An update on Conduril

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I bought my first shares in Conduril in 2012 for €22/share, and now, almost 7 years later we are roughly back to where I started with a shares trading at €25. It hasn’t been a total dud though, because in that period the company did payout a total of €9.50/share in dividends. I was also lucky enough to sell a large part of my position in 2014 and 2015 between €65 and €80/share when I saw deteriorating results appearing on the horizon. It has been a while since I wrote about Conduril, and with the publication of the 2019 interim results I thought it was a good idea to publish a quick update, starting with an updated overview of the historical financials below:

Historical income statements Conduril

When I bought my first shares on Conduril the company was doing pretty well, earning in some years more than €20/share, but the past years the results have been more modest. Last year the company reported €1.69/share in earnings which was actually a small miracle considering that they lost €9.15/share in the first half of the year. The first half of 2019 was also pretty bad with a loss of €4.52/share, but based on the language in the interim report the company is confident that this year will be better than last year. Given that the backlog has increased from €300 million at the end of the year to €600 million now, that might be a fair assumption. In the period between 2009 and 2014 Conduril was on average earning €16.70/share per year while the average backlog was €618 million. So it could be on the edge of turning things around.

While things seem to be turning around for the construction business itself, there is also a balance sheet aspect to the story. Conduril is at the moment a classic net-net with NCAV/share of €28.70 versus the current €25.00 share price. This number is excluding €89.8 million in “other financial assets” that are recorded as non-current assets on the balance sheet. Adding this to the NCAV would result in a value of €78.58/share. So besides the stock currently trading at a 4x P/E-ratio there is also a good amount of asset backing.

Unfortunately, there are some potentially losses hiding in the “other financial assets” that erode to some extent the asset backing that this stock has. Conduril has made a €13.2 million investment in the “Rotas do Algarve Litoral, S.A.” and a €20.3 million investment in “SPER, S.A.”, two toll roads in Portugal. The “Rotas do Algarve Litoral, S.A.” is facing legal troubles because the “Tribunal da Contas” declared the original contract invalid, and “SPER, S.A.” is possible facing the same. “Rotas do Algarve Litoral, S.A.” is seeking the recover the full amount of the investments from “Infrarastruras de Portugal”, the party that seems to responsible for this mess, but of course, what the outcome will be is highly uncertain and could take a long time. Writing down both Conduril’s investments to zero would leave us with an adjusted NCAV of €59.80/share.

Conduril has one of the rare companies where I have always been enthusiastic about its valuation. Sure, things haven’t gone great the past few years, but at the current price it is just really cheap. Even without factoring in that things look to be turning around it is trading at a 4x P/E-ratio, 0.22x book and a sizable discount to (adjusted) NCAV. But who knows, after seven years I could also just be wrong about this…

Disclosure

Author is long Conduril

Nzuri Copper merger arbitrage

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A merger that I have had a small position in for some time, and recently bought more of, is Nzuri Copper Limited (ASX:NZC). The company is being acquired by Chengtun Group (SHA:600711) for A$0.37 in cash while it is currently trading at A$0.31 for 19.4% spread. That’s a big spread, but when we are talking about an Australian listed company that has a mine in Congo and that is being acquired by a Chinese company I think it’s clear why many investors aren’t trilled to get involved. While the spread has always been quite big since the deal became public news, it got bigger again when the company announced last week that Chengtun is expecting delays in receiving regulatory approvals in China.

I simply don’t think that those approvals represent a huge risk. China has a long history of acquiring natural resources in Africa, and this acquisition fits perfectly in their long-running strategy. In the press release Chengtun Group also seems pretty optimistic about the regulatory approvals. They expect them to get them at the end of August, which is just a one month delay, and they state that they have no reason to believe that the approvals will not be provided:

“Chengtun Group has submitted all of the applications and ancillary documentation required to obtain the PRC Regulatory Approvals, and has attended to all further requests for information in relation to those applications received to date.

Chengtun Group understands that its applications for the PRC Regulatory Approvals are being processed, and as at the date of this announcement, Chengtun Group has no reason to believe that the PRC Regulatory Approvals will not be provided.

Of course, this requires a bit of trust in what a Chinese company is saying. I don’t see any reason to really doubt this, but at the same time, you never know for sure what is going on in China. But given the very big spread I think you are compensated more than enough for some risk, and I think the other aspects of the deal shouldn’t pose any problems. Chengtun can pay the acquisition in cash, they got regulatory approval in Congo already and shareholder approval should be a formality. At the same time the stock is also not trading a big amount above the pre-deal price, so downside risk in case of the deal breaking should be acceptable. I’m not betting the farm on this deal, but I think it’s pretty attractive.

Location of Nzuri's Kalongwe Project in Congo

Disclosure

Author is long Nzuri Copper

Half-year portfolio review, 2019 edition

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With the first half of the year behind us it’s once again time for the obligatory performance review. Absolute performance was quite satisfactory with a solid double digit return, but simultaneously I’m underperforming the MSCI ACWI for the first time since starting this blog. With my focus on special situations it’s a result that you would expect since these often offer a more or less fixed return, making it tough to keep-up with a rapidly rising stock market. Since I’m not too far behind I’m hopeful that I’ll be able to catch up in the second half of the year. There are a couple of special situations that are on the verge of being completed that could meaningfully boost my performance. But even if I don’t catch up, I can’t really complain!

Year Return* Benchmark** Difference
2012 18.44% 14.34% 4.10%
2013 53.38% 17.49% 35.89%
2014 30.11% 18.61% 11.50%
2015 24.23% 8.76% 15.47%
2016 64.97% 11.09% 53.88%
2017 29.04% 8.89% 20.15%
2018 13.07% -4.85% 17.92%
2019-H1 14.51% 16.67% -2.16%
Cumulative 709.22% 132.71% 576.51%
CAGR 32.15% 11.92% 20.23%

* Return in euro’s after transaction costs, net dividend withholding taxes and other expenses
** Benchmark is the MSCI ACWI (All Country World Index) net total return index in euro’s

As you can see below, the majority of the performance is driven by the special situations while both HemaCare and Viemed Healthcare were also significant contributors. The graph looks a bit like the one of 2018, and as a matter of fact, the top four is the same as at the end of 2018 (but the order is slightly different). The performance of the special situations bucket got a large boost when the situation around the Sorrento Tech liquidation payment got resolved earlier this year (+158bps). To some extent this is a bit of an artificial gain because the position was marked at zero by my broker last year, and most of it is just a reversal. But thanks to this, the special situations bucket is managing to keep up with the overall stock market reasonably well.

The performance of my long-term value stocks was a bit more mixed. There were unfortunately quite a number of losing positions which is not a great result in a period when everything seems to be going up. Luckily, not every holding was a laggard. Both Argo Group and Goodheart-Willcox launched big tender offers to buy back shares at a significant premium. I sold my entire stake in Argo Group for a decent profit, while I decided to hold on to all my Goodheart-Willcox shares. Based on the information provided in the tender offer document itself (and my own valuation) the company seems to be worth more, and so far the market seems to be agreeing with that assessment since the stock hasn’t traded down below the price of the tender offer. But liquidity is, especially now, after the tender offer, almost non-existent.

The tender offer was for $150/share while the shares were valued at $168/share in an external appraisal, and that number included both a 11.1% discount for a lack of control and a 15% discount for a lack of marketability.  Without these discounts the value per share would rise to $237. With Argo Group I was happy to sort of meet management in the middle and split the discount, but because I have a lot less concerns about the corporate governance of Goodheart-Willcox I’m more inclined to hold it if there is still a significant discount to “fair” value. Additionally, the management projections for revenue and earnings that were included in the tender offer documents looked pretty optimistic as well. I usually put very little value in these kind of projections, but it’s another data point that suggest that the stock is still undervalued at the current price. I guess we’ll see how it will play out.

Disclosure

Author is long or has been long all the stocks mentioned in this post

Nevada Gold & Casinos merger completed

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Last year, in October, I wrote about the Nevada Gold & Casinos merger. Back then I thought that it was a simple merger that would probably close before the end of the year, but that proved to be way too optimistic. The merger needed approval of the Washington State Gambling commission, and they took their sweet time. My guess is that this was mostly a bureaucratic delay instead of real regulatory risk, but of course, it didn’t have a positive impact on the annualized return of the position. Luckily the merger agreement contained a provision to adjust the price upwards in case of delays, and instead of a merger payment of $2.50/share the final price was $2.559333/share. I bought my shares for approximately $2.40, so the end result is a 6.6% absolute return which translates to 9.2% annualized. Not great, but not bad either for a deal that got severely delayed.

Disclosure

Still long UWN since the merger payment hasn’t hit my account

Exited the Aratana Therapeutics deal

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Just one week ago I wrote that I initiated a position in Aratana Therapeutics (NASDAQ:PETX). At the time stock was trading was trading at roughly a 1.2% discount to the price Elanco Animal Health (NYSE:ELAN) was willing to pay, and a CVR with a max payout of $0.25/share was thrown in the mix for free. With Elanco now trading at $30.77/share and Aratana at $4.63/share the spread is a negative 1.6% and the CVR is implicitly valued at $0.07/share. My rough, and perhaps optimistic guess, of its value was around $0.10/share so there is little reason to keep my Aratana position. Unfortunately I decided to not hedge with short position of Elanco, so while the spread went in the right direction, I didn’t make any money. But that’s not a bad result for a week like this!

Disclosure

No position in Aratana Therapeutics anymore