study is finally over for the year.

I’ve made a few portfolio changes since my last post.

I sold most of my Tenon after more and more disappointing homestart data out of the USA. Given it was such a big part of the thesis, and I was sure it was turning, I decided that me being wrong on that basically eroded my confidence in the thesis. I made a small gain as the shares traded slightly upward from purchase.

I sold Apple. It was up 50% from my purchase price, and I bought it because it just seemed so cheap. At $90 (post split), it doesn’t seem nearly as cheap any more (although still cheap).

Tower posted some good results, and so did (most surprisingly) Kirkcaldies.

Trademe got a lot cheaper, and I built a (for my portfolio) largish position. I may write a longer post on Trademe later. It’s not a super cheap stock, but given the business quality, it’s looking relatively cheap if you assume they can achieve any real growth (difficult, but not impossible).

 

 

 

 

 

Bought Tenon

I don’t have time to write up a proper post, as I’m behind in CFA level 2 study.

But I bought Tenon (TEN on the NZ stock exchange). Tenon is a wood products processing, marketing and distribution business.

Here are some brief notes:

• Director’s wife bought 50,151 shares for $68 000 In March 2014.
• Planned resumption of shareholder cash returns in second half of calendar 2014.
• Intending to increase the company’s equity exposure to US investors.
• Edison analyst report values Tenon at mid-point of $2.40 per share (current price of $1.40)
• Third Avenue Value Fund is a big (18%) shareholder.
• Bottom line profitability expected in second half of 2014 fiscal year (before restructuring costs).
• EBITDA of $5 million recorded in most recent year.
• Targeting $10 m EBITDA in fiscal 2014.
• Mid-cycle EBITDA (assumes 1.7 million housing starts and NZD/USD of 70cents) of $45 million.

Basically, this company is levered to US homebuilding, but has been left behind in the runup of those stocks. That could be because the float is limited, the stock is only listed in New Zealand, etc.

It looks pretty cheap, so I bought a smallish position. This is a useful summary of the latest annual meeting.

Back to study now!

Sold Marlin Global

The discount from NAV shrunk from 20% to about 10%, and the NAV rose a bit from when I purchased.

Given that I didn’t have particular views in either direction about fund manager skill, a 10% discount seemed appropriate given the size of the fund (small) and its expense ratio. Note that a much larger discount would have been appropriate had the fund not been paying out 8% of its NAV as dividends and buying back ~5% of its own shares each year.

I sold all of my shares over the last two months. It’s a 35% IRR, but a lot of that was due to the NAV rising. Given my thesis was almost entirely about the discount, the rising NAV was a lucky bonus.

I would buy again if the discount got to 20% again.

2013 performance

New Zealand/Australian

With dividends, my New Zealand/Australian portfolio was up 3.2% for 2013. The New Zealand index was up 16%. So that’s a bit disappointing. I had a bit of cash during the year, but the main detractor from performance was Kirkcaldies.

USA

My USA portfolio was up 47.5%. That beat the S&P500’s 32%. My best performers were:

• Liberty Ventures (LVNTA)
• Lakeland Industries (LAKE)
• Conrad (CNRD)
• Echostar (SATS)
• Apple (AAPL)

No particularly bad performers.

Overall I’m very happy with the performance, and am going to be cutting back investments due to general overvaluation of specific stocks, as well as the market generally.

Tower Insurance Buyback

Tower Insurance (previously written about here) recently reported results and announced a large share buyback. Here are the links:

• Results
• Presentation on results
• Buyback announcement

Since my first purchase back in June, the stock has paid a 5c dividend, but languished somewhat after some moderate earthquakes in Wellington (where I live).

The results are approximately what I expected, but I’m more interested in the buyback. Here are the key facts:

• The stock currently trades around $1.71.
• Tower intends to spend up to $70 million with an off-market, pro rata voluntary share buy back at $1.81.
• If Tower spent all $70 million, it would buy back 18.7% of its shares.
• The buyback is conditional on shareholders volunteering approximately 9% of shares to be bought back (technically “conditional on sufficient acceptances being received from shareholders to return an amount equivalent to at least 10% of TOWER’s average market capitalisation (at the time of this announcement)”.
• No brokerage charged on buyback.
• Repurchased shares will be cancelled.
• Eligible shares to be bought back have to be (record date) on 6 December.
• Offer closes 23 January 2014.
• Payment date 31 January 2014.
• (Dates may be changed at company’s discretion).

So the questions for me are: what do I do with my existing shares, and do I buy more?

If I can buy shares at $1.71 today and receive $1.81 on 31 January next year, that’s an internal rate of 41%, which is pretty good if you can get it.

But they’re “only” buying 18.7% of their shares back, and it’s prorated.

The other aspect is that if I sell for $1.81, I’m taking a very modest loss (after accounting for the dividend) on my shares. That’s really a sunk cost issue that is irrelevant for my decision today, but it raises the question of whether my analysis at the time of purchase was wrong, and if so, why?

The way I see it is that I’m still comfortable with my initial thesis, but that there may be a potential short term opportunity to capture the spread between today’s market price and the buyback offer.

The issue is that the buyback happens in two months. So depending on what the share price does between now and then, there will be different outcomes.

If the share price rises above $1.81 before the buyback, I can sell into the market and make a better than 41% IRR.

The problem is if the share price falls. As the price falls, more and more investors will opt to sell into the buyback. That will reduce my pro-rata share.

At an absolute minimum, I will be able to sell 18.7% shares into the buyback. In reality, the proportion would be higher as some investors cannot be bothered filling in the acceptance form.

For the remainder of my shares, I will own an insurer who has bought back 18.7% of its shares at below my estimate of intrinsic value. That doesn’t seem like such a bad outcome.

I’m still pondering what to do, but if anyone has any thoughts, email me or leave a comment.

 

Quick Marlin Global update

Marlin Global is currently the largest position in my New Zealand portfolio. I wrote a decent sized post on the stock, which I can’t seem to find. But this letter I wrote to the directors is a good overview: Marlin letter.

The CFO called me after that letter and was quite receptive to considering the ideas in the letter. I doubt if much will change because of my letter, but recently Marlin updated the market with this presentation.

It’s a quick presentation, so you can skim through yourself. But basically the new manager has changed strategy, and is focussing on good quality companies, rather than cheap growth stocks. So one of the biggest positions is now Google.

I’m basically in the stock because of the discount from NAV, but overall if I could choose, I’d choose these sorts of companies over cheap growth stocks (which I tend to find impossible to identify). I don’t mind holding google at a discount.

The company is still buying back a modest amount of shares, and paying out 8% of NAV per year.