Earnings season updates (AWDR.OL, CNRD, CLP.L, PVCS.L)

Awilco Drilling (AWDR.OL)

Awilco Drilling reported excellent results for the second quarter of 2014 with a revenue of $66.3 million and a revenue efficiency of 99.7%. There were however a bunch of one-time items that impacted the financials statements. Interest expense was artificially high because of costs related to the debt refinancing, the tax rate almost tripled and operating cash flow was relative low due to a big jump in receivables. The tax rate for this quarter was almost 22%, a lot higher than the roughly 8% the company paid in the past. Those low rates are unfortunately a thing of the past due to a new law. Awilco is expecting that the normalized tax rate going forward will be around 15%.

Because the share price of Awilco has been going up steadily since I bought it while the company has paid out all FCF as dividends I think the stock is now not significantly undervalued anymore. It’s not (yet?) expensive, but at an estimated 20% discount to fair value I will probably take some money off the table soon.

Conrad Industries (CNRD)

Conrad is another pick that has advanced significantly since I bought it and is now also trading a lot closer to intrinsic value than in the past. But it not expensive with 25% of its market cap in cash and a 8x PE-ratio. Given the large cash balance I expect another special dividend at the end of the year, and given how management has been able to grow the business I’m happy to continue to hold this. Might be a good stock to hold for the long-term.

Historical financials Conrad 1H 2014

Clear Leisure (CLP.L)

I described Clear Leisure as a train wreck in my first post on the company, so perhaps I should have known better, but unfortunately the bad news is not yet behind us. The stock was suspended from trading almost two months ago because the company was unable to fill its annual accounts in time. A bit of hope is provided in the trading update that was released today in which the company announces its intention to sell the Mediapolis land and building rights separately. Call me skeptical…

Crystalox Solar (PVCS.L)

Better news came from Crystalox Solar that announced a €8.7 million settlement with one of its long term contract customers that had entered insolvency proceedings. We will have to wait a few more days for the interim financial report. I expect that they will have maintained their solid balance sheet, but I don’t expect better than break-even results.


Author is long all stocks mentioned in this post

Beximco Pharma: London GDR trading at 60% discount

I’m a big fan of simple investment thesis’s. If you can’t write one down on a napkin it probably depends on too many assumptions which makes it likely that one or more of them are wrong, invalidating the thesis. Another possibility is that you don’t fully understand the thesis which makes it hard to drill down to the essence of the idea. As you might have guessed by now, the investment case for Beximco Pharma is simple: you really don’t need to read more than the title of this post to understand it. It’s really that simple!

It’s interesting enough to spend some more words on it though. Beximco Pharma is located in Bangladesh, and the company describes itself as follows:

Beximco Pharmaceuticals Ltd (BPL) is a leading manufacturer of pharmaceutical formulations and Active Pharmaceutical Ingredients (APIs) in Bangladesh. The company is one of the largest exporter of pharmaceuticals in the country and its state-of-the-art manufacturing facilities are certified by global regulatory bodies of Australia, European Union, Gulf nations, Brazil, among others. The company is consistently building upon its portfolio and currently producing more than 500 products in different dosage forms covering broader therapeutic categories which include antibiotics, antihypertensives, antidiabetics, antiretrovirals, anti asthma inhalers etc, among many others.

While the company talks about exporting drugs to numerous countries around the world it’s not a big part of their business. Exports account for just 6% of revenue. To complete the first impression some quick statistics based on the latest price in Dhaka:

Last price (Aug 15, 2014): Tk43.00
Shares outstanding: 367,851,652
Market Cap: Tk15.82 billion (US$204.18 million)
P/B (mrq): 0.79x
P/E (ttm): 10.76x
EV/EBIT (ttm): 7.28x

While I had never heard of the company before reading about it in the latest Krohne Capital monthly report they are apparently pretty big in the local market. They are part of the DS30 index and it appears that Beximco AGM’s are quite the event. The company writes in the 2007 annual report that around 7,000 shareholders attended the meeting that year. Don’t know if this is common in Bangladesh, but in the developed world Berkshire Hathaway is probably the only company that has higher attendance numbers at AGM’s. Some pictures:

Beximco 2007 AGMThe London GDR’s

Beximco doesn’t look particularly cheap or expensive when we look at the pricing metrics above, but as promised in the title we can buy the company at a 60% discount through GDR’s that are traded in London. Beximco has been listed on the Dhaka stock exchange since 1985 and the company obtained a listing in London in 2005 as the first and only Bangladeshi company. Approximately 22% of the outstanding shares are traded in London while the remainder is traded in Bangladesh. One GDR equals one ordinary share.

While a small discount might be appropriate because trading liquidity in London is lower there is really no good reason for the current pricing discrepancy. The discount probably only exists because there is no arbitrage possible. In addition to this presumably few people in Bangladesh have access to the AIM market in London, while at the same time few people with access to the AIM market care about investing in Bangladesh.

If you buy the stock in London the company suddenly appears dirt cheap:

Last price (Aug 15, 2014): GBX13.25
Shares outstanding: 367,851,652
Market Cap: £48.74 million  (US$81.23 million)
P/B (mrq): 0.31x
P/E (ttm): 4.28x
EV/EBIT (ttm): 3.15x


Knowing that the GDR is trading at a 60% discount is enough to know that Beximco is a bargain, but it is nice to know what we are exactly buying. I have compiled an overview of the historical financials in the table below:

Historical financials Beximco Pharmaceuticals

What is important to realize when looking at these numbers is the fact that inflation has averaged around 8 percent the past ten years in Bangladesh. This makes their growth in revenues and earnings a lot less impressive. What is a bit worrying is that the company has heavily invested in growing the business in the past decade – cumulative free cash flow is negative for the past 10 years – but it is failing to generate attractive returns on equity. So not really a business that you want to reinvest in. Because of this I think that the company is currently reasonable valued – perhaps a bit expensive – on the Dhaka stock exchange at a 0.8x P/B ratio and a 10.8x PE-ratio.


Beximco Pharma is owned for 5.6% by Beximco Holdings: the largest conglomerate in Bangladesh. The vice chairman of both Beximco Holdings and Beximco Pharma is Salman F Rahman whose net worth is estimated at around US$ 2 billion. He personally owns another 2% of Beximco Pharma while the chairman of the board (his brother?) also owns 2%. I think this is a healthy amount of insider ownership, although it is obviously just a small piece of his total net worth. Interesting tidbit: apparently Salman F Rahman is currently serving as a director of the Bangladesh Securities and Exchange Commision. Not sure if that is a positive or not…

As is visible in table above: the company has a irregular history of paying cash dividends. They reinstated the cash dividend this year after a four year suspension. If they would continue paying their current dividend – which should be totally possible since it represents a 25% payout ratio – the company would have a 5.7% dividend yield. That’s pretty decent!

What is annoying is that the company is also paying a stock dividend. This is a totally useless idea since a stock dividend is equivalent to a stock split and as a shareholder you own exactly the same economic interest in the company before the dividend as after the dividend. It only makes comparing historical financials harder. I have tried to restate all the per share information in the historical financials to account for the stock dividends.


Beximco Pharma isn’t a great business, but it isn’t too bad and it is an absolute bargain when you buy it in London. The AIM market is crappy with regards to liquidity and the execution of trades, but I don’t think that warrants a 60% discount. It’s hard to get a thesis that is simpler than this!


Author is long BXP.L

Bought two stocks in Japan

That stocks are cheap in Japan is no secret. Part of the reason is probably that it’s hard to get exited about a stock market that has been going down for decades. Even though 2013 was a pretty decent year for the Nikkei 225 the index is currently trading at the same level as in 1986. But the bigger issue is that corporate governance is a major problem in Japan, and it’s also the reason why I have never been too enthusiastic about jumping on the Japan bandwagon. As someone mentioned on Twitter this week:

This is certainly true to some extent in Japan. It’s not a coincidence that a majority of Japanese companies have a very large cash balance: it’s the result of a country wide culture of poor capital allocation. So buying cash at a discount with a small operating business attached never sounded very attractive to me. You should expect that the company continues to sit on the cash balance for years or even decades while earning shareholders almost nothing in the mean time. I expect that eventually corporate capital allocation will improve in Japan, but that could be an event that happens outside my investment horizon.

Luckily not every company in Japan is a stagnant business with poor returns on equity, and some are just too cheap to ignore. I will let the table below do the talking:

Fujimak and Nansin key stats

As is visible both companies managed to generate good returns on equity the past 5 years despite the drag of a medium/large cash balance. I expect that these companies will be able to grow intrinsic value meaningfully in the years to come, and hopefully that will be reflected in the stock price and/or higher dividends. Fujimak has a good history of growing it’s dividend while it has also been investing a lot of money in capex the past years. Normally I would be a bit worried when I see a lot capex, but in the case of a Japanese company I actually think it’s a pretty good sign: almost anything is better than idle cash…

Since both companies are located in Japan and I don’t speak a word Japanese my analysis of both companies is superficial at best and purely based on the financial statements of the past 5 years. It is totally possible I’m missing something important. That’s why I initiated two small positions, and I might add a couple of other names in the future to create a small basket of similar priced Japanese stocks to diversify my risk.

More reading:


Author is long Fujimak and Nansin

Ming Fai International Holdings: 200% upside?

A reader pointed me in the direction of Ming Fai International Holdings. The company is based in Hong Kong and is primarily active in the amenity business. They manufacture and sell products suchs as soaps, toothpastes and towels to hotels and airlines. What makes the company interesting are the solid operating earnings – especially when we look past a loss making subsidiary that has been shut down – in combination with a nice dividend yield, a large cash balance, significant real estate holdings and high insider ownership. As usual first some simple valuation metrics to get an idea of what we are looking at:

Last price (Jul 25, 2014): HK$0.74
Shares outstanding: 697,763,697
Market Cap: HK$516.3M  (US$66.6M)
Free float: 55%
P/B (mrq): 0.40x
P/E (ttm): 12.9x
EV/EBIT (ttm): 3.4x


Ming Fai appears to be cheap when we look at book value and at the EV/EBIT ratio, but when we look at the current earnings ratio it’s not an obvious bargain. I have compiled an overview of the historical financials in the table below:

Ming Fai historical financials

As is visible earnings/share show a downward trajectory and the dividend has been cut as a result. This probably explains why investors aren’t enthusiastic about the company, but when we dive deeper in the various operating segments we will see that things aren’t as bad as they look. And too be honest: things don’t really look that bad to begin with. The company is currently valued at roughly HK$500 million while it has investment property worth a bit more than HK$200 million and a net cash balance of HK$300 million. You get the operating business for free!

Whether or not the investment property is really worth book value is a good question. The company recorded HK$4.8 million in rental revenue and HK$0.6 million in operating expenses for a NOI of HK$4.3 million which implies a cap rate of just 2.1 percent. Apparently this is normal in Hong Kong, but I wouldn’t buy this stock if the investment case would hinge on the valuation of the real estate. It’s certainly not cheap.

What makes Ming Fai interesting is that the true earnings power of the business is a bit obscured. A relative small issue is that the reported earnings are a bit hard to understand due to the consolidation of the partially owned “Everybody Labo Limited” subsidiary. The company owns just 51% and since this subsidiary is generating sizable losses in most years line items such as operating profit underestimate the earnings that are attributable to equity holders of the company. A quick and dirty estimate of the earnings of the retail segment that are attributable to shareholders of the company:

Ming Fai retail segment after minority interests

What is more interesting is that the profitability of the various operating segments of the company is very different. The core business – supplying amenity products to hotels and airlines – has been pretty solid. Revenue has grown straight through the recession at a 10% CAGR since 2007 while segment earnings before taxes have been a bit more erratic:

Ming Fai amenity segment revenue and profitability

The reason that we don’t see this solid performance back in the earnings statement is the fact that the two other segments: laundry and retail have been a lot worse. The laundry segment is new venture of the company that was started in 2011 in an attempt to expand the range of services they offer to hotels, but it’s fair to say that this has been a failure since it has never been profitable. The retail segment – that includes the 51% stake in “Everybody Labo Limited” – has been profitable in the past, but performed very poorly last year:

Ming Fai revenue and EBT by segment

Luckily management has realized that the laundry business isn’t a good one, and they have decided to exit the venture before 30 June 2014 and this will obviously improve the performance of the group going forward. Note that other income, primarily revenue generated from the investment properties, is also reported in this segment so the laundry business is even worse than it looks in this table.

How the retail business will develop will be though to tell at this point in time, but I do think this has more potential since it has been profitable in the past. Perhaps it will return to profitability, and if it doesn’t it seems that management is rational enough to pull the plug.


The value of Ming Fai is the sum of the cash, real estate and of course the operating business. The first two pieces of the puzzle are easy to value: book value should be accurate enough, although the conservative investor might want to add a discount because of the high property values in Hong Kong. The value of the operating business is a bit more complex, because the laundry segment has been shut down while the performance of the retail segment has been erratic.

I think simply valuing the retail segment at zero is a decent choice. Either the retail segment will return to (historical?) profitability and it will be worth a decent amount, or it could struggle and lose money for a couple more years before management shuts it down. The weighted average of those two outcomes is probably not too far from zero.

So what really matters is the value of the amenity segment. While it has shown strong revenue growth the growth in earnings has been mediocre so a 10x multiple seems reasonable to me. A good question is what kind of tax rate we need to apply to the pretax earnings. The effective tax rate last year was 44.4% which is more that double the average tax rate of the previous six years. It’s unclear to me what the exact reason is, but I think this is a temporary phenomenon since the corporate tax rate in Hong Kong is just 17.5% and it’s 33% in China. Using the 27% rate that the company paid in 2012 seems like a better guess.

This creates the following picture:

Ming Fai valuation

I’m the first to admit that this is not the most conservative valuation possible, but with this kind of upside potential there is a large margin of safety when some of your assumptions are a little bit too optimistic. Maybe taxes will be higher in the future, maybe book value overstates the value of the investment property or maybe the retail segment will continue to generate losses and has in fact a negative value. It could all be true and you would still have a decent amount of upside.


Insiders own 30.33% of the outstanding stock which is in my opinion a great amount. They own more than enough to care more about the success of the business than their salary, but they don’t own enough to be able to ignore outside investors. Unfortunately their ownership stake is making it hard for the company to repurchase shares because insiders would be required to launch an offer for the whole company if they cross the one-third ownership threshold. Sucks, because repurchasing shares would be an great way to spend some cash.

What I do like is that the company has a solid history of paying out a large percentage of income as dividend since their IPO in 2007. The average pay out ratio is above 40% and even though earnings are currently depressed that still translates to a 4.7% dividend yield. I expect that this will go up next year after the exit of the money losing laundry business.

What’s perhaps the biggest risk is that management will spend more cash on unsuccessful ventures like the laundry business, and the retail business doesn’t look that great in hindsight either. But I don’t know if this is really a big deal. They tried to enter businesses that were adjacent to their main business, and not everything you try will be a massive success. But as long as you are willing to exit when it doesn’t work some diversification isn’t a disaster, and their ownership stake is big enough to give them the right incentive. Would probably be better if they would only focus on the core business though.


There is a lot to like about Ming Fai at the current price. The amenity segment could be worth twice the current market cap of the company, and you also get a bunch of cash and real estate thrown in the mix as well. Of course not everything is perfect when you buy a stock this cheap, but I don’t think there is anything seriously wrong with Ming Fai. It seems to me that a lot of investors simply have trouble looking past the headline revenue and profitability numbers, and don’t give the company credit for shutting down the money losing laundry division and the possibility of turning around, or exiting the retail segment.


Author is long Ming Fai International Holdings

Jewett-Cameron’s segment revenue in two graphs

After my short post on Jewett-Cameron Trading I received some comments that by basing my valuation on net operating profit I was missing what was going on within the various segments, and this was certainly true to some extent. The graph below shows how Jewett-Cameron’s revenue mix has evolved the past ten years, and as visible it is fair to say that the company is now in a completely different business than a decade ago:

Jewett-Cameron revenue mix

Note that the column labeled 2014 is in reality the TTM and includes one quarter of 2013, but that’s something I’m unable to fix in Google drive. While the lawn, garden and pet segment has grown to be a very large part of Jewett-Cameron’s business the absolute growth of the segment hasn’t been that stellar. Revenue increased from $24.8 million in 2009 to $33.4 million today, representing a 6.5% compounded annual growth rate. If we don’t pick the lows of 2009 as starting point but the previous high of 2008 the compounded annual growth rate drops to 3.2%: not bad, but not great either.

Jewett-Cameron lawn, garden & pet segment revenue and profitability

The reported segment earnings before taxes also show few signs of operating leverage. Earnings before taxes grew at a 4.0% rate if we start measuring from 2009 and just 1.7% if we start at 2008. With those kind of growth rates just taking the average operating earnings of the past five years or so seems a pretty reasonable approach to me. You need a little bit of nominal growth to keep-up with inflation anyways.

I do agree that there might be some positive optionality if the industrial wood segment recovers. I don’t want to call this a free option since the segment has shown declining sales for five years in a row and is a bit below break even. They also do have some excess real estate that they will be able to monetize at some point in the future. But don’t think this is enough to revise my previous conclusion that the company is currently fairly valued.

What’s basically the case is that the lawn, garden and pet has been such a big part of Jewett-Cameron’s business for an extended period of time that drilling deeper doesn’t add a whole lot of value. What’s happening in the other segments is almost irrelevant now.


No position in Jewett-Cameron Trading