Monthly Archives: June 2014

Another position exit: Solitron Devices

I have owned Solitron Devices for more than two years. When I bought it I saw a profitable company trading at the value of the cash on the balance sheet while I was blissfully unaware about the corporate governance issues facing the company. Since that time some progress has been made on the corporate governance front. The company held it first shareholder meeting in decades last year, and the next meeting will be held in July. Solitron also paid its first ever dividend last month, although it was a very small one. The $0.05/share represent a yield of 1.2% and cost the company a bit more than $100 thousand while they have almost $7 million in cash and equivalents on the balance sheet.

Unfortunately I don’t think there will be a lot more progress anytime soon. In the past few years a couple of activist hedge funds bought a stake in the company and pressed for changes, but last week Groveland Capital exited their stake. Their stake was bought by a small hedge fund located in the Netherlands that is run by a 26-year old manager. I doubt that he can achieve more than Groveland Capital. He doesn’t have the experience, and his location will also be a handicap.

In the mean time I don’t think Solitron is trading at a big discount to it’s potential intrinsic value anymore. When we look at the historical earnings we see the following picture:

Historical earnings Solitron

Last years operating income of $718 thousand is close to the average of the past years and in my opinion a good number to use in a base case valuation. Since the company doesn’t pay taxes because of significant NOLs carryforwards we can simply throw a multiple on operating income to estimate the value of the operating business. A 10x multiple seems pretty fair to me. Add the cash balance to this number and account for the dilutive effect of the outstanding options and I get a fair value per share of $5.48. Use a 8.5x multiple and fair value is $5.07 per share.

This represent an upside potential between 22% and 32%, but this is not what the stock should be worth today. That is what the stock could be worth if the management team (read: Shevach Saraf) would suddenly deploy capital in a more sensible manner instead of just letting it sit idle on the balance sheet. At the moment the stock deserves to trade at a discount to its potential value even if at some point in the future the strategy is changed because the return on the cash will be near zero in the mean time. You could argue that that is a fair risk adjusted return, but you also need to consider your opportunity cost.

Because of that I think that Solitron is currently more or less valued at the right price, and while this has been and probably will be an interesting stock to own just to see how the story will unfold I don’t think that is a good reason to own the stock. So I sold my position yesterday for a 36.2% gain versus my entry price: a reasonable result.


No position in Solitron anymore

Exited Asta Funding

I exited my position in Asta Funding (ASFI) last week when the share price made a small jump after the company announced that it settled it’s debt obligations with the Bank of Montreal. Asta Funding was the first write-up on this blog more than two and a half years ago. It was at the time a high conviction idea and it constituted a big part of my portfolio, but unfortunately the performance of the stock was mediocre. While my portfolio gained more than 100% in this time frame my investment in Asta Funding returned just 4.3%.

Looking back I think I was partially unlucky, but also partially wrong. In my initial analysis I overstated the upside potential because I didn’t account for G&A expenses (rookie mistake). This is something I realized long ago, and also taking this in account there appears to be significant upside potential based on the asset value of Asta Funding.

The bigger problem is that management is less shareholder friendly than I thought. My thesis was that Asta Funding was undervalued because of the complex balance sheet, but I now think that the discount exists mostly because of how management is running the company. While I could have spotted some of these issues back in 2011 I think this is also a bit of bad luck. At the time management looked a lot better because they just announced a big share repurchase program that was also (partially) executed after some delays. Unfortunately it now seems that everybody at Asta Funding is getting paid well, except shareholders: they even cut the dividend that was pretty mediocre to begin with…

I still think that at current prices Asta Funding is interesting, but I prefer opportunities where I have more faith in how fair the management team is.


Author has no position in Asta Funding anymore

Boom Logistics: Emeco’s cheaper cousin

After my unsuccessful dabble in Emeco a reader pointed me in the direction of Boom Logistics: a company that is in many ways almost identical. Boom Logistics is also an Australian rental company with a big exposure to the mining industry and a heavy debt load. The type of equipment is different though: Boom Logistics owns and operates more than 400 cranes and over 250 travel towers. Before diving deeper in the company some quick metrics:

Last price (Jun 13, 2014): 0.135 AUD
Shares outstanding: 474,868,764
Market cap: 64.1M AUD (60.3M USD)
EV (mrq): 166.0M AUD
Tangible P/B (mrq): 0.26x

What we see here is that Boom Logistics is trading at a significant discount to book value. So if book value even remotely resemblances economic value the upside could be huge. At the same time there is a significant amount of debt, but it’s a lot less than what Emeco needs to cope with. The deb/equity ratio of Boom Logistics is 1.59x versus 2.88x for Emeco. The lower leverage provides a bigger margin of safety, and a lack of one was exactly why I sold Emeco.

Boom Logistics equipment

Asset valuation

Cranes are assets that are not purely used in the mining sector making the value of the assets less dependent on the state of the Australian resource sector (and by proxy the Chinese economy). The mining sector itself is pretty important for the operational results of Boom Logistics since it accounted for 68% of revenue if FY2013.

We have a couple of data points that can be used to guesstimate how much the equipment is worth. Last year the company recorded a A$11.0 million impairment and A$6.0 million of this amount was attributable to “assets classified as held for sale”. With A$10.9 million in assets classified as held for sale at the end of FY2013 this implies that the assets were written down by 35.6%. While Boom Logistics would still be significantly undervalued if we would apply this discount to the whole fleet there are a couple of reasons to believe that this discount is overly pessimistic:

  • In the subsequent first half of FY2014 Boom generated A$9.9 million from the sale of equipment and recorded a net profit on disposals of A$2.5 million. If we assume that this profit is representative for the value of all the assets held for sale at the end of FY2013 the true discount to unimpaired book value is just 14.4%.
  • Boom Logistics sold equipment that wasn’t a good fit with the rest of their fleet and that should be expected to have less value in the used equipment market because they sold “the less recognised brands, one-off, specialised, prototype or unusual model cranes”.

The latest interim report contains some other hints that the intrinsic value of Boom Logistics’ assets doesn’t diverge hugely from book value. Being able to sell assets at a premium to book value is very encouraging, although it’s obviously a small sale:

During January, the Group sold its Tasmanian access & general hire assets to local Management for proceeds of $1.55 million and a profit on sale was realised which will be recognised in second half accounts.

The refinancing of the debt in December is another positive:

In December, the Group successfully completed the refinancing of the company’s syndicated bank debt facility, which was due to mature in August 2014.

The A$120 million 3 year revolving debt facility has been provided by existing syndicate members National Australia Bank and GE Capital and introduces ANZ Bank as a new syndicate member.

The rigorous due diligence performed as part of this refinancing has given the Group further significant comfort in respect of the carrying value of its assets.

What’s probably the best sign is that the new debt facility carries the same 7.5% interest rate as the old debt while covenants have been loosened. Note that interest rates in Australia are higher than in the US and the EU by approximately 2.5% so this is a pretty reasonable rate and a lot better than the ~10% rate that Emeco is now paying.

Pinpointing how much the assets of Boom Logistics are exactly worth is hard, but you don’t need to be very precise at the current market price. If we assume that their other assets and liabilities are simply worth book value we get the following graph:

Upside Boom Logistics depending on discount on equipment

The market seems to be thinking that Boom Logistics equipment is worth a bit less than half its book value while I’m thinking that a 35% discount is already pretty pessimistic.

As a sanity check we can also look at how Manitowoc (NYSE:MTW) and Terex (NYSE:TEX) are doing. See for example the slide below from the latest Terex presentation:

Terex Cranes segment sales and bookings

And at Manitowoc the situation seems to be similar:

Crane segment backlog totaled $842 million as of March 31, 2014, an increase of $267 million, or 47 percent, from the fourth quarter 2013. First-quarter 2014 orders of $733 million were 29 percent higher than the first quarter of 2013, representing a book-to-bill of 1.6 times. Orders in the quarter include all confirmed orders that were placed at the ConExpo trade show, of which approximately 26 percent of the backlog will be delivered in 2015 or later.

The lower demand that Boom Logistics is facing seems to be a local issue. In Manitowoc’s 2013 annual report we can find the following table with a geographic breakdown of revenue:

Manitowoc sales by region

As is visible their revenue in Australia was down by a significant amount, but they are doing fine in the rest of the world. This is also a point were Boom Logistics differs positively from Emeco. The various mining equipment manufacturers are seeing a strong worldwide drop in demand and as a result the prices of second hand equipment are also dropping world wide. Boom Logistics should have a lot less trouble to sell their equipment globally for a good price, and their results so far seem to indicate that this is indeed the case.


A weak point in the thesis – one that Emeco also shared – is that insiders own very little of the company: just 1.0%. But it doesn’t appear that corporate governance is a problem at this point in time. The company put for example a freeze on senior executive salaries during FY14 which is appropriate given the current results and the fact that they are also shrinking the work force. Seeing management shrink a company is in my opinion always a good sign from the governance perspective.

Management is also thinking about shrinking the company through share repurchases. This could generate a lot of value if the company is in fact undervalued, and it appears that management seems to think this is the case:

Following last year’s level of capital investment we expect a significantly lower requirement for new investment in FY14 and free cashflow will be directed to further debt reduction and an expected on-market share buyback. The latter is a response to the continuing gap between our share price and the underlying net asset backing per share of 51 cents.

You have to question though how strong their believe is when you don’t see insider buys…


Until now I haven’t talked about earnings and cash flow, but that is because the company produced and is producing plenty of both. It’s currently trading at a P/E of just 7.5x when we annualize the results of the first half of FY2014 and exclude one-time gains and losses. If utilization improves the company could earn a massive amount compared to its current market cap, and when things don’t turn around they can sell idle equipment.

I don’t hope that they need to liquidate a big part of their fleet, but I think that at current prices they could do that and as a shareholder you would still be able to generate a healthy profit. The asset value is there to provide a margin of safety. Buying something cheap that could produce great returns when things turn around is easy. Buying something cheap that can also produce great returns when things don’t turn around is a lot harder, but I do think I have found that combination in Boom Logistics.


Author is long Boom Logistics

Bought Retail Holdings NV (RHDGF)

Retail Holdings (RHDGF) is a well known stock in value circles with a simple story, and because of that I’m going to keep this post short. The company owns a majority stake in Sewko Holdings that has operating subsidiaries in Sri Lanka, Thailand, India, Pakistan and Bangladesh (selling home appliances, consumer electronics, sewing machines and other products). Because these operating subsidiaries are all publicly listed the value of Sewko Holdings can easily be determined. Besides the publicly listed companies there is also some net cash at the various holding companies and a note receivable:

Retail Holdings NV NAV

As you can see the company is trading at a sizable discount, and the good news is that there is a catalyst on the (far) horizon for this discount to close since the company wants to liquidate, but only at a good price. Last year Retail Holdings wanted to do an IPO in Singapore, but this plan was shelved because it didn’t think it could realize fair value. In the mean time Retail Holdings pays out generous dividends and with the CEO and his wife owning 25.7% of the company I’m confident that they will try to maximize shareholder value.

There is a lot more that can be said about Retail Holdings but since not a whole lot has changed the past years I recommend you check out these posts on OTC Adventures (post 1, post 2 and post 3) and this post from WertArt Capital. Note that the discount that the author of the WertArt Capital blog applies to account for the license fee that Retail Holdings pays for the use of the Singer trademark is not appropriate. The operating subsidiaries also pay royalties to the parent company to use the trademark so this is already reflected in the market value of the various operating companies. It might actually have a small positive value since Retail Holdings has also licensed the trademark to a couple unrelated companies operating in Malaysia and Australia.


Author is long Retail Holdings NV