Monthly Archives: March 2017

Retail Holdings making progress with liquidating

Retail Holdings announced yesterday their results for 2016.  That these would be good was already known since the individual subsidiaries had already reported their 2016 results. But it’s nevertheless good to see it confirmed that revenue was up 16.9% in US dollars while operating earnings increased by 26.0%. Bigger news is that apparently the liquidation of the company is well on track. A $2/share dividend will be paid in the coming months while a second distribution is expected later this year, depending on how much assets the company will sell in the meantime. Apparently Retail Holdings has already started to liquidate their stakes in the last three remaining operating subsidiaries (emphasis mine):

“I am optimistic about the prospects for 2017, in terms of both financial performance – – the individual operations are all off to a very good start – – and likely further progress in our strategic divestment program. Public market sales of additional shares are either already underway or planned in Bangladesh, India and Sri Lanka; the initial results from this effort should be disclosed in the next several weeks. Additional asset sales are planned for later in the year.

So the company has finally decided on a course of action, and it will try to sell their stakes in the public market. With Retail Holdings owning a 72.8% stake in Singer Bangladesh, a 75.0% stake in Singer India and a 79.7% stake in Singer Sri Lanka this will take time. Presumably they will also not sell everything at once, but I’m guessing that in twelve months time Retail Holdings will look very different than from today.

This NAV calculation is still using some stale numbers since the 2016 annual report hasn’t yet been published (should be coming in the next few days). Most likely there is now a bit more cash at the ReHo holding company level (they are planning to pay a ~$9 million dividend after all), but since the majority of the value sits inside the three publicly traded subsidiaries it should still be reasonable accurate. Given the imminent liquidation of the company I think a ~35% discount is quite attractive, and I added a bit to my position at the market open.


Author is long Retail Holdings

Update on my basket of Italian real estate funds

Two years ago I bought a basket of Italian real estate funds with a simple thesis: they are all liquidating (because they all have a fixed end date) and they are trading at a big discount to net asset value. Since then that thesis has been playing out slowly. Back then there were a total of 24 funds with a total net asset value of €4.0 billion. Thanks to asset sales (and also some write-downs) there are now 21 funds remaining with a total asset value of €2.6 billion. The total market valuation is €1.4 billion for an overall discount of 46%, down just slightly compared to the 48% discount two years ago.

While the overall discount has remained roughly constant there have been some significant shifts between individual funds. I bought for example Europa Immobiliare N1 at a 54% discount, but thanks to some successful asset sales the discount is down to 14% (pro-forma for a large liquidation dividend that will be paid next month). Other stocks have seen their discount grow. Two years ago I thought that the Atlantic 1 fund was richly valued at a discount of just 24%, now it’s actually one of the cheapest funds with a 58% discount. I have strongly considered adding this one to my basket, but so far the relative high leverage (50% LTV) has been holding me back.

I did decide to sell Europa Immobiliare N1 though, and added a couple of other positions. A new addition to my basket is Amundi RE Italia. They haven’t made a lot of progress with liquidating so far and incurred some asset write-downs, but the discount is huge at 61%. My other additions are Securfondo and Socrate. Securfondo has been making good progress with liquidating and has only one building remaining, while Socrate also started with selling assets. A great site to keep track of what is happening in this sector of the market is this one. It’s Italian, but it keep track of asset sales, financial reports and other developments related to these funds.

My current basket of Italian REIFs and their performance so far looks as follows:

Ticker Purchase Date entry Sell Date dividend Price/Exit Return
QFSEC.MI Mar 27, 2017 260.10 259.90 -0.1%
QFARI.MI Mar 27, 2017 725.50 724.00 -0.2%
QFSOC.MI Mar 27, 2017 237.30 245.00 3.2%
QFAL.MI Feb 26, 2015 1,150.00 97.00 1,329.00 24.0%
QFARE.MI Feb 23, 2015 1,120.00 168.50 950.00 -0.1%
QFDI.MI Feb 26, 2015 41.01 62.65 52.8%
QFEI1.MI Mar 2, 2015 720.00 Mar 27, 2017 450.00 948.5 94.2%
QFID.MI Feb 27, 2015 70.90 3.50 77.65 14.5%
QFIMM.MI Feb 27, 2015 1675.00 1400.00 -17.4%
QFVIG.MI Feb 27, 2015 1635.00 1395.45 850.00 37.3%


Author is long everything in the table

Reorganizing my portfolio: sold Fujimak, PVCS & Awilco

I will admit it: I’m a lazy investor. Especially for my smaller positions I often forget about the stock after having done the initial valuation work. Sure, I follow the price/news/filings to see if anything significant is happening, but often it’s just business as usual. That doesn’t mean that fundamentals can’t deteriorate gradually, or that the price can climb slowly. And those small changes over time can add up to change the investment case. Because of that I started this month with a bit of a cleanup project. I’m reevaluating all my positions, and adding to them or selling them as I see appropriate. The first casualties of my cleanup project are Awilco Drilling (OSL:AWDR), Fujimak (TYO:5965) and PV Crystalox Solar (LON:PVCS).

Sell: PV Crystalox Solar

My reason for selling PV Crystalox Solar is simple. I primarily invested in this company because it is on a path towards liquidation and was trading at a near 50% discount to NAV, but with the share price increasing from 10p/share last year to 21p/share now this discount has almost completely disappeared. The stock was actually trading even higher around 24p/share just two days ago, but the preliminary results for 2016 were not well received by the market. The company managed to turn a lot of its inventory into cash (as expected), but the industry environment once again deteriorated sharply during the year. While the discount to NCAV is gone there might still be a decent amount of upside. The company is involved in an ICC arbitration case against a former customer that might result in a large favorable judgement. This is expected to happen in the third quarter of this year, but I have decided not to wait around for this, because I have no clue how to value this and it’s not a free option anymore. If I would encounter this stock for the first time today I would not buy it so I’m not keeping it either. I acquired my first shares of Crystalox in 2013 and they have returned 110% since.

Sell: Fujimak

The second position that I sold, coincidentally also today, is Fujimak. I bought this stock at the end of 2014, basically because it was super cheap when looking at simple metrics like P/E and net cash per share. The past weeks the stock suddenly started to move up, and I managed to exit with a total profit of 100.2% (after taking into account two small dividends). Despite the rise in price the stock is still very cheap. Valuing the cash balance at 50% and slapping a 8x earnings multiple on the company and it’s still trading at a discount of ~30% to this conservative estimate of value. Not a bad deal, but in Japan you can do better than this.

Sell: Awilco Drilling

A position that has been on my ignore list for a long time is Awilco Drilling. I bought the stock early in 2013 when it had two drilling rigs under long term contracts that, according to my calculations, would generate roughly enough cashflow and dividends to pay back my initial outlay. With oil prices high at the time it was not an unreasonable assumption to think that the company would most likely be able to rent out the drilling rigs again when the two contracts would end. Of cours, we now know that that didn’t happen and as a result one rig is currently cold stacked while the other rig will reach the end of its contract in the first half of 2018.

I bought the stock at 90NOK/share, received 75NOK/share in dividends and sold the stock for 31.8NOK for a total profit of 18.9%. That’s in absolute sense not a whole lot (especially considering the holding period), but at the same time I’m extremely pleased with this result. Despite encountering one of the most unfavorable scenarios possible I managed to generate a positive return. At the same time it also validates the correctness of my initial thesis since I did indeed managed to get most of my capital back. Right now the share price of Awilco Drilling is absolutely not covered by the future cash flows from the contract that is left. I think they might generate roughly 15.5NOK/share in dividends, and the remaining value is a bet that either the rigs can be sold or that the situation changes in the coming years and they can find some work again. With my original thesis gone I don’t see a reason to stay invested.

Buy: Beximco Pharma

Besides selling stock I have also added significantly to my position in Beximco Pharma. Just two months ago I wrote that I sold a large part of my Beximco Pharma stock since the discount between the GDRs in London and the ordinary shares in Dhaka had come down from 60% to just 25%. Since then the stock price in London has slipped again while the price in Dhaka continued its upward trajectory, and as a result the discount is now back to exactly 50%. This doesn’t make any sense, but I’ll happily continue to buy low and sell high as long as the market is willing to provide those opportunities :).


Author is long Beximco, no position in Awilco rilling, Fujimak or PC Crystalox Solar anymore

Itasca Capital: asymmetrical exposure to Limbach

Itasca Capital (CVE:ICL) is an interesting company that offers a creative way to get asymmetrical and leveraged exposure to Limbach Holdings (NASDAQ:LMB). Itasca Capital is the new name of Kobex Capital that was taken over by activist investors last year. After repurchasing roughly 50% of the outstanding shares in a tender offer the company invested substantially all its assets in the most senior securities of 1347 LLC, a holding company that owns various parts of the Limbach Holdings capital structure. Limbach Holdings is a former SPAC that acquired an “integrated buildings systems provider” that manages, according to themselves, all components of mechanical, electrical, plumbing and control systems, from system design and construction through service and maintenance.

On Seeking Alpha there are a number of decent articles that argue that Limbach is currently moderately undervalued and on VIC there is a write-up that argues that Itasca is substantially undervalued. If you want some background information I suggest reading those articles, because I will start straight with the valuation of the company.

Itasca’s main asset is a stake in 1347 LLC. This holding company owns 400,000 Limbach preferred shares with a par value of $25 that are convertible in 800,000 common shares. The preferreds were issued half a year ago when the SPAC transaction closed and have an interest rate of 8% for the first three years, 10% for the following two year and 12% for the last year after which they will be redeemable. I have valued the preferreds at par plus the value of the conversion option as calculated by a Black-Scholes model. In addition to the preferreds 1347 LLC has a large stake in the common shares and two small warrant positions with a $11.50 strike and a $15.00 strike. I have valued all the options/warrants using a volatility of 30% to estimate fair value. The $11.50 strike warrants are also publicly traded (ticker: LMBHW) and are almost exactly traded at this level:

With the warrants valued it’s easy to compute the value of 1347 LLC itself:

Itasca doesn’t own the whole holding company though, they own $10 million of the Class A shares that accrue interest at 1%/month and after the other share classes are paid they are entitled to 44.44% of the remaining profit. Based on the current value of Limbach, and taking into account that 8 months have passed since the securities were issued the waterfall of the profit distribution looks as follows:

With this waterfall and the total value of 1347 LLC we can calculate what the current value is of the Class A shares that Itasca owns. The value is simply the value of the priority amount plus 44.44% of the remaining value, after subtracting the preferred claims of the other equity classes. Accounting for some small assets and liabilities at Itasca NAV/share is US$0.89:

With an upside of just 30% the picture is completely different from the VIC write-up that estimates more than 100% upside. There are various reasons for this difference, the big one being the inclusion of $13.5 million of debt at the 1347 LLC level and accounting for the accrued interest at the other share classes.

While 30% upside might still sound attractive to some I would argue that in reality the picture is a bit worse. Because the lower level share classes also have interest that accrues before the profit share is paid the amount of debt that has priority will grow in time. After 5 years (when the Class A shares can be redeemed) the value of the B, C and D classes will have grown from $10.5 million to $16.8 million. In addition: 1347 LLC has to pay more interest on its own 13.5% debt than it is being paid on the Limbach preferred shares which means it will incur an additional $3.8 million in liabilities. The result is that if Limbach would be at $13.50 in 5 years time the upside isn’t 30%, but just 6%. What is nice to see though if we plot the value of Itasca after a 5 year period with various prices for Limbach that the asymmetrical nature of the bet becomes quite clear:

This payoff diagram makes it clear that despite the small discount to NAV it is still possible to make a good case for an investment in Itasca Capital since the payoff diagram is superior to a investment in Limbach itself. As long as the stock doesn’t drop more than 40% this investment might still make a little bit of money while there is leverage to the upside at the same time. If the stock goes from $13.50 to $22 you make 63% while with this investment you stand to make 107%. That sounds relatively good to me!

And there is more good news: Itasca Capital has $20 million in NOLs that expire between 2026 and 2036. To make use of these the company would need to acquire a profitable operating business for which it doesn’t have money at the moment, but it might be able to do this though when 1347 LLC returns the capital that is now tied up in Limbach. It’s worth more than zero.


Is Itasca a good deal? I don’t think it’s a bad investment at current prices, but certainly not great either. It has some (small) costs at the company level and it’s very illiquid, so it deserves to trade a bit at a discount to the underlying value of Limbach. Usually I don’t agree with the size of the discount that the market places on holding companies, and here it might also be a bit high. It’s hard to pinpoint the exact number, but I guess it’s around 20%. Not high enough for me to get interested in buying shares.


Author has no position in Itasca Capital or Limbach Holdings.

Exited my position in Burelle: discount at 34%

Sometimes I like to buy investments that are trading at a clear discount to underlying value, but with absolutely no catalyst in sight to narrow it. Burelle (EPA:BUR) was certainly one of those ideas: it’s a holding company with a large stake in Plastic Omnium (EPA:POM).  I wrote it up in 2013 when it was trading at a discount of roughly 50%, and since then Plastic Omnium has performed very well, but the discount has only shrunk slowly. However today, Burelle’s share price jumped with 7% while Plastic Omnium stayed almost flat reducing the discount to 34%:

As far as I can tell the only reason for todays market move is this article in the French Financial newspaper called Les Échos. An unexpected catalyst, but I’ll take it. A discount of 34% is not bad, but obviously a lot less attractive than a 50% discount and since I’m at the moment almost fully invested raising a bit of cash for potential new ideas is not a bad move. So I decided to exit my position in Burelle.

During my four year holding period the stock generated an total return of 236% and an internal rate of return of 34.1%. This compares favorably to an investment in Plastic Omnium itself which would have returned 189% during the same period for an IRR of 29.8%. So most of the return is definitely caused by the strong performance of the underlying stock, but at the same time this result shows the power of just buying stuff at a big discount. Having a discount shrink from ~50% to ~35% during a four year period sounds like a very marginal result. At the same time it’s enough to add almost 5% alpha annually for four years, and that is huge!


Author has no position in Burelle anymore