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.


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:

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.

Quick Kirkcaldies update

Financial statements here, press release here.

As expected, a significant loss on the retail business.

Shareholder funds increased $18,049,000 due to the building now being carried at fair value. So the price/book ratio is 0.55, and the book value is predominantly made up of the building, now independently valued at $50,000,000.

Most disappointingly:

In December 2012 Kirkcaldie & Stains Limited appointed external parties to provide advice on the options available to facilitate the separation of Kirkcaldie & Stains Properties Limited which owns the HCC from its parent company, Kirkcaldie & Stains Limited which owns the retail operations. Having carefully considered the advice received, in October 2013 the Directors resolved that the separation of the two businesses was not in the best interest of shareholders and the plans were abandoned.

They need to sell the building, but the press release is entirely silent on that issue. Worse, there is an implication that they’re not even interested in selling it:

The focus for 2014 is driving increased retail revenue by providing the best customer experience in New Zealand while further reducing our cost base. The improved rental stream from the HCC should see the Group return to profitability.

Sounds like they’re still just interested in having the building subsidise a dead-end department store business.

I’m not likely to sell given how cheap the stock is, but I’m disappointed.