I sold the remaining half of my position in Salem Communications today at $8.71/share after already selling the other half last month at $6.99/share. This concludes the most successful investment I have made since starting this blog, returning more than 200% (including dividends) from my $2.65 entry point in a bit more than a year time. I think that Salem Communications is still cheapish, but it’s getting close to being fairly valued. If I would have to make an estimate I’d say that the fair value of SALM is currently between $9 and $11/share. I’m potentially selling a bit prematurely, but I have to admit that I’m not that thrilled to own a company with a large amount of financial leverage and I also don’t have a lot of cash in my portfolio, so it’s time to make room for something cheaper.
No position in SALM anymore
Salem Communications announced yesterday the settlement of the tender offer for the 9.625% bonds and the entry into new credit facilities. At the end of 2012 the company had $269 million of debt outstanding with a weighted average interest rate of 8.45%. Because Salem paid more than par to redeem the $213.5 million of notes in the tender offer the debt will go up to $300 million, but the interest rate will go down to 4.5% (they will pay LIBOR with a 1% floor + 3.50%). This means that the interest expense will go down from $22.7 million/year to just $13.5 million/year, and the FCF yield will go up from ~12.8% to ~18.3%.
I haven’t fully read all the details of the credit agreement, but a few highlights:
- The loan will reach maturity on March 14, 2020
- SALM is required to pay $750,000 in principal quarterly
- They can prepay without penalty
- At least 50% of the loan needs to be hedged at a fixed rate
Author is long SALM
Suntech Power (STP)
With the debt maturity of Suntech’s $541 million in convertible bonds at the end of this week it’s not a surprise that this issue is getting a fair amount of attention recently. Today the company announced that it had entered a forbearance agreement with 60% of the convertible debt holders. They have agreed to not exercise their rights until May 15, 2013 if the company doesn’t pay at the end of this week. Suntech’s plan is to try to restructure the notes. My bet is that this is going to result in massive dilution for the equity. Bankruptcy as a step in between also seems like a plausible scenario since 40% of the bondholders haven’t signed the agreement. It could take some time to see how this is going to play out.
WSP Holdings (WH)
Basically nothing has changed fundamentally between 21 February, when I first wrote about the going private arbitrage opportunity, and today. We are still waiting on the SC 13E3 filing, so it’s probably going to take at least a few more months before before it will go private at $3.15/share. Despite this the price has gone up from $2.83 to $3.05: changing the potential return from 11.3% to 3.3%. Annualized that would still be decent if it’s a transaction with zero risks, but it isn’t. So I’ve decided to substantially reduce my position in the company, and I’ve sold all my shares that I bought two weeks ago.
Salem Communications (SALM)
SALM has been on fire since I bought the stock a bit more than a year ago, returning almost 170% including dividends. Intrinsic value has been moving upwards at a significantly slower pace, and while I don’t think the company is expensive at current prices it’s probably getting pretty close to fair value. At the same time SALM had grown into a big position in my portfolio. Because of this I’ve decided to sell 50% of my position last week at $6.99. I’ll keep the other half to see at what rate they will be able to refinance their debt: I expect that this will provide a nice boost to FCF.
Deswell Industries (DSWL)
I have been looking at various Chinese small caps, but in most cases I’m thinking that I simply like DSWL more because it’s profitable, the balance sheet is rock solid and the company has a long history of returning cash to shareholders. Since Deswell wasn’t a very big position to begin with I thought the logical thing to do was to add a bit to this position instead of buying into an inferior idea. Increased my position size last week by 33% at $2.51.
Short STP, Long WH, SALM, DSWL
Salem Communications reported the results for fiscal year 2012 yesterday. At first sight the numbers don’t contain big surprises. Adjusted EBITDA is for Salem Communication a decent measure of the business performance relative to previous years, and with Adjusted EBITDA down 0.4% I think it’s clear that nothing really big happened. It’s a pretty stable business.
What is worth mentioning is that the company has launched a tender offer to buy back the $213.5M in debt that has a 9.63% interest rate. Salem is offering 110.654% of par, and that more or less seems to be a fair price considering the fact that the debt would have been callable December this year at 104.8% of par. Refinancing the debt could increase the free cash flow that the company is able to generate significantly. Last year it generated $21.3 million in free cash flow after paying $23.4 million in interest expense. We’ll have to see at what rate SALM will refinance, but there is a lot of room to improve the FCF yield (currently at 13%) by reducing the interest expense.
With the first half of 2012 behind us it seemed a good idea to me to quickly review my portfolio. Not because a time frame this short is really useful in evaluating how good or bad certain picks have been, but a portfolio is not a static entity. Some positions could become more attractive over time because of new developments, insights or changes in price, while other positions become less attractive.
The performance of the various positions is summarized in the table below. As is visible I have a few positions with a small loss and some positions with a pretty good return with SALM being the icing on the cake. I wish I could attribute this to buying undervalued companies with good downside protection, but this is not yet even getting close to getting a sufficient sample size. Besides: the company with the highest return was (and still is) also the riskiest company based on the amount of leverage.
|Ticker||Purchase Date||AVG Price||Rating||Dividend||price||Return|
|ORGN.PK||May 10, 2012||1.45||8.5->7.5||0.38||1.45||26.2%|
|CNRD.PK||Mar 29, 2012||16.50||9.0->8.5||–||14.92||-9.6%|
|SODI.OB||Mar 26, 2012||3.09||8.0||–||2.96||-4.2%|
|DSWL||Mar 6, 2012||2.11||8.5->8.0||0.02||2.84||35.6%|
|SALM||Feb 21, 2012||2.65||8.0->8.5||0.07||5.64||115.5%|
|IAM.TO||Jan 24, 2012||0.59||8.5||–||0.59||0.0%|
|ARGO.L||Jan 3, 2012||14.69||8.5||1.3||12.84||-3.7%|
|URB-A.TO||Nov 28, 2011||0.99||8.0->7.5||–||1.02||3.0%|
|0684.HK||Nov 16, 2011||2.21||8.5||0.025||2.09||-4.3%|
|ASFI||Nov 7, 2011||8.33||9.0||0.06||9.51||14.9%|
I have also included how I would change the rating of the attractiveness of the various positions based on today’s stock price and information. I have summarized my reasons for the changes below. In most cases more details can be found in the comments on the original write-up or in a followup posting.
- ORGN.PK: Have to say that this stock really showed the value of this blog for me. Got great feedback from multiple readers and realized that it’s currently trading closer to fair value than I initially thought. The positive return thanks to the fat dividend is purely luck and only showed I didn’t fully understand the risks (and luckily in this case the rewards!) of the interest rate swaps (now terminated).
- CNRD.PK: Small re-rating based on some errors in my original write-up, mainly because there was less excess cash on the balance sheet than I thought.
- DSWL: I’m more convinced than ever than I’m right that it isn’t a fraud thanks to the increase in regular dividend plus a special dividend this month. But since the stock price is also up a decent amount I think it’s less attractive today.
- SALM: It’s up a lot, but still trading at a near 20% FCF yield. The refinancing possibility next year (missed this in my first write-up) and massive insider buying after I bought it are the reasons to upgrade my rating. But it was a close call: the increase in share price is obviously not positive for the risk/reward ratio.
- URB-A.TO: The discount has been getting smaller since I initiated my position, and the recent transaction was also a small negative development.
So far there isn’t anything in my portfolio that I think I should sell right now. Cash is in my opinion one of the least attractive assets with an almost guaranteed negative real yield. But if a better opportunity comes along I do have two positions on the hot seat.
Long everything mentioned in this post.