Wednesday, July 27, 2011

SHG - Shanta Gold - sticky situation fund

SHG Shanta Gold is a gold explorer, about to turn producer. Lots of high-quality analysis has been done on
its likely value, and it appears that the company is worth a lot more than indicated by the share price.

There was an episode of the Simpsons where Homer decides to become an inventor. One of his inventions was for women who wanted to apply their makeup in a hurry. It consisted of a blunderbust which is pointed at a lady's face. The trigger is pulled, shooting out makeup over the woman, thereby requiring only an instant to apply. Homer tries to demonstrate this on his wife. Fortunately, Marge ducks just as he pulls the trigger, causing the load to splatter on the wall. It cracked me up bigtime. Alas, I haven't watched the Simpsons for a number of years, as Channel 4 seem to keep repeating old episodes over and over again, and I never know when they are showing ones that I haven't seen before.

Which leads me to my point: I'm going to eskew all the very fine work by analysts and others and present my own blunderbus approach to looking at SHG. To borrow a phrase from Joel Greenblatt, I want to be able to bungle my way into a profit on this one.

I'm basing my "valuation" that I saw by a poster called Isaac over at Stockopedia (article). The New Luika gold mine is expected to produce 175k-190k oz of gold over the first three years. Let's call it 180k oz. That's about 60k oz pa. Cost per oz is estimated at $570 - $610. Let's call it $600. Gold price is $1600/oz. So, the profit per oz is $1000. Multiply that 60k, and we're looking at profits of about $60m. That's about £35m.

"slartybarfast" estimated that at 19p, the market cap of SHG is £50m. So, that puts SHG on a PER of about 1.5.

Undoubtedly they'll be other costs to consider that will reduce the PER. New Luika is just one of 3 resources that the company owns.

Also worth mentioning is thatat the end of Dec 2010, directors had an interest of 18% in the company, and have bought into the recent share placing.

Current ask price for the shares is 23p, and FT-ALL SHARE is currently 3076. It goes into my "sticky situation" fund, which I'll present on an ongoing basis as soon as I get the programming together to produce reports. I call it the "sticky situation" fund, because I don't know if "special" or "event-driven" quite describes it accurately.

Sunday, July 24, 2011

PIC.L - Pace - an event-driven situation

Bottom Line Up Front

Pace's share price has been hit hard by two mis-steps during the year. Concerns have also been expressed for the need for additional equity finance, the outcome of a forthcoming strategic review, and doubts about the future operational performance of Pace Europe. At a share price of 107.7p, it has an unleveraged earnings yield of 14.8%, and a return on tangible capital of 140%. It appears that the market has over-reacted to recent temporary setbacks, creating a buying opportunity.

Brief Description of Trading Activities

Pace makes satellite, cable and IPTV devices for PayTV operators. IPTV (Internet protocol Television) refers to TV content delivered over the internet instead of traditional methods like radio frequencies, satellite or cable [1]. PayTV refers to subscription-based television services, like BSkyB.

Pace manufactures STB's (set-top boxes). These are electrical boxes that receive incoming signals (from satellite, cable, etc.) and decode them to produce output that televisions can use. A PVR (Personal Video Recorder), which records programs on a hard drive instead of video tape, is one example of an STB. There are many models of STBs, depending what they do: whether they receive signals from satellite or cable or internet, whether they can record programs for playback or not, and introduce new features like high definition improved compression technology, and ease-of-use.

Year to date

PIC's share price was around 183p at the start of the year, rising to 229p at around mid-February. On 08-Mar-2011, PIC announced its results for y/e Dec 2010, noting strong revenue growth, strong earnings growth, increased returns on sales, and three acquisitions [2]. However, the share price plunged from 220p to 165p (25% down) over the course of a few days. This was due to an exceptional charge of £19m for acquisition costs and a delay in customer upgrade plans, both of which were unexpected by investors.

The share price then drifted downwards to 153p by 09-May-2011. On 10-May-2011, PIC issued an IMS (Interim Management Statement) [3], stating that the Japanese Tsunami had created supply chain problems, that the profitability in Pace Europe had been below expectations, and that Pace Networks has been closed as a standalone business unit due to insufficient demand. Consequently, the share price plummeted to about 93p on heavy volume. Since then, the share price has recovered to about 107p (51% down on its earlier peak).

I had elaborated on these issues in a blog post [4], noting that the increased debt of the company made it more risky than formerly, and that Altrium Securities challenged the credibility of the reasons contributing to the lowered margin expansion cited in the IMS.

On 31-May-2011, PIC announced that Mike McTighe retired as a director of the company, and proposed Allan Leighton as its new non-executive chairman [5]. Mr. Leighton is a former CEO of Asda and non-executive director of the Royal Mail. He took up the PIC role on 21-Jun-2011. He will perform a strategic review of the business, and should improve the communication flow with the City.

On 21-Jul-2011, Numis downgrades PIC from hold to reduce. They are concerned with a possible painful transition following Mr. Leighton's business review, the possibility of needing to issue equity to refinance their debt, and uncertainties over the future performance of Pace Europe.

On 26-Jul-2011, PIC will announce its Interim 2011 Earnings Release.

Quantitatve/Technical reasons for purchase

PIC has suffered two significant gap downs on heavy volume during the year, dropping its share price to levels not seen since April 2009. Analyst forecasts expect an 11% decline of EPS for y/e Dec 2011. Clearly, there is a lot of negative sentiment and uncertainty surrounding the company.

Using a quantitative approach suggested by Joel Greenblatt [6], PIC has a high ROC (Return on Capital) and UEY (Unleveraged Earnings Yield). Greenblatt's formulation of ROC is based on EBIT (Earnings Before Interest and Taxes) over Tangible Capital Employed. UEY is based on EBIT over EV (Enterprise Value).  Sharelock Holmes reports figures of ROC as 118% and UEY as 13.8%. According to my calculations, ROC is 140%, and UEY is 14.8% [7].

The FTSEALLSHARE stands at 3088.36. PIC is on an ask price of 107.70p


Long position, no intention of changing in next 72 hours.


[1] IPTV Wikipedia -
[2] Prelim results for y/e Dec 2010
[3] Intermin Management Statement issued 10-May-2011
[4] Pace - I got it wrong
[5] Allan Leighton To Become New Chairman Of Pace plc
[6] The Little Book That Beats The Market
[7] Spreadsheet calculations of ROC and UEY

Monday, July 18, 2011

ACHL - digging through the accounts of Asian Citrus Holdings

ACHL (Asian Citrus Holdings) is a food producer listed in both UK and HK (Hong Kong). It is an AIM-quoted stock, having floated for 6-odd years. ACHL runs orange plantations.

In 2010, 96% of its revenues were the sale of oranges themselves, less than 1% were due to the sale of self-bred saplings, and the remaining 3% were due to the sale of properties. By type of customer, 41% were to supermarkets, 34% were to corporate customers, 24% were to wholesale customers, and 1% were to "other". The company doesn't elaborate what "corporate" customers are; and I'm a little perplexed as to what that actually means. Maybe it refers to the supply of oranges to customers like juice manufacturers, but that is speculation on my part.

Looking through the accounts, I was unhappy to see that a lot of the profits are in the form of "fair value gains". According to note 2h of the accounts:
fair values of orange tree biological assets are based on the present value of expected net cash flows from the orange trees discounted at a current market-determined pre-tax rate
Well, isn't that just booking profits in advance? You can see the effect that value gains are having on the company's reports on profits from their 5-year summary statement:
       TOTAL  2010  2009  2008  2007  2006
PBT     2077   587   442   367   373   308
FVG      930   305   211   165   133   115
PBTX    1147   281   231   202   240   193
RATIO %   55    48    52    55    64    63
Figures quoted above are in RMBm (millions of CNY), except for the ratio, which is in percent. PBT is the profit before tax. FVG is the fair value gain. Both of these figures are in the accounts. PBTX is a self-computed figure, simply being PBT-FVG. RATIO is PBTX/PBT as a percentage. What are these figures telling us? They are telling us that management are upping profits by revaluing the worth of their orange trees, and in no small amount. Over the five-year period, profits were only 55% of those stated in the accounts, if you strip out these gains. The trend has been consistently downwards, too - an unwelcome sign for those with a prudent mindset. That didn't stop the auditors, Baker Tilly, from giving the company a clean bill of health, though.

Confirmatory evidence that accounting profits are far above cash flows can be obtained by looking at figures published by Digital Look. The figures they produce are:
       TOTAL  2010  2009  2008  2007  2006
OCF     1285   393   278   228   214   172
OP      2079   585   442   363   375   314
%         62    67    62    63    57    55
OCF is the Operating Cash Flow, and OP is reported operating profits. Both figures are in RMBm, as before. Expressed as percentages, we see that, on average, operating cash flows have been only 62% of operating profits. Not a good sign.

Average ROE seems very good, at 16%, as computed below:

       TOTAL  2010  2009  2008  2007  2006
NP      1999   585   440   399   318   257
TE     12176  3189  2905  2469  2108  1505
ROE%      16    18    15    16    15    17
NP is the net profit for the year, TE is the total equity. I obtained these figures from Digital Look.

However, the picture isn't so rosy if I strip out the FVG, and reduces the ROE to a more modest 10%. To obtain this figure I have subtracted the FVG from both NP and TE. Here's the computation:

       TOTAL  2010  2009  2008  2007  2006
NPX      1069  279   229   234   185   142
TEX     11246 2883  2694  2304  1975  1390
ROEX%      10   10     9    10     9    10
NPX, TEXT, and ROEX have the same meaning per the previous table, but with the X implying that the FVG have been removed.

The returns on equity have not been distorted by excess leverage, as the company has no non-current liabilities, and net cash of £289m, as reported by Sharelock Holmes for the latest interims. How comes the balance sheet looks so robust? Well, during the latest 5 year period, it had total net cash flow from operating activities (inflow) of 1231m RMB, investing activities (outflow) of 904m RMB, and financing inflows of 565m RMB.

Included in current assets are trade receivables of 2.5m RMB. However, 1.1m RMB of that are over 6 months old. Prudence would seem to dictate that at least some of this amount should be written off. However, the company has not done so, stating that it has collateral over these balances. Also included in current assets are "other receivables, deposits and prepayments" amounting to 17.1m RMB. The bulk of it, 11.1m RMB releate to amounts "expected to be recovered or recognised as an expense after more than one year". In the previous year, FY2009, the amount was 6.1m RMB. I don't know what's going here. Are they principally prepayments, or dilinquent debts? They do not appear to be material, though, as the company has 975m RMB in cash and cash equivalents alone, and it is only a small amount if it were written off (in FY2010 the profit before tax amounted to 587m RMB). 

The company has some related party transactions. In Novemeber 2009, the company entered into an agreement to buy fertiliser from Fujian Chaodo Group, which is 95% owned by Mr. Kwok Ho (100% if indirect holdings are included). Mr. Ho isn't on the board of directors, but Chaodo is a holding company of Huge market, which is a substantial shareholder of ACHL. In 2010, total related party transactions amounted to 48m RMB. Profits before tax amounted to 587m RMB (and remember, that's before we strip out the "fair value gain"). So that's about 8%. Although the company states that the supplies are at market rates, I believe one would be right to be nervous about how much influence the related parties seem to be having.


Sunday, July 17, 2011

Non-manufacturing z-score calculator

Sites like Sharelock Holmes typically publish the Altman z-score, assuming the company to be a manufacturer. However, many companies are not manufacturers, so his less-common, but more applicable, calculation is required. I am a programming geek who likes tinkering with "cool" languages like (Racket) Scheme.

I have combined these two interests together to create "fiqua", a fledgling company account analyser. Currently, it performs only one calculation: the Altman z-score for non-manufacturers. I plan to add more functionality. The calculator can be downloaded here. The program is free, and contains no spy- or ad- ware. Simply download the file, unzip it, and click on the executable file. Let me know if you have any problems.

The first company I tried it on was TCG.L (Thomas Cook), which is on my watch list - deathwatch list, that is. It looks pretty poorly to the naked eye, but the z-score confirms the bad news. My program calculates it as -1.2, well into the danger zone. Here are the specific numbers I pulled from Digital Look:
Total Assets: 6900
Total Liabilities: 5157
Working Capital: -1922 (Current Assets 1463 - Current Liabilities 3385)
Retained Earnings: -626
EBIT: 167
Mkt Cap: 624


Saturday, July 9, 2011

MC02 Value screen

I have been having discussions with Richard Beddard about value-based portfolios, whether they worked, and under what circumstances. My view is that deeper value shares only provide truly superior performance, as a class, coming out of bear markets. I don't think this is where we find the markets today, so I consider mechanical value-based strategies to be risky propositions at this point in time. That's not going to stop me in what I am about to do, though.

I also take inspiration from Joel Greenblatt and his Magical Formula. I am a little skeptical of his formula, though, as people have reported results that are less than the returns that he claims to have. It is also too difficult to replicate his precise calculations, not least because he hasn't laid them out in precise detail.

Another source that I am taking inspiration from is Stingy Investor, who is doing exceptionally well with a Ben Graham formula. The portfolio has thrashed, and I do mean thrashed, the S&P500 over a decade, having returned 18.1% annually. Good enough for you? The formula is very restrictive, and tends to throw up very few stocks.

I have decided to broaden and simplify their approach into just two basic criteria: balance sheet safety, and cheapness. Here are the exact criteria I used:
  • market cap > £200m - for adequate size and low spreads
  • z-score > 3 - the balance sheet safety measure
  • PTBV (Price to Tangible Book Value) > 0 - I don't want any company with negative tangible equity
  • PER > 0 - I want to ensure some earnings
  • operating margin > 0 - this just ensures that earnings aren't made positive by exceptional gains
I rank the results by ascending PTBV. It is easy to run this screen using Sharelock Holmes. I then run through the results, from top to bottom, selecting 10 shares. I want to diversify by sector. Seeings as the results tend to be clustered in the same sectors, I allow only two companies per sector. I also apply some very lightweight rationalising to my selection. For example, I will allow two miners in, but not if they're both platinum miners; and I consider oil producers to be the same as miners. I have also excluded REITs, because they tend to trade on low book values anyway, and I think they are similar-ish to housebuilders. Similarly, I have lumped "construction and materials" in with housebuilders. One food producer that cropped up on my list was ACHL (Asian Citrus Holdings), which sells crops in Asia. It has a dual-listing on Hong Kong, which many readers might know is a giant red flag to me. Nevertheless, I have included it in the list. The next share on my screen is AEP (Anglo-Eastern Plantations), which develops in Indonesia and Malaysia. So I have given that one a miss, as it is too similar to ACHL.

I have not investigated the companies in any depth, and have not applied any insight as to how they are likely to perform, their relative merits, and so on. I have simply tried to diversify sectors and applied a minor amount of common sense.

With that in mind, here's the list I came up with:


The prices (SP) quoted are the ask price in pence as of yesterday closing, obtained from Interative Investor. The FTSE All Share stands at 3122. See you in a year's time.

Saturday, July 2, 2011

Private Investor calls

In a previous article, I looked at the top ten buys and sells by private investors, as reported by TD Waterhouse. I discovered that investors made good calls on both their buys and sells. Encouraged by the first set of results, I decided to repeat the experiment.

I have changed my methodology slightly. This time, I am looking at 4 weeks worth of data (the weeks of 31-May, 07-Jun, 14-Jun, 21-Jun) from TD Waterhouse. The same principle applies: I look at the top 10 buys and sells, and eliminate shares appearing as both buys and sells. Here are my results:

  • CWC - Cable & Wireless Comm - 40.62p
  • NG. - National Grid - 614.32p
  • PIC - Pace - 107p
  • VOD - Vodafone - 164.26p
  • ANTO - Antofagasta - 1408.18p
  • EO - Encore Oil - 63.50p
  • SOLO - Solo Oil - 1.40p
The FT-ALLSHARE currently stands at 3120. Share prices are as at today, and have been taken from Google. Barring spreads, dealing costs and stamp duty, they represent prices that you could obtain right now.

I am happier with the way the list has turned out this time, as it shows some more consistent themes, rather than a lot of to-ing and fro-ing within the same sector. Commodities is out the window, and investors have opted for techie and/or safety. Will investors be proved right in dumping their junior oilies? Will Pace finally sort their supply issues out and resume growth, or was that delay in a customer contract an ominous sign of things to come? I'll let you know in 6 months time.

In the meantime, happy and prosperous investing.

Edit 08-Jul-2011: FT-ALLSHARE corrected from 3210 to 3120.