Aware I haven’t posted in a while – been busy as you can see below..
Overall it’s been a difficult year, natural resources not the place to be. Rough performance right now is looking to be roughly flat.
Had a busy last couple of months adding a number of positions to the portfolio which may be of interest. A little bit of a health warning is needed as many of my ideas haven’t been working out of late.
My favourite is probably HAUTO.OSL 0 Hoegh Autoliners. This provides car shipping. The market is tight and prices are high. In a insanely volatile / specialised market such as shipping I would usually stay clear but some of the growth in demand is in Chinese EV’s being shipped to Europe. EV’s are far cheaper in China than Europe (for the same model) and Chinese EV’s (in Europe) far cheaper than those produced in Europe. There is some talk of import restrictions by the EU. Apparently they are being subsidized / dumped – despite retail prices in China being far lower (for the same vehicle) than the EU. Shipping is a challenge. Some older lower rate contracts are rolling off – but they are not the most transparent on this if the market stays tight likely to be good revenue rises…
HAUTO is trading at a PE of under 3 with a c20% yield. Book value is 70 NOK per share vs a share price of 86. Given this book value is underpinned by ships it should be pretty safe, they say the book value of their boats are worth less than the market value (P22). I don’t like the share price chart – I, sadly, got in following the recent rise at an average of about 89.6, currently the price is about 88. The share is owned by Leif Hoegh and Moller with a relatively small 26% free float – though a reasonable market cap of £1.24bn.
There are differing views on the likely future path of car shipping rates, there are lots of deliveries of ships the next 3/4 years. Some commentators expect a rapid fall in rates, others think demand will be there to hold prices up. There is also a question mark over underlying demand given rates / potential for recession / a war involving China and Taiwan. At the current rates I am prepared to take the risk. The cynic in me thinks even if there is war the transporters can transport tanks as well as vehicles! My weight in this is about 3.5%. Although it seems good idea (to me) I am a tourist to the (notoriously volatile) shipping market so will go a little easy.
Next idea is CMC markets – a holding from a while ago. Now the pandemic trading boom is over trading and profits are down. Earnings of 3-8p vs a price of 100p isn’t particularly cheap, though cashflow is likely going to e more positive. Dividend yield is about 4-5% looking forwards Nevertheless CMC has solid assets. Probably at least £120m surplus capital vs a market cap of £277m – though if punters start trading again they will need that money to fund operations. They have also invested lots in technology and their platform. There was talk of spinning this off - I will believe it when I see it. They have £37bn AUA and 152’000 active clients as well as the trading business. Compare this to Hargreaves Lansdown with £125bn AUA and a 3.5bn Market cap. OK it’s not entirely like with like but this is very cheap to my eyes. To me, the likely buyers are Peter Cruddas who already owns 59% – he is 70 but built the business from scratch and remains involved as CEO. Robinhood are looking to enter the UK market so may value the trading customers.
In my view the major negative is the management, particularly the CEO. They have very much a back to office approach rather than embracing remote. I think this is stupid, but typical. Far better to cut pay, hire from a wider area and not work people hard, than pay more have people work in London / the SE, paying lots of tax, commuting and living miserable lives, and also (likely) quitting far more often. This is not how to optimally run a company, world has changed – but few companies accept this. I will give you this charming glassdoor review (one of many):
Pros
Complimentary drinking water and toilet roll is provided alongside a copy of the critically acclaimed, literary classic “Passport to Success: From Milkman to Mayfair” for all members of staff.
Cons
A once really nice company to work for is now in complete disarray, incredibly toxic and rotten to the core largely due to CEO who was once expelled by the Conservative party as part of a Cash for Access scandal in 2012 and has since been admitted into the House of Lords despite objections from the watchdog for access to the house of Lords. There is no direction, projects are not well thought through and management change their minds constantly flipping from one thing to the next with little thought of the consequences. The company is run like a dictatorship and the share price reflects this. Additionally there absolutely no regard whatsoever for employees and their welfare. Flexible working arrangements were removed with four days notice in the middle of school summer holidays with no exceptions. Lots of people joined on the provision of flexible working however this ‘benefit’ was removed. Mass redundancies have since followed and morale is at an all time low. People are actively and openly discussing leaving the company and I really don’t blame them. The office is also egregious, it’s akin to sitting in a dungeon. There is next to no natural light, the office chairs are falling apart, the tea/coffee machines are not working more often than not. GB news is also displayed on the TVs around the office which says an awful lot about the company and their values. The Glassdoor score and share price plummeting says an awful lot about this company and where it is heading.
Advice to Management
It’s too late. The horse has bolted. You only have yourselves to blame.
Still one advantage of being in financial services is the CEO (who from the sound of things mandated back to office) is similar to pretty much all the rest of financial services who are equally backward – so competitive pressure is weaker… Weight is about 3.6% (average 92.5 (currently 98.39) – little concerned CEO will drive business into a death spiral as he seems terribly out of touch with what employees demand, there is no going back on some degree of work from home and more is a competitive advantage.
Next idea is Ashmore group. Feels like a trade I have done a thousand times before. Its an asset manager with a focus on emerging markets. £1.5bn MCAP, book value of assets worth (in theory) £900m, so, more-or-less you get an asset manager paying an 8% yield earning £75m in a bad year and £150-£200m in a good year for £600m. Some loose takeover talk, but nothing too serious. A strategy tip is to look for when the Investment trusts bounce from a bottom. The next sector to move is often asset managers with lots of cash / seed funds on the balance sheet. This one has worked out for me so far with an entry of 182.7 and a current price of 212. Not sure exactly where my target is – probably in the 300 region.
The next stock is VOD (Vodafone). Bought some at c68 current price is 65. I just think this is too cheap for what it is, a large, dominant telco trading at a yield of c10%, 24p a share free cash flow (maybe a bit less now) but at a share price of 65p it’s just too cheap. OK it has a lot of debt but that debt is fixed,low coupon and very, very long duration, seriously if you are running a big corp and can hire the guys who structured this you should… (P29 FY23 presentation)
It isn’t a problem for at least a few years and if rates are where they are now in the late 2020s / early 2030s, VOD will still be a relatively safe place to be – amongst chaos everywhere else. They have scope to sell businesses / cut costs. I really think what will happen here is a big long-term investor will buy this as a strategic asset – like buying an airport or water company. Emirates Investment Authority already owns 14%, Liberty Global 5%, they may feel tempted to take this out. They are trying for a merger with Three, doubtful this will be allowed, positive if it is as the market becomes more oligopolistic. They are bloated and badly run, though they seem to acknowledge this and may do something about it. Weight is 4.9%.
As something of an outlier I have bought ECH – ishares Chile ETF. I was looking for cheap stocks around the world and Chile lept out as ridiculously cheap. I would have much preferred to buy individual Chilean stocks but despite calling multiple brokers I haven’t been able to. Yield is 5% and a price to book of 1.22. The Santiago / Colombian and Lima Stock exchange plan to merge. I suspect Interactive Brokers / other brokers will then make the market more accessible and prices will rise as a result – I may be able to get in with a local broker before this… Very, very keen to get into Chile – stocks like PASUR – Chile forestry, 0.4x book with a 16% yield… The ETF is very much a compromise and best I can do for now. If anyone reading knows of a Chilean broker that accepts UK based clients please get in touch. This is a 2.8% weight – unfortunately due to UK regulations it is difficult to invest in the ETF so I have to spreadbet on it and pay a financing fee, limiting my size because of this. I also have a few tiny options positons. The irony is these regulations (requiring a KIID for products – to ‘protect’ UK investors from risky investments mean I have to use options and spreadbets- far riskier than the ETF itself.
Chilean Stocks by Price to book – pretty much none of which I can buy…
Chile is cheap largely because they have elected a leftist president – Gabriel Boric. He only just won by getting 56% of the vote and appears to be struggling – he currently has a 33% approval rating. With a highly unequal society its never going to be stable – but even that doesn’t justify this level of cheapness.
Next idea is Eurobox REIT, this is a big box REIT based in Europe. NAV of €1 vs a share price of €0.69. I bought in quite a bit lower at €0.60. I like it as the debt has been meaningfully reduced and you are still getting a yield of about 7%. This wouldn’t be all that exciting except for the fact that the leases have a measure of inflation protection – so whilst it isn’t a 7% real yield it isn’t a million miles away (and CPI links will likely be broken by govt if inflation really takes off). Leases are with solid counterparties / duration. Details below:
Not entirely sure of profit target / strategy on this. There will come a point at which it is no longer something I want to hold but there is still upside from here – with limited downside. In my view it should be viewed as vaguely akin to European index linked debt. This fund – with a similar ish maturity trades at a 3% yield to maturity, but its not like-with-like, so what is a fair yield – or does it fairly trade at NAV ?
Along similar lines I have a couple of smaller positions in GSF.L – energy storage fund and FSFL.L – solar fund. FSFL is valued at less than solar transactions are occurring for in private markets and GSF energy storage should do well with more renewables on the grid / volatility in prices and need for storage.
The issue with all these recent ideas are all are OK but none have huge upside (possibly except Chile). All are 20-50-70% gains over the next few years at moderate risk. Really want to get ideas in which will have a bit more kick, without excessive risk.
I have bought more GKP – which I have briefly posted about previously. Oil in disputed area of Iraqi Kurdistan, some debate as to how legal/constitutional their contracts are. Pipeline closure stopped exports and production. They were draining cash, now they are a producing and shipping oil by road tankers at a level sufficient to cover costs. They haven’t really been able to recover in terms of share price vs when they were producing nothing and had going concern worries . They have $85m+ in cash (£67m) vs a market cap of £250m. Negotiations seem to be ongoing between Kurdistan/Iraq and the oil companies which have banded together in an organisation called APIKUR. This is a 6.7% weight. Its very much unknown but it is a vast oil field, with very low extraction costs, there is enough money there for everybody. Bit concerned there is an unwillingness on the part of APIKUR to compromise (a trait I have noticed amongst the region’s inhabitants). Definitely not one for widows and orphans. I still think a deal will be done, I think an expropriation of a region’s oil and gas producers unlikely but I think contract terms will (and should) be modified to reduce the gains to shareholders. I am fine with 3-4x rather than 5-20x+ that some talk about.
These have all been funded from cash / sales of gold, getting out of Begbies Traynor (sick of them issuing shares and acquiring to grow the business). Have also sold out of AA4 but this could easily be a mistake and I may reverse. Have also trimmed PBR and CNOOC.
Next targets are more stocks in China / South America, and potentially some PE funds / fund of funds / similar ideas in the UK. Best opportunities generally look to me to be in natural resources but I have a high enough weight, arguably too high. I’m likely to be very busy the next 3-6 months.
Usually post new ideas in brief on X (twitter) – link is here.
As ever, comments / thoughts /similar ideas welcome.
