Marben's Misc Bits

PS I'll live tweet the HFD conf. call @marben

I've been asked for my views on the likelihood of a divvy cut. at Halfords (LON:HFD) . IMO management are wise to be cautious and not commit at this stage, until H2 results are known.

Net debt is down to £115m from £145m a year ago - and that's after half a year of share buybacks which have now ceased (and after the current level of divvy has been paid). That implies that cash generation remains strong. I see no reason why the level of CAPEX should need to increase significantly, so IMO that augurs well for being able to maintain the divvy.

Pretax profit of around £70m implies an EPS of around 26.7p, based on NPAT of £53.2m and 199.06m shares in issue. That compares to a 22p divvy, at present, i.e. 1.2x covered.

So, cover is a bit thin and it may be prudent to implement a cut - maybe to 15p. What happens will depend on a) evolution of the business and the UK economy; b) whether the new CEO sees a need to invest the cashflow in other ways (unlikely, I suspect). Overall, whilst the divvy may need to be cut, I'd put the odds at less than 50% (contrary to analysts previous assumptions).

Worth bearing in mind that the whole reason for not paying out too high a proportion of earnings is precisely so that in tough times the divvy can be maintained and cover will improve as and when the economy improves.

Cheers,

Mark

In reply to marben100, post #111

Oops. The twitter id should, of course, have read @marben100

I have just read a learned article which illustrates precisely what is wrong with the academic approach to finance: http://www.nature.com/srep/2012/121018/srep00752/full/srep00752.html - however, it also supports my own approach to hedging!

The thrust of the article is that diversification may not help you when you need it. Here is the key flaw:

Diversification in stock markets refers to the reduction of portfolio risk caused by the investment in a variety of stocks. If stock prices do not move up and down in perfect synchrony, a diversified portfolio will have less risk than the weighted average risk of its constituent stocks^{19, 20}

The problem is the definition of "portfolio risk". Academics and many financial mangers equate risk with volatility - that's handy because volatility is a nice, measurable statistic. From my POV, as a long term INVESTOR (not a short term speculator) , risk has little to do with volatility. Risk in my eyes is the chance of a permanent loss in value. True "risk" is the chance that I've got my assessment of the merits of a particular investment/asset class wrong, not that the market decides to fall out of bed for a period. The former is what diversificaton protects against - the article infers that the best way to protect against the latter (if you wish to do so) is through hedging, rather than diversification. That is what I do, and I am currently well protected with December FTSE100 puts, hedging my well-diversified portfolio.

Just for the record, despite the hedging "drag" and broad diversification my porty is currently up 18% YTD (10 year performance 13.9% p.a.)

Cheers,

Mark

Hi Mark - those are impressive returns well done. If I could have given your post a bigger thumbs up I would have because it makes a lot of sense. I'd go a even further to say that diversification can be a very very bad thing indeed for private investors.

In simple laymen's terms it is difficult for a private investor to research a basket of well diversified stocks which fit all the usual boring old criteria which define traditional safety any better than an institution or fund. Thus the returns are likely to be rather in line or worse. So why bother apart from avoiding fees.

However it is possible for private investors to get into all sorts of special situations which might be quite risky in a volatility sense but carry much lower risk because they are likely to multi-bag and pay for any disasters elsewhere. This is how I would describe a strategy which mitigates risk by investment in stocks which have a good chance of very large returns even if a large percentage of these situations turn out rather badly. I guess this is more the VC approach to picking investments.

Log

Some porty adjustment that needs more than a tweet to explain...

Noticed that this morning SocGen were recommending IMI (LON:IMI) over Weir (LON:WEIR) ... so did a comparison. Having done so, I agreed: IMI looks better value right now than Weir, being on a lower rating but with better short-term growth prospects, a higher yield and (importantly for me) a significantly higher ROC. Both companies have performed well over the last few years. I also checked IMI's pension scheme and find that it looks manageable relative to the company's market cap. (£1.3bn gross liability & net deficit of £202m vs £3bn mkt cap.). The deficit forms a large part of the company's non-current liabilities - so not as heavily geared to external creditors as the raw figures might suggest.

Moreover, both companies' shares have risen strongly today, with Weir bouncing more. So, easy decision to bank a 20% profit on my Weir purchases made in May and June. However, I am already overweight the "miscellaneous" portion of my porty, so have decided to defer any purchase of IMI and will put it on my watchlist instead.

By contrast, I am underweight my target for globally diversified investments, so decided to add to my already large holding of RIT Capital Partners (LON:RCP) . That now stands at over a 6% discount to my estimate of NAV (historically quite high for this trust, which was trading at a substantial premium to NAV last year), so 1126p looked like a good price to add at. I expect interesting developments at RCP over the coming years, with the company strongly building interests in asset managers. Having asked about this at the AGM, Lord R confirmed then that it was part of a deliberate strategy, to take advantage of forced sellers in the sector, needing to divest to meet new regulatory requirements. With the earlier premium to NAV causing me to sell down (and I was even short for a period!), I am now back to RCP being one of my largest holdings.

Cheers,

Mark

Well done on HFD Mark! I was very downbeat on them (still am longer term) but you made a nice turn.

What else are you buying/holding ATM if you don't mind disclosing?

Thanks nigelpm. Suggest following me on @marben100, if you want to know ! I generally post day-to-day buy/sells there. Have bought lots of ICAP (LON:IAP) and AstraZeneca (LON:AZN) lately, within my "high yield" subportfolio.

Continuing a Twitter thread with Stemis3 re Signet Global Fixed Income Strategies (LON:SIGG) ...

Me:

$SIGG.L final NAV for SEPTEMBER published: 91.07p. => 37% discount or 58% upside on full realisation.

Stemis3:

@marben100 Yes but only 37% = 34p per share can be realised with any time frame. Share price = 57p

Me:

But just because a time-frame can't be put on the rest with any certainty doesn't mean it can't/won't be realised. ;0)

From their last update:

The remaining 63% consists of assets held through 27 funds, 3 of which are side pockets, where their expected realisation cannot be precisely estimated. All the investments are in wind-down. 

Given that they're all in wind down, and assuming that NAV is conservatively estimated (generally the case, in such situations), whilst the process might drag on a bit, I don't expect the wind down will take forever. As the situation clarifies, SIGG should be abe to add assets to the realisation table and the ultimate NAV should become more certain. Risk/reward looks pretty good to me but, as ever, the market hates uncertainty, so is discounting the shares heavily (plus short-term traders not prepared to wait).

It may pay to wait, but who knows? Clearly the SP could move upwards sharply on announcements of significant realisations and subsequent tenders.

Happy to add even more at higher discounts to NAV.

Cheers,

Mark

PS a 58% gain over a 2-3 year timeframe (a significant proportion of which will be realised sooner) will do me nicely. ;0)

Hi Mark,
My concern is how long it will take to realise and at what discount. Visibility of the investments is very low. Not really sure what they are or even how they are valued (bearing in mind there is no market in a lot of them, clearly). What if the 37% realisable takes a 10% discount and the balance 30%. Say you get the 37% (less 10% haircut) back in one year and then the balance (less a 30% haircut) in a further 2 years. My model says IRR is about 10%. There must be easier ways of making 10% pa?
Do you have any evidence that the investments are conservatively valued? Or even that they will increase over next two years. Are there management/admin fees eating into the value?

'Mark ‏@marben100 Been trimming $RCP.L - discount to my estimate of NAV now small, so being cautious. '
Last week it was a major core holding! The price is only up about 10p, and no RNSs!!

you're wielding big sums for small shavings.

you're doing highly geared bets under the guise of being a sober investor.

you're too much in love with your spreadsheet software and internet research.

.. nota

It is a troll.

Ignore it, don't feed it.

In reply to snickers, post #120

The price is only up about 10p, and no RNSs

Whilst the SP is up only slightly, markets are off substantially (and hence NAV is likely to be lower). Therefore, controlling risk makes sense. I would prefer to have a larger holding, but when Mr Market offers me a good price for these shares, I prefer to sit on cash for the time being.

Will be happy to reinvest, either when the general outlook looks more promising, or a bigger discount becomes available. Interim results to 30th September are due soon. Will review when they're released.

Signet Global Fixed Income Strategies (LON:SIGG) released their IMS this a.m. SIGG is a "liquidation situation", offering a substantial uplift to the current SP on realisation of assets, but an uncertain realisation (and hence cash return) timetable. I have analysed the realisation timetable issued today compared with the one contained in the interims. I have adjusted the figures in the interim report to allow for the cash return made by way of tender offer in September:

As can be seen, the anticipated timetable for near-term realisations through to next March has slipped, but more realisations are expected in July and August that year than were previously visible. If that timetable proves accurate, I'd expect a further tender offer (at a small discount to NAV, to allow for costs) next April/May and possibly another one towards the end of next year.

NAV has increased from 89.95p at the date of the interims to 91.07p as at end of September. The SP currently stands at around 57p.

I hold.

Cheers,

Mark

E&OE - as ever!

@FangornForest1 has asked me about my comment that the market is perturbed by underperformance at Medusa Mining (LON:MML) .

Here is a table showing the trend of recent production forecasts by Medusa's management (in '000 oz p.a.):

Though I still have a modest holding, I think quite a few investors have "fallen in love" with the company and the above table shows that, frankly, recent performance has been woeful. FY12 actual prodution came in at only 60% of the original target and now FY13 forecasts are starting to drop too. Is it any surprise that the market is now sceptical of delivery on the 200koz target for 2014 (which posters on the ADVFN thread seem to assume is "in the bag")?

Another consequent factor is that, due to this underperformance (and heavy CAPEX), instead of generating cash, Medusa has been burning it. At the start of FY12, cash and bullion stood at US$100.7m. As at 31st Dec 2012, it had fallen to just US$15.7m. Is it any wonder investors are nervous?

Having said all that, it does look like production may have turned a corner (as would be expected from the CAPEX undertaken), rising to 18.2koz in the last quarter from 14.4koz in the previous quarter. Further increases are implied by the latest production forecasts.

Based on past experience, I think the heavy selloff in the last two days is mainly driven by steep falls in the gold price. The market for MML does seem to adopt a herd mentality and ignore the fact that Medusa's low operating costs make it much less heavily geared to the gold price than most other producers. I may take advantage of that and buy back some of the shares I sold at much higher prices, when I became concerned about management performance.

Mark

Looks like John Craven & co. are back in business with Cove mk II - "Discover Exploration": http://www.ft.com/cms/s/0/d4cc6e4e-89a2-11e2-92a0-00144feabdc0.html

Also looks like he & his team might have pulled off quite a coup, securing 18,000km2 of Comoros acreage:

The 10-year deal covers a block of 18,000 sq km close to the gas discoveries made in the Mozambique blocks operated by Anadarko, Cove’s former partner, and Eni of Italy that are estimated to contain up to 175tn cu ft of gas.

I owe a big H/T to "Jaws6" from ADVFN for suggesting Ashmore Global Opportunities (LON:AGOL) some weeks ago as an interesting wind-up situation. Since then he and I have built up significant positions, relative to our portfolios.

Following hot on the heels of its first confirmed capital return, AGOL has just issued its annual results this p.m.

These contain an update on the expected capital return:

The Board intends to distribute the cash currently available for distribution by the Company to Shareholders by way of a pro rata compulsory redemption of Shares at NAV per Share. The Board will then make subsequent quarterly distributions to Shareholders once investments are realised and the proceeds of such realisations are received by the Company, provided that the Company holds liquid funds of at least US$10 million at each quarter end. The initial distribution relating to the quarter ended 31 March 2013 will be US$88.8 million with payment expected to take place on or around 3 May 2013. The Board expects that approximately a further US$40 million will be realised during the following six months and that, including the above mentioned distributions, in total approximately 50% of the 31 December 2012 NAV will have become available for distribution by 31 December 2014.

So, at the current SP of 590p, how do these anticipated returns look?

I.e., a return of ~144p/share now ( 149.91p confirmed for 3rd May); a further @ ~65p/share in two quarterly tranches over the next 6 months; and a further 180p by the end of 2014, representing a total of 389p/share... with a residual value of 389p at the end of 2014 (assuming NAV unchanged between now and then).

Looks rather attractive to me, even after some SP gain following the first redemption announcement.

NB, if you do consider an investment, check with your broker that shares you purchase are cum the initial distribution.

Cheers,

Mark

In reply to marben100, post #126

Hi Mark, thanks for flagging this up. Picked up a few myself on the same day as the RNS. :)

On your advice to check if that they are cum initial distribution, would there be any reason for them not to be? Especially since the record date is the 26th?

I'm guessing you might be mentioning it for the benefit of those that may come around to reading your comments a bit later?

Cheers!

In reply to j1mster88, post #127

Hi j1mster88,

I'm not entirely clear on the situation, which is why I recommend checking. This is the key passage:

Up to the Redemption Date (but not including the 3 May 2013), Shares will be traded under the Old ISIN. The Redemption will be effected pro rata to holdings of shares on the register at the close of business on the Redemption Record Date, being 26 April 2013. Purchases of shares that were unsettled as at the close of business on the Record Date, including trades arranged after the Record Date but before the Redemption Date, will be transformed automatically by CREST and will settle under the New ISINs with an accompanying delivery of cash though CREST in respect of the redemption proceeds.

It suggests to me that they can be bought cum the return right up until the redemption date - hence best to double check if buying or selling until then. For dividends, the ex- date is usually 2 days before the record date, but different dates may apply to other forms of corporate action.

Cheers,

Mark

In today's volatile market session just wanted to document some repositoning I've done on puts that hedge my porty.

• Sold FTSE6500 June 20th puts. These have gained 50% today and are close to expiry. Being in-the-money they're also no longer a pure hedge but more of a gamble on short-term price movements.
• Sold small tranche of FTSE6500 December puts. This was an intial tranche of what was intended to be a larger position, assuming worthless expiry of June puts. However, since acquring these on 20th May, the market has fallen considerably and hence they've gained some 40%. I did consider repricing to a FTSE6250 strike price - but even these are rather dear.
• Used the proceeeds of these sales to buy September FTSE6250 puts (fully hedging my porty with a little cash left over). My intention is to retain these for 1-2 months and then review the situation again: if the market falls continue, I may well simply sell & take profits, as (absent seriously bad economic news), the possible froth in the market will have lessened; if the market bounces back or stays around these levels, I may look at swapping to December expiries.

I did not previously consider the September options because they expire at a time that may prove volatile, making them risky as they get close to expiry. Now, however, they provide a "bridge" whilst market sentiment sorts itself out.

Mark

Sept 6250 puts :-))