Portfolio buys & sells

There have been a lot of changes to my portfolio in the last week. Here they are along with my reasoning behind them.

Boom Logistics (ASX:BOL)

This is a classic Ben Graham type stock sourced from Alpha Vulture, selling way below book value and what I estimate liquidation value is. Latest interims show the balance sheet is good and the 2013 Annual Report gives more details on the business. As with my Emeco investment, this is heavily reliant on the valuation of plant and equipment which currently stands at AUS$328m compared to tangible equity of $245m. Hence any writedowns on equipment have a much larger writedown effect on stockholders equity. But with tangible equity of $0.52 a share and the share price at $0.135, the equipment would have to be written down by 55% before you lose money at this price.

The company reported equipment impairments in 2012, when it was getting rid of its most specialized weak-branded cranes which don’t have much cross use. So it is reasonable to assume that these took a larger write-down than the groups assets as a whole will. Even then they were not written down by 55% in my estimation. Historically the company has sold surplus equipment for more than its carrying value in the last 5 years.

Much like other Ben Graham businesses, this one hasn’t done much over the last few years. Take a look at the selected financials below, TBV hasn’t really changed despite some positive FCF.

Disturbingly, the same board that oversaw the ridiculous leverage increase in 2007 are the same ones in charge today. I don’t have much faith in them and unsurprisingly these jokers have nothing but token shareholdings.

One final thought, the bank extending a loan to Boom recently valued all its assets and said book value was fair, the interest rate of 7.5% seems reflective of that (interest rates aren’t rock bottom in Aus). If that is the case then the upside here is obviously huge. Personally I like to be more conservative, but even with a 20% discount to equipment the company is worth 280% the current share price.

I’ve bought a position in the stock, it is 4.3% of my portfolio.

Codan Limited (ASX:CDA)

This is an interesting company, Shadowstock gives an outline of it and the numbers and here is a Codan ltd research report giving some more background. This is essentially a play on the company’s reduction in profits being temporary. Its profits are driven mainly by sales of gold detectors in Africa. The latest interim results were a disaster, yet it still managed a $4.8m profit. All the way back in the early 2000s it was doing business at this sort of level and making nice profits of at least $10m per annum.

The big worry here is that profits over the last decade have been artificially high because of the surging price of gold. Of course this is a factor, but I think its not as bad as that. Consider that it has recently been hit by civil unrest in its main markets like Sudan, unrest that has had direct impacts on gold mines. Its three biggest African markets have all been hit at the same time, so one has to wonder if this dies down then will revenues shoot back up? These kind of unrests have been happening for years and clearly there are periods of relative stability in which people feel it is safe to prospect for gold again. Even if gold gets cheaper it will still be worthwhile going out searching for it.

“With the civil unrest in Sudan reducing the number of prospectors in that region, we are seeing a strong second-hand market of used detectors in and between our key markets, which has limited our ability to sell new detectors into these markets.”

Also worrying is the rise of counterfeits, it is hard to know how well these work, but the word “counterfeit” rather than “cheaper competitors” suggest they wouldn’t sell brilliantly without the fake branding. The company will release a low cost detector in FY15 and hopefully this can compete with these cheap knock-offs.

After a closer look at its financial statements, I notice the company capitalizes “product development”. This is a trick used to inflate reported income. The company regularly spends around $15m a year on product development and buying intangibles yet amortization is only running at $10m. This is however partially offset by restructuring charges of $2.4m in H1 2014 which to managements credit, they don’t net out to give an “underlying” profit figure, it’s buried in the footnotes. The company has a bloated inventory which should mean more free cash flow over the next couple of years if sales stay low – metal detectors don’t strike me as a short life product so they should be able to sell the inventory down over a period of time without requiring more cash to replace it. That makes me a bit more comfortable with the companies $65m net debt figure.

Overall the company is trading at a market cap of $136m, which isn’t amazingly cheap given net profit running at circa $8m a year. This investment really relies on a recovery in gold detector sales in the key African markets or the stock will go lower. I’ve taken a smaller ‘starter’ position in this of 2% of my portfolio, and will keep an eye on developments in the company.

Texhong Ltd (HK:2678)

I don’t mind admitting I am at the limits, perhaps even beyond my circle of competence on this one. Texhong is a Chinese/Vietnamese cotton company, that buys raw cotton, makes yarn and fabric, then sells on the finished product to clothes manufacturers etc. Red does a better job than I could ever do of looking at different scenarios of cotton prices and how Texhong can profit from a whole range of them. Here are a lot of reports he provided on them too in the comments. The reason the stock is cheap is that the current inflated price of cotton in China is not sustainable. I would agree, but do not think this will end suddenly because all parties involved will suffer losses on current inventory if that happened – more likely it will be a gradual reduction of the Chinese governments fixed cotton price to something more in line with international prices. This will hurt Texhong’s Vietnam business which buys cotton abroad cheap and sells finished products to China where it’s expensive. But it will benefit its Chinese business. In such a fragmented and commodity industry I wouldn’t expect Texhong to be a great star holding, but earnings are high while we wait until this actually happens. Also what I have read about the management and how effective the owner has been is encouraging.

I think it will pay off to be greedy when others are fearful, but without knowing a huge amount about China or the industry I have to make this a smaller position size of 3.6%.

I am not hedging the GBP/HKD exchange rate as it is currently at 5-year highs and will take my chances that it reverts to mean.

Amlin (LSE:AML)

Amlin, one of my long standing holdings, is a well run reinsurance company trading at a Price/Book of 1.4. I like the long term prospects of the company, but I needed cash to fund the recent round of purchases and looking through my portfolio Amlin was the position where I saw the least amount of upside. So I sold my entire position in Amlin at 473p which is 60.9% above my entry price. That works out at an annual compound return of 17.9% as I have held it for a number of years.

Goldplat (LSE:GDP)

Since my last article on Goldplat the stock has continued to sell off and is now 37% below my purchase price, on no new developments. It is currently a 3.9% position and I intend to double that and bring down my average cost.

Kentz (LSE:KENZ)

Kentz shares soared this week on a takeover deal priced at 935p, which the board has approved. I have a limit sell at 930p which has yet to be filled.

Cash

Portfolio cash now stands at 11.4%, and will reduce to around 7.5% once I top up on Goldplat.

Disclosure: Author is long ASX:CDA, ASX:BOL, HK:2678, LSE:KENZ, LSE:GDP and has no position in LSE:AML