Conduril reports 2015 results

Conduril released their annual report for 2015 yesterday. As usual the report is initially only available in Portuguese, but luckily Google Translate is pretty awesome. Unfortunately Conduril’s results for 2015 are not equally great. While revenue only dropped 6% from €208 million to €196 million net income dropped dramatically from €29.5 million to €6.2 million. The company doesn’t provide a real explanation for this. They spend a lot more this year on “External supplies and services”, but no idea why and whether or not is going to be an onetime issue or a permanent change. In addition the positive effect of currency movements was a lot smaller this year, although that was partly offset by a big reversal in the provision for doubtful accounts. If Conduril didn’t have that reversal reported earnings would have been close to zero.

Besides the poor – and unexplained – earnings I found the following noteworthy:

  • Conduril finally started to do some business again in Portugal. In 2015 23% of revenue originated from their homecountry compared to 7% in 2013 and 2014.
  • They loaned €20 million to two Portugese companies that they also own a minority stake in, bringing the total balance to €33.8 million. €20.3 million is outstanding to “SPER – Portuguese Society for Construction and Road Exploration, SA” while “Algarve coast routes, SA” has €13.5 million outstanding.
  • A huge part of their balance sheet continues to consist of Angolan government bonds, now worth €101.8 million. Unfortunately the credit rating of the country was recently downgraded from B+ to B because of the lower oil price, its main export product.
  • In the second half of 2015 the company finally managed to turn some receivables into cash, lowing the “cash conversion cycle” metric from 283 to 223 days.
  • Despite the difficult conditions the backlog is holding up reasonable well, dropping from €450 million at the start of the year to €340 at the end of 2015.
  • They announced a dividend of €0.50/share, just 25% of the €2/share that it paid last year.

While the 2015 results were not very good I think that the company continues to represent a great deal, although an increasingly risky one because of the large credit exposure to Angola. With the stock at €42 Conduril is trading at 66% of NCAV and that is ignoring the €33.8 million in loans to Portugese companies that are classified as non-current assets. If we would include those in the valuation NCAV/share would jump from €64 to €83/share.

The Algarve coast


Author is long Conduril

PV Crystalox Solar: the struggle continues

Last year I decided to increase my position in PV Crystalox Solar because it was trading at just 40% of net current asset value (now at 47%). The company is struggling because of (Chinese) production overcapacity of photovoltaic wafers (its main product). At the same time, it was locked in an unfavorable long-term contract to buy polysilicon (the main material that is used to create wafers). PV Crystalox Solar released preliminary results for 2015 last week that show us exactly how bad 2015 was.

I expected last year that they would burn through roughly €10 million in cash, and they actually had a negative operating cash flow of €12.9 million. As a result, they have €12.7 million of cash left while the company has a €21.0 million market cap. The good news is that this amount is now expected to grow because they still have an inventory of €23.2 million that consists largely of polysilicon (€20.3 million) that they now can turn into wafers without losing money. Because of the “favorable” market conditions the company has decided to extend the strategic review period. If they are unable to start operating profitable they will liquidate, and that is what keeps the stock attractive despite the cash burn so far. From the latest presentation:

PV Crystalox outlook 2015

What I also found very noteworthy was the following statement in the letter of the chairman:

In view of changes in market conditions during recent months that have positively impacted the Group’s competitive position the Board considered it sensible to extend the review period. This extension will also provide time to take full account of the outcome of the ongoing dispute with a long term wafer contract customer where we have filed for ICC arbitration.  The judgment of the arbitral tribunal is expected later in the year and while the outcome is uncertain, the value of any award if our claim is upheld could be a multiple of the Group’s market capitalisation.  

In previous annual reports there was talk about this dispute, but then the expectation was that the value of the claim was a lot smaller. In 2014 the company received a €8.7 million payment for a similar dispute with another customer and wrote that the magnitude of an eventual cash payment would be significantly smaller for the last remaining dispute. Apparently that has now completely changed since the market cap of PV Crystalox Solar is more than €20 million, and the eventual award could be a multiple of that!

Because of this, and the large discount to NCAV, I think that PV Crystalox Solar is still a very attractive investment were most eventual outcomes range between good and fantastic. Even if the company continues to lose some money in the near future and is eventually liquidated investors could make a decent return given the current discount to NCAV. If the company turns around and starts making money and/or the large claim is awarded the outcome could be even better. I think the biggest risk is that losses continue to accumulate and that when the company is finally liquidated there is not a lot left. But so far I don’t think that’s very likely since management has been very clear about this plan. They are not desperately trying to keep a job while running down everything to zero.

Because of this I decided to add a little bit to my position once again.


Author is long PV Crystalox

PNE Industries: a profitable net-net from Singapore

PNE Industries is a manufacturing company that is headquartered in Singapore. The company is active in two main segments: manufacturing electronic controllers and other electronic products on a contract basis, and the manufacturing and trading of emergency lighting equipment and printing materials. The company is currently cash rich thanks to the sale of some subsidiaries, has a history of paying dividends, is solidly profitable and trading at a discount to net current asset value. A combination that warrants a closer look in my opinion.

Before we do so time to get a quick feel of the valuation. These numbers are proforma for the sale of the PNE Print subsidiary that has been sold for RMB48.85 million (approximately S$10 million). The sale hasn’t closed yet, but I don’t think that will be a potential problem with RMB10 million already in escrow.

Last price (3/18/2016): S$0.595
Shares outstanding: 83,916,763
Market cap: S$49.93M
Enterprise value: S$11.51M
Trailing P/E (ttm): 5.23
EV/EBITDA (ttm): 0.95
Price/book (mrq): 0.65
Price/NCAV (mrq): 0.75

Historical financials

Based on these simple statistics it is clear that PNE Industries is pretty cheap, both on an asset basis and an earnings basis. I have compiled an overview of the historical financial results in the table below. As is visible the adjustments required to account for the sale of the PNE Print subsidiary are minor, thanks to the fact that the company already classified it as held for sale. Because of this, only a couple of small adjustments to the balance sheet are required.PNE Industries historical financials
It should be noted that only the results of 2015 and 2014 have been adjusted by the company to exclude the results of the PNE Print subsidiary. Because of this, the revenue for the past two years is lower while earnings are higher since it was a loss-making subsidiary. So to get the best impression of the current state of the company I think it’s best to look mainly at the last two years. These two years look pretty good, but a large part of that is also caused by the “other operating income” line. In 2014, the company booked a gain of S$9.8 million on a “disposal of an associate” while it booked at S$3.6 million gain in 2015 on favorable FX movements. Without “other operating income” PNE Industries would have made on average S$5 million the past two years, and this is the number I will use to value the company.

What we can also see in the numbers above is that the company has been able to convert reported income to cash flow without problems, although the cash flow numbers show more variance than the earnings as is usually the case.

The balance sheet is also solid. As already said in the introduction, a huge part of it is simply cash while there are also a lot of other current assets such as receivables and inventories while there are few liabilities and no interest bearing debt. Besides the S$4.9 million “asset held for sale” that is classified as current there is also a S$3.1 million non-current “available for sale investment”. This is not the PNE Print subsidiary that already has been sold, but a 13.9% equity interest in PNE PCB Berhad that the company is also looking to sell. PNE PCB Berhad is listed on the Malaysian stock exchange and is down ~10% since the start of the year. The stake isn’t very material compared to PNE Industries itself, but since I’m not trying to cut too many corners I’ll also incorporate this in the valuation.

Insider ownership

One of the main reasons I think why PNE Industries is cheap is because of the fact that is controlled by the Tan family. The latest annual report included the following list of the 20 largest shareholders:

List largest shareholders PNE Industries

As you can see almost every name on that list is part of the Tan family, and I imagine that there could be more family members that have a stake that is not big enough to make it to the top 20. Because of the high insider ownership, there isn’t much liquidity in the stock since the float is probably just ~20% or even less. With a market cap of US$35.9 million, that means that the float is just US$7.5 million.

When you invest in a company that is controlled by a single family you have to ask yourself how you will be treated as a minority owner. I think in this case the answer will be “pretty good”. The reason for this is twofold: most importantly the company has a long history of paying sizable dividends, so you will get paid the same way as the Tan family. A second reason is the fact that there are a large number of family members who own shares, and not all are part of the companies management since the directors own “just” ~38% of PNE Industries. I think this makes it more likely that they will try to maximize the value of the shares instead of siphoning value away through other means.

Given how active they have been selling subsidiaries, a full liquidation/sale of the company might even be possible although there is a hint in the latest annual report that that isn’t that likely in the near future. The company disclosed in its latest annual report that it recently incorporated a new wholly-owned subsidiary with investment holding as its principal activity. So possibly there might be plans to keep hoarding cash that is still on the balances sheet and buy investments. It’s not the worst possible thing that could happen, but it is certainly not the scenario that I would prefer!


I think that the valuation of PNE Industries is reasonable straightforward: we normalize earnings by removing “other operating income”, and we add the value of the non-operating assets to the value of the continuing business. This creates the following picture:

Valuation PNE Industries


Based on my valuation of the business I think that PNE Industries is significantly undervalued, depending on your point of view the company either doesn’t get credit for its large cash balance or it doesn’t get credit for its earnings power. It has both, but it is valued like it only has one. The reason for the low valuation is I think mostly related to the fact that the company is family controlled, and liquidity is very low.

I don’t see a low liquidity as a problem since I don’t need a lot of liquidity to be able to buy or sell a position when I have some patience. In addition to that, I believe that liquidity will be realized at some point in the future. Perhaps slowly when the company continues to pay dividends, or perhaps fast one day when it the whole company is sold.

The fact that the company is tightly controlled by one family is a cause for some concern because it would mean that outside investors have little influence in the case of weak corporate governance. I don’t see any evidence that this is a problem right now, and I believe that the fact that a large number of different family members owning shares will act as a deterrent.

Adding this all up I think that PNE Industries is too cheap to ignore.


Author is long PNE Industries

More reading

See for more on PNE Industries Paul’s excellent blog here.

CTC Media merger arbitrage

CTC Media (NASDAQ: CTCM) was, until recently, the owner of four television channels in Russia. Because of a new “Mass Media Law” in Russia the US-based company was forced to basically sell its whole business because the law limits foreign ownership of television broadcasters in Russia. The operating business in Russia was sold successfully before the end of the year, and the final tranche of the purchase price was received earlier this month.

CTC Media logoBecause the purchase price was subject to adjustments based on the operating performance and other factors the company could at the time of the transaction only provide that the estimated payout would be between $1.77 and $2.19/share. With all the money now received, there is more clarity on the final amount, and the company now estimates that it will be “at the lower end of the upper half of the range approved by stockholders of $1.77 to $2.19 per share”. I think this should mean that shareholders will most likely receive at least $1.98/share and probably a little bit more. With the stock currently trading at $1.85, that means a possible return of >7.0%, a lot of money for a merger arbitrage deal that is sounds like almost completed.

The reason for the fact that there is still a big spread is because the company is waiting for a license from the Office of Foreign Assets Control of the US Treasury Department. They need this because a 25% owner, Telcrest, who in turn is owned by Bank Rossiya, is subject to US sanctions. Because of that, the deal was structured in such a way that this shareholder will not be cashed out and remains a part-owner of the TV stations. The market obviously doesn’t like this, but I don’t really see a reason why getting a license from the US government for the completion of this deal would prove to be problematic. Stopping this deal would punish everybody expect the blocked shareholder, and he doesn’t get anything when the deal is approved. His stake will remain blocked. Punishing innocent (US) shareholders can’t be the purpose of the sanction, but I guess you never know…

What I do think is that you are getting paid more than enough to take this risk.


Author is long CTCM

Vote AGAINST the Argo Group Share Buyback Proposal

Vote no!Most shareholders in Argo Group must have noticed that the company has launched a proposal to buy back shares that requires shareholder approval because it could increase the stake of insiders to a controlling stake. I think that this would not be a positive development if management is unwilling to cash out minority shareholders at a fair price, among other things. Wexboy makes the case to vote against the proposal in a lot more detail here, and I would urge every Argo shareholder to read it (and vote accordingly)! Unfortunately, I’m not able to vote against the proposal because my broker (Binck) doesn’t support it, but if I could I would certainly vote against the proposal.


Author is long Argo Group