investing

Kubera Cross-Border Fund, liquidation at a more than 50% discount

/ Maarten Pieters / 2 Comments

I posted about this liquidation on August 20 2017. At that time, the Kubera Cross-Border Fund was already in liquidation mode. It was about to close a sale of their largest asset, a stake in Planet Cast Media Services, valued at $23m. The deal finally closed on June 14 2019 (more than 2 years after the announcement of the sale!) at a value of $20m (a small discount to the initial agreement + FX effects). The company made a distribution on July 19 of 0.18 USD per share.

The remaining net asset value of the company is 0.116 USD per share while shares are available at ~0.050 USD per share. This represents a discount of more than 50%. The shares are very illiquid, but from time to time larger blocks are sold. With a bit of patience, you should be able to acquire a sizeable retail position.

 

 

Net asset value

The assets consists of a stake in Synergies Castings Limited (manufactures alloy and chrome plated wheels for OEMs), a tax fund to be received from the Indian tax authorities and positive net working capital.

The fund has annual costs of approximately 600k USD per year (administratitive and liquidation costs). Management of the fund explained me that they are currently assessing options to reduce these costs significantly, potentially including a delisting of shares. They expect to provide more details soon.

I expect a long liquidation process (Indian authorities have showed to move slowly) and therefore estimate cash burn and liquidation costs for a period of 2 years adjusted for some savings. If we further take the book value for granted, total distributions add up to 0.108 USD per share (116% upside).

If we discount the stake in Synergies Castings Limited and the tax refund by 50% and take 2 years of current annual expenses we still break-even. Downside seems well protected.

For the tax refund I believe that it is unlikely that it will be lowered as it is based on simple tax rules, however I have no experience with similar situations in India. The actual refund should amount to $4.85m, it is valued at $4m on the balance sheet to take into account the time value of money and uncertainty with regard to timing. So there could be further upside.

Synergies Castings Limited

https://www.synergies-castings.com/

The fund agreed to sell its complete stake in the company for $14-16m in four tranches ($2m discount if consumated within 18 months) in August 2017 to a buyer (I believe to be the founder of Syergies Castings Limited) who at the time still had to find buyers. A strange situation. I believe that the founder basically guaranteed to buy the stake at this price and believed that he could find buyers for a higher price.

Payments for the first two tranches were received soon after the agreement. However, the 18 months have passend and the 3rd and 4th tranche are still open. The fund also received an advance of $1m (liability on the balance sheet) which is a penalty which the fund can keep in the case the 3rd and 4th tranches don’t close. The fund values the remaining stake based on the lower range of $14m out of caution. The fund is in discussions with the buyer/founder and confident that they will eventually close the sale, although with further delays (based on conservation with the funds manager the Indian and US market conditions are not as favourable as a couple of years ago, however they see this as a temporary issue).

The company is still growing revenues and profits and makes investments for the long term (https://www.thehindubusinessline.com/companies/synergies-castings-to-set-up-a-650-cr-greenfield-plant-in-visakhapatnam/article23738268.ece).

This indicates that there are no real issues in my opinion. The business itself is not wonderful. EBITDA margins are in the 11-15% range historically, I have no view on capex but for a manufacturer with a high degree of automation this is likely substantial.

Below an overview of historic performance. The fund explains that revenues, EBITDA and net income increased in both FY18 and FY19.

Synergies castings

 

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TRIA tokens – value in the cryptobubble? – Part 1

/ Maarten Pieters / Leave a comment

Hit by the FOMO virus I decided to take a closer look at the cryptomarket. That didn’t change much to my view on the crypto-market. The valuation of the coins make no sense to me at all. I was even more surprised by the lack of valuation attempts by people who write about the coins. A typical (or maybe even above average) valuation is often as follows:

Typical valuation

  • Coin will increase 50% in value because of patch x3.7
  • Coin will increase 300% because of the launch of a beta product 
  • Coin will increase 200% because [some random crypto words]

A combined 800% increase in value! Buy them today! We don’t have to talk about competition, that does not apply to crypto!

The worst part, the valuations often come true at this stage of the bubble. This makes the writers more confident about their valuation skills, resulting in even more comical work. It is also possible that I haven’t found the right sources yet. If so, please let me know.

On the one hand, it is quite funny to observe this all. On the other hand it is quite difficult to manage your emotions as a value investor who performs actual research to make a decent profit in the stock market. I have the feeling that my valuation skills impede my chance of success in the crypto-market and that it is therefore better to stay away from it. However, during my research I stumbled upon an interesting token which has the potential to be worth multiples of the current price (BASED ON VALUATION PRINCIPLES). This gave my FOMO infected brain the last push resulting in my first crypto investment.

Before going into the valuation: I believe in the blockchain technology and can’t imagine the crypto-market to go away anytime soon.

This blog post is a short introduction to the TRIA token. More posts will follow with my own estimates of key variables and research on other important topics such as competition and the company behind the token. At this moment I don’t apply the same margin of safety as I do with stocks (FOMO alert) because we have the random crypto bubble factor thrown into the mix that often results in excellent results, even if the underlying asset does not perform. A result of this lower margin is safety, is that my investment in the TRIA token is only a small part of my portfolio.

Why the TRIA token has the potential to be worth multiples of the current price?

Summary: The TRIA tokens are entitled to 50% of the trading profit of all coins created by Triaconta. A company in the Netherlands focussed at creating types of indextrackers for the crypto market. They currently have one coin (CombiCoin, tracking the top 30 crypto-currencies) which will be listed on an exchange at the end of this month. They clearly have a first mover advantage, as there are limited comparable products yet. Using the popularity of indextrackers in the stock market as a proxy for interest in comparable products in the crypto market I see the potential for the CombiCoin to attract serious trading volumes. If it does, the TRIA token is a home-run. The total market cap of the TRIA token is only $10m and the Company has a viable model to profit from CombiCoin trading volume.

How Triaconta generates trading profit and why it is important for the CombiCoin

When someone is looking to buy the CombiCoin it is important that the price of the coin is not much higher than the value of the underlying assets. Otherwise you are paying a premium compared to buying the underlying assets yourself. It is also important for CombiCoin holders that the price of the CombiCoin is not significantly lower than the price of the underlying assets. Otherwise you are selling your CombiCoins at a discount to the value of the underlying assets.

Triaconta’s trading software will keep the value of the CombiCoin close to the value of the underlying assets and hereby generate a profit. The picture below from the whitepaper clearly explains how this works:

TRIA

With the profit generating mechanism explained, we can move to the valuation fundamentals.

The value of the TRIA tokens should be based on the future income of Triaconta’s trading software to manage the CombiCoin’s price and also that of future coins issued by Triaconta.

There are a total of 276,001 TRIA tokens outstanding. These were released as bounty during the ICO of CombiCoin and are fixed. At the current price of $35 per TRIA token this results in a market cap of $9.7m. It’s the market’s estimate of the discounted value of all future TRIA dividends.

The TRIA dividends are paid monthly. The total dividend can be calculated as follow:

[A] Total trading volume (in $) of CombiCoin x [B] % of total trading volume executed by Triaconta’s trading software x [C] average profit % generated by trading software x  50%.

TRIA dividend = A x B x C x 50%

In the  ICO whitepaper Triaconta makes the following estimates:

  • [B] % of total trading volume executed by Triaconta’s trading software = 35% (average)
  • [C] average profit % generated by trading software = 5%

I think that the average profit % will lower significantly over time. Today it may be possible as the market is extremely inefficient.

Using Triaconta’s estimates and some estimates for the total trading volume gives some feeling about a bull scenario:

[A] = $50m per month (volume rank 246 on Coinmarketcap)

Annual dividend = $50m x 12 (months) x 35% x 5% x 50% = $5.25m

[A] = $100m per month (volume rank 191 on Coinmarketcap)

Annual dividend = $100m x 12 (months) x 35% x 5% x 50% = $10.5m

[A] = $200m per month (volume rank 143 on Coinmarketcap)

Annual dividend = $200m x 12 (months) x 35% x 5% x 50% = $21m

In follow up posts (at the earliest next weekend) I will dive deeper into:

  • Estimates of the variables determining the dividend ([A], [B] and [C])
  • CombiCoin properties compared to competitor’s (e.g. no management fee)
  • The company Triaconta and it’s management team
  • New entrants and effect on valuation

Orbit International’s operating leverage

/ Maarten Pieters / 5 Comments

Orbit International (ORBT) is a really interesting stock due to the company’s operating leverage, which I believe is not recognized by the market.

Mainly due to the United States budget sequestration in 2013 the company had to implement significant cost savings in order to return to profitability. One of the largest projects was a consolidation of two manufacturing facilities into one.

https://en.wikipedia.org/wiki/United_States_budget_sequestration_in_2013

Mitchell Binder, President and CEO of Orbit, commented, “We were driven to this decision by a number of factors, among them, a difficult business environment due to budgeting concerns in Washington, our broader focus on promoting operating efficiencies, and TDL’s expiring lease. This consolidation is expected to reduce excess capacity at our Hauppauge facility, provide the advantage of greater manufacturing capabilities offered by our ISO 9001:2008 operations, reduce labor and overhead costs, and boost margins, all while maintaining the world-class level of service that our customers have come to expect.”

Mr. Binder added, “After consolidation of these two facilities, our Hauppauge facility will have sufficient capacity to support future growth without any significant facility investment.”

Following the implemented cost savings, the company has returned to profitability. However, revenue is still low. Investor’s haven’t seen the effects of the new cost structure combined with higher revenues (yet). Incremental revenue, on top of 2016 revenue of 21m USD, is estimated to flow to the bottom line at 55-65%.

Although it is difficult to form a view on the likelihood of the company generating additional revenue over the next couple of years, I believe it is more likely than not. If the company can increase their revenue by 6-9m USD this will increase earnings by 0.90-1.35 USD / share. Shares currently trade at 4.30 USD. The downside seems well protected. The company has no long-term debt and I estimate new break-even revenue at ~17-18m USD, a level they have always exceeded over the last 10 years.

Year Revenue (m USD)
2007 26
2008 28
2009 27
2010 27
2011 31
2012 29
2013 25
2014 19
2015 20
2016 21
2017 More than 21

If the company manages to run at 100% utilization this will boost earnings per share by 1.35 USD

The company’s manufacturing facility ran at 70% utilization during 2016 (~21m USD in revenue). The company’s management believes that additional revenue can be served without additional overhead costs. They estimate that every additional dollar of revenue flows to the bottom line at 55-65%. If they manage to fill the available capacity, this will have a significant effect on earnings:

80% utilization: 21m USD/7 *1*60% = 8m USD –> 1.8m / 4m shares outstanding = 0.45 USD EPS growth

90% utilization: 21m USD/7 *2*60%= 6m USD –> 3.6m / 4m shares outstanding = 0.90 USD EPS growth

100% utilization: 21m USD/7 *3*60%= 4m USD –> 5.4m / 4m shares outstanding = 1.35 USD EPS growth

Revenue grow seems more likely than not

The company expects that there revenue in the 2nd half of this year will be better than the first half. They have good insight into quarterly revenues due to agreed delivery schedules with customers. So we may see some of the operating leverage effect in the next two quarterly reports. However, the real question is if they will be able to grow revenues significantly (3-9m USD).

It is very difficult to answer this question, but available information makes me believe it is more likely than not (at least a couple of million).

  • Tuck in acquisitions: the company is constantly looking for “tuck-in” acquisitions to make use of their available manufacturing capacity. So far without luck, which is probably price related. The company intends to pay 3.5-4 times EBITDA + earn-outs, which is low in the current M&A environment. In January the company was in talk with two potential targets, there has been no further news since then. I have no real expectations, but their persistence may pay off one time.
  • Oil price recovery: the power segment business heavily depends on the oil industry. Revenues have been lower due to the low oil price. If the oil price recovers and investments pick up in this sector, this may give a nice boost to revenue.
  • Historic revenue: Before the sequestration the company managed to do 25-30m USD annually in revenue.
  • Management optimism + share buybacks: Reading through all the press releases of the current management team, you can clearly see that their tone changed and that they are more optimistic that their revenue will increase. Both via organic growth and due to increased defense spending by the US government. That is also one of the reasons they continue to buy back shares. This year they have been very aggressive buying back shares reducing shares outstanding by 7.1% YTD (my estimate), which may increase to 9.8% if they can utilize the remaining funds in the buyback program.

ORBT1

ORBT2

Kubera Cross Border Fund’s liquidation offers more than 30% upside

/ Maarten Pieters / Leave a comment

This is a special situation investment where the Kubera Cross Border Fund is in the process of selling their latest assets and returning proceeds to shareholders. I estimate the net proceeds per share, if all goes well, at 39ct USD per share of which I expect ~20ct USD to be returned before year-end. The shares currently trade with a bid/ask of 25ct/31ct. The company trades on the AIM market of the London Stock Exchange. The shares are extremely illiquid.

I submitted a full write-up on http://www.microcapclub.com to apply for membership, hence I am not sharing further details here.

KUBC1

http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary/KYG522771032MUUSDAIM.html?lang=en

 

Please… sell me some more shares

/ Maarten Pieters / Leave a comment

When I invest in a company I want to make sure that I understand the company’s filings properly and that I have a good view on the sources I can use to obtain company information.

My mother tongue is Dutch, however the number of (interesting) companies trading on the Dutch stock exchanges is very limited. As a result I mostly invest in US securities. Which also have the advantage of clear reports which are easily accessible.

The disadvantage here is that my fellow investors, #competitor’s, also know their ways to find all relevant data and are part of probably the largest investment group in the world (investors who understand English). My investing edge has to come from better interpretation of available information rather than investigative work to find more information than the competition.

For US illiquid nano/micro-cap securities the disadvantages are limited from my experience. Hence, this is where I invest a large part my portfolio.

From time to time, when I can’t find anything interesting in the US, I start looking at securities on other exchanges. About two years ago I stumbled upon a very interesting liquidation play where my estimate of proceedings to investors was ~200% higher than the stock price with limited risks. It took me about a month to buy some shares. I think that the shares only trade 1 or 2 days per month. Bid/Ask spreads are often ~100% (Ask two times the Bid).

During the last two years unexpected uncertainties arose. About 50% of the company’s value became at risk. At this point I even tried to sell some shares at 50% of net asset value (NAV). Luckily for me it was impossible to do so. The Bid/Ask spread was 200% and all my sell orders were cancelled because they deviated too much from the Bid price. My broker couldn’t help it. Once you get into this stock, it is impossible to get out.

Recently the story de-risked tremendously. About 50% of the company’s net assets consists of cash at this time, which will be distributed to shareholders. The current bid is approximately 30% of the company’s NAV per share and the current ask is approximately 75% of the company’s NAV per share.

At this time my buy orders are also being cancelled as they deviate too much from the current Ask. Hopefully I will be able to buy more shares soon and share the idea on this blog.

Unknown

Telkonet ($TKOI), high growth, cash rich and nearing profitability in the IoT market

/ Maarten Pieters / 1 Comment

TKOI

Until recently Telkonet consisted of two business units:

  1. A high speed internet networking asset business unit
  2. Ecosmart – a business unit operating in the internet of things (IoT) market by providing both IoT devices and software to manage and save energy usage in all types of buildings

The high speed internet business was a business in slow decline generating nice amounts of cashflows. The company used these cashflows to invest in their Ecosmart business in order to stay relevant as a company in the long term.

The initial strategy of the company was to sell the first business unit once Ecosmart would reach profitability. However, recently they could divest the first business unit for a good price. Hence, the company decided to complete the divestiture earlier than planned and while Ecosmart is still unprofitable.

The company expects Ecosmart to be profitable by the end of the year. They expect to accelerate growth now they can fully focus on the Ecosmart business. The growth over the last couple of years has been lumpy but strong.

Recent significant insider buying in the stock by one of the directors sparked my interest. About half of the current market cap consists of cash. With only a couple of quarters of negative cashflow ahead of us (according to management) and good operating leverage, this seems like an interesting opportunity to buy a high growth company in a hot market at a cheap price.

TKOI - insider buying