Monthly Archives: September 2013

Consciencefood Holding, a value growth stock?

Consciencefood Holding sells instant halal noodles in Indonesia  The company went public in Singapore at the end of 2010 after showing excellent results in the previous years. In the IPO the company raised money to finance further growth, but these plans hit trouble. At the end of last year their new factory in Jakarta burned down and their entry in the beverages market has been delayed from 2011 to the second half of 2013. These two items are probably the biggest part of the explanation of why the shares are currently trading at an all time low. Some quick stats:

Last price (Sep 16, 2013): 0.149 SGD
Shares outstanding: 396,247,933
Market cap: 59.04M SGD (46.52M USD)
P/B (mrq): 0.74x
P/E (ttm): 5.9x
EV/EBIT (ttm): 2.7x


At first sight the company looks pretty cheap, and if we take the net cash position of the company in account it’s currently trading at a P/E of just 3.6x. When we examine the historical financials it looks like Consciencefood might be a excellent business that just hit some temporary troubles in the past years. The numbers:

Consciencefood Holding historical financials

The results from 2007 till 2011 are simply excellent. Gross margins are high, revenue growth is high and so is the return on equity. Since then revenue growth has slowed down and the return on equity is back to an average level. Part of the explanation of this deterioration is probably the Jakarta factory. They started operating the Jakarta factory in April 2012 and a fire in the warehouse caused a lot of damage on 25 December the same year. For the trailing twelve months the factory fire is a less obvious explanation because they actually received a big insurance payment in the second quarter of this year that more than offsets the impairment loss they took in the forth quarter last year. If we adjust for this their historical income statements look as following:

Consciencefood holding adjusted income statements

Part of the explanation of the lower profitability the past six months is the decrease in gross margins the first six months of the year. The company gives the following explanation:

The Group’s gross profit decreased by Rp11,061 million or by 19.1% from Rp57,764 million in 2QFY12 to Rp46,703 million in 2QFY13 due to the higher raw material cost, labor cost, depreciation expenses and other production costs. The higher cost was also due to the fire that affected our warehousing operations at our Jakarta factory on 25 December 2012.

The fire at the factory is obviously not a structural problem, but higher raw material costs are a problem if the company is unable to successfully pass through those costs to consumers. The outlook of raw material prices is not positive according to the company. They actually have prepaid a large amount of raw materials because lower fuel subsidies in the second half of the year are expected to have a negative price impact.

But what’s depressing earnings more are the high marketing and distribution expenses, and the high administrative expenses. Compared to 2011 both items have almost doubled in size. Once again the Jakarta factory is part of the explanation, from the 2012 results:

Administrative expenses increased by 72.5% or by Rp16,399 million from Rp22,612 million in FY2011 to Rp39,011 million in FY2012, due to the increase in employee benefit expenses and other operating expenses since we commenced the operation of Jakarta factory in April 2012, and due to the recognition of idle capacity cost incurred in production cost of Rp5,100 million since we have not fully utilized of our production capacity, mainly in the Jakarta factory and cup noodles production line.

The latest quarterly report also points in this direction:

Administration expenses increased by Rp1,607 million or by 32.1% from Rp5,013 million in 2QFY12 to Rp6,620 million in 2QFY13, due to the increase in salary expenses and the recorded of fixed overhead cost for unused production capacity of Jakarta factory which this cost was not recorded under operating expenses in 2QFY12.

The company is also preparing to launch beverages and while this project isn’t producing any revenue at the moment all sorts of costs are probably being incurred. The 2012 annual report discloses that they already have Rp105,262 million in assets related to their beverages segment: 16% of book value at that time. The depreciation expense alone related the this equipment must be significant and just like the factory fire this is not a structural problem. Those assets should start earning money when the beverages are launched in the second half of this year, at least if there are no more delays…

The investments in the beverages segment and the Jakarta factory also explain why free cash flow has been low recently, and this also introduces us to yet another probable reason why the stock isn’t liked. The company started paying out ~20% of net income after the IPO, but stopped paying a dividend in 2012. I have mixed feelings about this decision. Not paying out dividends when you have attractive growth opportunities and negative free cash flow makes sense, but not when you have a massive net cash position. They are probably going to need more working capital when the Jakarta factory is running at full capacity and when they have launched the beverages, but with this much cash on the balance sheet you should be able to do both. I also wonder why there is simultaneously a big debt and cash position.


Consciencefood is run by Djoesianto Law who saw his stake diluted from 73.4 percent to 55.6 percent in the IPO. He didn’t sell any shares in the IPO though, and that’s positive in my opinion. It was not an event to cash out, but to raise cash for the business. He gets a salary between S$500,000 and S$750,000 so his stock is worth something between 40 and 65 times his yearly income at current market prices.

His big stake in the business should align his interests to a reasonable amount with shareholders, but since Consciencefood has a limited history as a public company there is not a whole lot to go on to form an opinion. What’s curious is that hasn’t been updated since 2011. Communications with shareholders doesn’t seem to have the highest priority and you have to go to to find the latest news. Yet another reason why the company might be undervalued, although this is not directly a positive.


How much is Consciencefood Holding worth? I don’t know, but at today’s prices you are paying a price for a mediocre and declining business while it’s probably at least an average business and potentially a great business. Together with a strong balance sheet I think that should provide a good margin of safety, and you are also not paying anything for the potential success of their entry in the beverages market. How that’s going to work out is of course a big question, but it’s good to see that in the past they were willing to exit from marginal segments. They tried selling snack noodles in previous years, but this didn’t generate any real money so they exited the business in 2011.

Rating: On a scale from one to five I’m going to give this idea three stars. There are a lot of unknowns, but the most obvious problems seem temporary in nature to me, and if they can repeat their past success the potential upside is huge.


Long Consciencefood Holding

More reading

The company was written up earlier this year at “the red corner”-blog (part 1, part 2).

Hunting bargains using a screener: Kantone Holdings

A fellow poker player recently started investing using a, mostly mechanical, process mainly based on the Quantitative Value book. The screen selects companies with a high earnings yield, and from that group the companies that score poor on quality metrics such as the F-score are eliminated. I think it’s a pretty solid strategy that most likely will outperform the market. One of the companies that appeared at the top of the list this month is Kantone Holdings, so what do they do and how cheap is it exactly?

Kantone Holdings is part of Champion Technology Holdings that owns 55% of the company while the other 45% is traded on the Hong Kong stock exchange. Champion Technology itself is also traded on the Hong Kong stock exchange and has a 874M HKD market cap while Kantone Holdings is slightly smaller with a 818M HKD market cap. The company describes itself as a leading provider of IT driven communication systems with a presence in over 50 markets. They provide solutions for example for emergency services communications, they have a home land security division that makes things like radiation monitors and they develop online betting websites. Before diving deeper in the company lets start with a quick overview of some key metrics:

Last price (Sep 13, 2013): 0.109 HKD
Shares outstanding: 7,504,576,000
Market cap: 818M HKD (105M USD)
Free float: 45%
P/B (mrq): 0.25x
P/E (ttm): 8.13x
EV/EBIT (ttm): 6.35x


Based on earnings yield this doesn’t directly look very cheap, it got probably included in the screener because it ignores exceptional items such as impairment losses (more about this later). On an asset basis the company does look remarkable cheap, and it’s in fact also trading at 25% below net current asset value. Especially this got me interested because it seems at first sight that we have not only earnings power but also a classic net-net. The historical financials from a high level perspective look like this:

Historical financials Kantone

When we look at the first few rows everything looks solid. We see nice gross margins and a long history of profitability. But there are also a few very worrying things going on: despite the good gross margins the return on equity has been very low and the amount of free cash flow that the business generates is extremely poor.

The disconnect between the high gross margins and low returns on equity have two reasons. The company has an history of taking impairment losses on items such as (prepaid) development costs. The latest annual report includes a nice graph on the first page of total bullshit earnings: EBITDA adjusted for impairments and other non-cash items. Since the normal EBITDA is also included in the figure it nicely shows how big and structural the impairment losses are.

Kantone bullshit earnings profileThe screener is ignoring the one-time impairment charges, but they appear to be anything but one-time. The reported earnings are in this case a way better estimate of normalized earnings power, but I doubt that even the lower earnings figure is accurate or useful.

The company capitalizes a huge part of their software development costs, and the biggest asset that they have on paper are 1.4 billion HKD in development costs for systems and networks. If these costs are indeed investments that the company can use for the years to come that could make sense, but it’s looks to be aggressive accounting: based on the historical low returns on equity it doesn’t really seem that it’s worth much (if anything). If the company would expense the software development costs instead of capitalizing them they would have shown a loss in almost every year since the free cash flow as a percentage of net income is minus 50 percent on average. Almost all their capex are investments in software development.

What’s also curious is the quickly increasing share count. This is the result of a few rights offerings, an acquisition that was paid in shares and the company also gives shareholders the choice to get a dividend in cash or in shares. I don’t mind a rights offering to raise capital because existing shareholders can participate without being diluted, but why pay a regular dividend if they need to attract capital on a regular basis? As a results of the rights offerings book value per share has been going down significantly.


A small positive to the story is that the chairman of the company owns 15.11% of the outstanding share capital through his 27.47% stake in Champion Technology and that’s roughly the same as his 28.49% stake 10 years ago. So that means that Champion Technology did participate in the various rights offerings.


I don’t think that Kantone Holdings is a ticking time bomb, but I do think the accounting is very aggressive and most of the book value and earnings are simply air. This got the screener fooled despite the incorporated quality checks.

Even though this result isn’t encouraging for using a mechanical approach I don’t think using a screener to pick stocks is a bad idea. You sometimes pick a bad apple, but if we can believe the back tests you pick enough bargains to make up for that. The screener also returns Conduril at the top of the list, and I think you all know by now what I think about that pick :). I think I can do better than the screener, but it’s going to take years before I can be confident in that assessment, and one thing is certain: it’s a lot easier and it takes lot less time to run a screen. And who knows, I could absolutely be wrong about Kantone Holdings…


No position in Kantone Holdings and no intention to initiate one

Boring and cheap: Spindex Industries

My screening process for stocks is simple: I just wait till I stumble on something that sounds really cheap, and then I start digging to find out if that’s true, or if there is more to the story. Spindex Industries caught my eye because it’s trading at an 3.3x ex-cash PE-ratio, it has been profitable every year since 2003, insiders own a decent chunk of stock and it’s paying a 4.6% dividend. The company is a manufacturer of precision machined components for various sectors such as imaging & printing, and automotive & machinery. The company is listed in Singapore and has manufacturing locations in Singapore, Malaysia, China and Vietnam. Lets start with some quick stats from Yahoo Finance first:

Last price (Sep 12, 2013): 0.39 SGD
Shares outstanding: 115,365,000
Market cap: 44.99M SGD (35.5M USD)
Free float: 75.29%
P/B (mrq): 0.71x
P/E (ttm): 6.28x
EV/EBIT (ttm): 2.83x


So the key ratio’s above hint that the stock we are looking at isn’t expensive, but what of course also matters is how fast the company is growing and how good the business is. The table below shows historical financial data that should shine some light on those questions:

Historical financials Spindex IndustriesSpindex Industries seems to be a reasonable solid business. Gross margins are stable and despite a net cash position the average return on equity is decent. Book value has grown 7% a year since 2006 while they returned on average roughly 30% of net income to shareholders through dividends. If a stable solid business has on average a return of 10% on equity I’d say it should be worth roughly book value. That’s of course if the company is just the company itself, and not a company + cash box.

So in this case the company should be worth roughly book value + the value of the net cash on the balance sheet. Book value is 54.7 cent per share while there is 18.9 cent per share of cash for a total value of 73.6 cent per share. With the shares trading at 39 cents it implies a possible upside of ~90 percent.

That’s pretty decent, but I would argue that at that point the shares would be overvalued. The large cash position of the company implies in my opinion sub optimal capital management and some sort of discount should be warranted to account for this. I have no idea how big of a discount would be fair, but it should be bigger than zero (and smaller than the current 47%). In addition you could argue that you would want a bit of a discount because of the countries the company is active in, or that some of the cash on the balance sheet is required as working capital.


I know little about the insiders of the company, but there are two things that I like. They are not paid with options, but cash bonuses, keeping the share count constant. Secondly the executive chairman owns a 24% stake in the company, probably since he assumed the position in 1989. I do wonder though what the hell an @-sign is doing in his name: he’s called “Tan Choo Pie @ Tan Chang Chai”.


Is Spindex Industries cheap? Absolutely. Do I own it? No. Why not? Good question! Part of the reason is probably that I’m at the moment almost fully invested. If I would have 100% cash and zero other idea’s I would absolutely buy some shares. The second part of the reason is that it’s cheap, but it’s not the magical 50 cent dollar. It’s a bit of an arbitrary hurdle, and I have to admit that I have bought plenty of times stocks at a smaller discount, but when you are almost fully invested you can afford to be picky.


No position, but might change my mind at any time

Conduril interim results: still going strong

Conduril reports twice a year, and today they released the interim results (in Portuguese) for the first half of 2013. Despite the low levels of construction activity in Portugal Conduril is doing just fine because of their foreign operations: in the period just 7% of their revenue originated from Portugal. New is the entry in Zambia where they won a contract to expand the Great East Road. I have updated the table below to include the latest results:

Historical Conduril results (2013 interim update)As is visible revenue was down a little bit while the more important metric: net income, went up a bit. I don’t think that the decline in revenue is signaling a trend: the order book actually went up from 610 million at the beginning of the year to 680 million at the end of the period. If we take book value as a proxy for intrinsic value we see that Conduril continues to grow at a healthy speed (while paying out dividends).

The interim report doesn’t include a statement of cash flows, but you don’t need to be a rocket scientist to figure out that the amount of free cash flow wasn’t a positive number the first half year. The amount of cash available dropped significantly while receivables went up. For Conduril this is simply the nature of the beast. Cash flows are lumpy because the company works on big projects that can take years to finish, and most of the cash is only received when the projects are completed.

I continue to view Conduril as a pretty solid business, but despite the fact that the share price has been going up significantly this year it’s still trading at 3.1x P/E, 0.45x P/B and 1.35x EV/EBITDA ratios. That’s just way too cheap in my opinion.


Long Conduril

A look at mortgage closed-end funds

There are a handful professional investors that I follow closely to see what they think is attractive and what isn’t. Murray Stahl’s (FRMO CEO) letters to shareholders are always an interesting read, and so are the (semi-) annual reports of the Special Opportunities Fund that is run by Philip Goldstein. Both were released recently, and as you could have guessed based on the title of this post both like mortgage closed-end funds.

From the FRMO 2013 letter to shareholders:

Recently, fixed income as an investment has become questionable, given increases in interest rates. We have no views as to the likely direction of monetary policy. Yet, the closed-end fund market is one of the least efficiently priced areas of securities markets. It is frequently possible to purchase funds at not insubstantial discounts to net asset value that are managed by genuinely talented individuals. In other words, we can buy the same bonds that they buy except, in our case, they are cheaper since we take advantage of the discount. Most recently, it has become possible to purchase mortgage funds at discounts to net asset value. These funds hold mortgages of 2005 vintage with high loan to value ratios, since that was accepted practice in 2005. However, the mortgages are current and there is a strong incentive against default because of the self-amortizing nature of a mortgage when existing for 8-9 years. The mortgages trade at discounts to par. The funds yield between 8-9% with yields to maturity of meaningfully higher levels. Our investments are not very substantial. However, that is the general direction of our fixed income investing.

When you read this it certainly sounds like an attractive investment, and since the number of closed-end funds invested in mortgages isn’t high it isn’t hard to figure out the funds in question (more about that later). First lets take a look what Philip Goldstein is doing:

BSP and CSP are sister closed-end funds sub-managed by Nuveen. Each fund invests a substantial percentage of its assets in whole mortgage loans and to a lesser extent, in U.S. Government securities, corporate debt securities, preferred stock issued by real estate investment trusts, and mortgage servicing rights. Both funds’shares have long traded at a double digit discount to NAV. We have had discussions with management about the need to provide an exit for shareholders of CSP, our older position, at or close to NAV, but nothing definitive has resulted thus far. As a result, on July 10th, we formally submitted a proposal recommending that CSP’s shareholders be afforded an opportunity to realize a price at close to NAV for their shares. If the board does not respond favorably, we intend to seek representation on the board via a proxy contest. BSP is a new reporting position for us. We filed our initial Form 13D on July 26th. BSP is similarly in need of a liquidity event and we intend to pursue a similar strategy to achieve that.

Reading this description it’s clear that Murray Stahl and Philip Goldstein aren’t invested in the same funds. BSP and CSP have been trading at a discount for years while the unnamed funds that Murray Stahl likes have only started trading at a discount recently.

The CEF mortgage space

The number of CEF’s that invest in mortgages is limited: there are just 13 different funds so it’s easy to get an overview of the entire sector. I have compiled an overview of the various funds in the table below:

Mortgage closed-end funds overviewBased on the description in the FRMO 2013 letter I think the funds that Murray Stahl likes are the two Nuveen Mortage Opportunity Term funds. They yield between 8 and 9 percent and have only recently started trading at a significant discount to NAV.

One thing that’s in my opinion very positive about the two Nuveen CEF’s is that they have a limited life: they are automatically dissolved 10 year after their creation. JLS was created at the end of 2009 while JMT was created in the beginning of 2010. If a manager doesn’t add any alpha a CEF deserves to trade at a discount to NAV because you will be paying fees perpetually, unless of course an activist investor like Philip Goldstein comes along and put the CEF out of it’s misery.

With JLS and JMT you know you will get back your investment at NAV, so when you buy at a discount near 10% you basically get professional management for free. Murray Stahl seems to think those fund are managed by genuinely talented individuals and that the underlying assets are very attractive. Unfortunately for me I don’t know a whole lot about mortgages, how attractive these assets are and the quality of the funds management.

The funds have obviously a pretty decent yield, but they also employ leverage (slightly above 25%) and I doubt that the yield is sustainable given the fact that they currently pay out a bit more than they earn.

What might also be an interesting opportunity is the American Strategic Income I fund. Philip Goldstein is already involved in the #2 and #3 funds, and the #1 fund has by far the biggest discount currently at almost 17%. I think it’s a safe bet that he has noticed this, and you might be able to buy before he announces a position (unless there is of course a good reason why this specific fund isn’t a good candidate for activism). Usually the discount already shrinks when an activist investor announces that he has taken a position in a CEF.


I like to buy things that are so obvious cheap that a monkey can understand the investment case. Unfortunately I don’t think this is true at the moment with JLS, JMT or ASP. They are not expensive, but a ~10% discount doesn’t scream value to me either. Maybe the underlying assets are indeed attractive, but I have no idea what I’m exactly buying when I look at the funds holdings… That’s too bad because I have to admit that I do like the idea of owning Mortgage Backed Securities simply because it’s an asset class that I don’t already have in my portfolio. Maybe I have a reader with more knowledge about the sector?


No positions at the time of publication in any of the mentioned funds.