I exited my position in Conrad a week ago and I sold my position in AIG today. I bought both stocks in 2012, and they were both big winners (although I could have done a lot better if I sold Conrad earlier). Including dividends Conrad returned 114.7% while I made 92.6% on AIG. At this point in time, they were both low conviction ideas, and I needed to make some room. My portfolio is currently 102.7% long and 5.0% short for a net long exposure of 97.8%, so I’m still almost fully invested. Luckily a couple special situations will also be concluded this month.
Northern Offshore reported that the merger with Shandong Offshore was completed earlier this week and that the cash payment will be made on August 12. MCGC has scheduled their shareholder meeting for August 14, and if enough shareholders vote in favor for the merger it should and could be completed shortly thereafter. There is a risk that the company will not be able to gather enough votes because a lot of shareholders are retail investors who might not take the trouble to cast a vote. I don’t think people will vote against the merger because they are unhappy that the deal with HC2 didn’t go through since that deal is now totally dead after HC2’s stock price dropped ~40%.
Author is long NOF.OL, MCGC, no position in AIG and CNRD anymore
Conrad reported results for the third quarter of 2014 last week, and unfortunately it contained a bit of a nasty surprise since revenue was down 9.6% compared to the previous quarter and net income took a bigger hit and went down 34.1%. The backlog also decreased 22.0%. This is obviously not a good development, and not surprisingly management’s discussion of the results have a cautious tone compared to the previous quarter:
Although we are optimistic about the long-term prospects of our business, we also take note of near-term risks. Current declining oil prices and a decrease in demand for tank barges used to transport petroleum products produced from shale plays lead to some uncertainty about our shorter-term demand and margins.
Although bid activity has been good and we are pursuing many opportunities, we have not signed contracts as anticipated which is leading to gaps in our production schedules.
Luckily the drop in earnings isn’t as bad as it looks from the surface. A bit buried at the bottom of footnote #2 we learn that Conrad recorded a $2.2 million provision for unprofitable contracts. This cost is fully recognized as soon it becomes evident while earnings are recognized based on the percentage of completion method. This heavily penalizes the earnings of the current quarter with a cost that should not reoccur (and is not necessarily incurred in this quarter). Without this item earnings would have dropped more inline with revenue: ‘just’ ~13 percent instead of 34 percent.
The Company recorded total charges of $2.2 million for the quarter ended September 30, 2014 (and no charges for the year ended December 31, 2013) in cost of revenue to reflect revised estimates related to anticipated losses on uncompleted vessels in progress in the repair and conversion segment. The offsetting credit was recorded in costs and estimated earnings, net in excess of billings on uncompleted contracts. As of September 30, 2014 and December 31, 2013, approximately $2.2 million and $0, respectively, of this provision are included in costs and estimated earnings, net in excess of billings on uncompleted contracts.
At the same time management is also seeing new opportunities:
Management continues to engage in a detailed business planning process to identify potential uses of the Company’s cash. Although we have experienced a decline in demand for inland tank barges, we have also experienced increased opportunities to produce different types of vessels for emerging markets. Some of these vessels would be larger, take longer to start production, and take longer to complete than vessels we have constructed in the past, and some may require additional capital expenditures. Management is pursuing and evaluating these opportunities and intends to take them into account in making a recommendation in the near term to the board regarding the use of the Company’s cash.
These new opportunities might also explain why the company didn’t declare a dividend this quarter. The past two years Conrad paid a 2$/share dividend at the end of the year, and while the dividends were not classified as regular dividends I was expecting something similar again since they now have more than $10/share in cash. While a dividend would have been nice I don’t mind not receiving one this year. I do trust Conrad’s management team to do something sensible with the cash, and that is the important thing.
Author is long Conrad
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.
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
While I was on vacation for just three weeks a ton of companies thought that would be the perfect time to release news. So some quick thoughts on the latest portfolio developments:
Awilco Drilling (AWDR.OL)
Awilco refinanced its debt last month. The company had ~$100 million of debt outstanding at a 9% interest rate that matured in 2015 and they replaced this with $125 million of debt with a 7% interest rate that will mature in 2019. Because Awilco decided to increase its debt load the lower interest rate will not lead to a meaningful reduction in interest payments which is unfortunate. Although $25 million isn’t a whole lot of money (for Awilco) I don’t see why they would want to borrow more. It’s not very cheap at a 7% rate, they don’t need it because they pay this much in quarterly dividends and since the effective tax rate of Awilco is low it has little value as a tax shield.
Conrad Industries (CNRD)
Conrad Industries reported their 2013 results last month, and business continues to be good. Earnings increased from $20.8 million in 2012 to $28.6 million in 2013 and the backlog is up 27% compared to last year. With the stock now trading at $42/share the company is certainly not as cheap anymore as it once was, but with a capable and shareholder friendly management team at the helm this is a business I don’t mind owning close at fair value (it would probably be more correct to incorporate a premium for management quality in the fair value estimate).
PV Crystalox Solar (PVCS.L)
Crystalox also reported their 2013 results last month, and their news was positive as well. The solar panel business is still struggling, but the company managed to increase revenues by 54% and they recorded a small profit of €3.7 million. After returning €36.3 million to shareholders at the end of 2013 they still have a net cash position of €39.2 million while the current market cap is just €37 million. Given the positive operating cash flow and the strong balance sheet I think Crystalox is still cheap and in a good position to wait for better times. So despite the fact that the shares are up significantly this year I’m keeping my position.
Schuff International (SHFK)
The last company in my portfolio that reported 2013 results was Schuff International. I never wrote about the stock on this blog because it has been covered extensively on other value investment blogs, and because I never managed to buy a full position (unfortunately). A good introduction to the stock can be found on OTC Adventures (part 1, part 2).
Just like my other holdings Schuff also reported excellent results. Revenues stayed more or less flat, but margins increased significantly: almost doubling operating income. What’s very encouraging is that the backlog has grown a whopping 130%: next year should be good! What’s also nice is that they managed to eliminate most of the debt that they incurred when they bought back almost 60% of the outstanding shares at the end of 2011. Looking back this must have been one of the best share repurchases ever.
Schuff recently also launched a shiny new website that includes a pretty cool infographic that showcases how much of the Las Vegas strip has been built by them:
Author is long all names mentioned
It’s earnings season again, and that’s always an interesting time for an investor since it’s the moment of truth: is your thesis playing out as expected, or is reality throwing a wrench in the wheels?
Awilco reported results for the second quarter earlier today, and they are excellent. Revenue was 59.5 million thanks to slightly higher contract rates and a revenue efficiency of 97.3%. The company also announced a second quarterly dividend of 1 USD, giving the company a dividend yield of more than 20%. Other good news came earlier this week when the company announced that it signed a 3 year contract for the lease of WilPhoenix, increasing the value of the backlog with 424 million to 860 million. If the stock price stays at the current levels I’m probably going to increase my position slightly.
PV Crystalox Solar
Crystalox Solar also reported today, and the results for the first six months of 2013 seems to be alright. The business is in trouble, but the company does have a lot of cash and it anticipated that it should be roughly cashflow break-even in 2013 after restructuring. Cash from operations before changes in working capital is slightly positive while reported earnings are slightly negative. So that look good to me. The return of cash to shareholders is taking more time than I expected, but according to the company that should happen sometime later this year.
Conrad Industries reported yesterday and the results were simply excellent, and it appears that the company is on track to earn a record amount in 2013. The backlog is up 218% compared to previous year and the new construction site that was build on the land adjoining the Conrad Deepwater facility was taken in use this June. A slight negative is that it seems that the BP claim is being delayed, although that’s not a surprise given the fraud BP has to battle.
ASFI reported results a week ago, and the most interesting development is the settlement with the Bank of Montreal on the non-recourse debt that backs the Seneca portfolio. Asta Funding has prepaid $15 million on the loan, and the next $15 million in of collections will also go to the bank. After this Asta Funding can recover the $15 million prepayment, and further collections will be split 70/30 between ASFI and the bank while the interest rate on the loan has also been lowered. Seems like there is a bit of value after all in the Seneca portfolio for Asta Funding, although it’s not going to be a lot.
Author is long AWDR.OL, PVCS.L, CNRD and ASFI