June portfolio update

For the three months to June, my portfolio continued to fall, albeit less than the broader market. Unfortunately my stocks were not significant beneficiaries of the recent rebound in equity markets. Since June 30, my portfolio is down 1.79%, while the ASX200 index has gained 8.69%. There is little to no correlation between my stocks and the ASX index, so I don't spent too much time worrying about fluctuations like this. However, my recent performance has been disappointing, and I've made a number of regrettable mistakes. That said, I'm confident that, over the long term, the stocks in my portfolio will perform well.

Portfolio activity

I added two new positions in the June quarter, Countryside Partnerships (LSE:CSP) and US Masters Residential Property Fund units (ASX:URF). Shortly after I purchased Countryside, Inclusive Capital made a hostile takeover bid for 2.95 GBP per share. Countryside rejected the advance and instead put the company up for sale under a formal sales process. I sold my CSP shares recently for 2.94 GBP, which resulted in a small profit. While there is a chance CSP gets an improved takeover offer, there is no firm bid, and economic conditions in the UK have deteriorated. I was happy to take the money and move on. 

The URF situation has been well documented by CSK Capital and others. I bought the ordinary units in early May and then sold them in late June to purchase some more TTJ Holdings shares, which was under a takeover offer. I have since rebought URF's convertible step-up preference units, which trade as URFPA on the ASX. The URFPAs will almost certainly be converted to URF units on January 1 on a 1:205 basis. The conversion price is based on the 10-day VWAP of the ordinary units prior to the conversion date. If you adjust for the remaining $3.15 coupon payment, by buying URFPA at $59 (today's close), you are effectively buying URF units at 27.24 cents. Considering URF units closed at 28.5 cents today, URFPA seems an attractive bet. Besides this arbitrage on offer, each URF unit has an estimated unaudited net asset value (post tax) of 57 cents. While the near-term outlook for US property is poor, it's important to note that US house prices are up 9.79% YTD, according to the Case-Shiller National Home Price Index. This should add in a further buffer on top of the >50% discount to NAV. Finally, both URF's responsible entity and major shareholders appear to want a speedy resolution to this situation, which is good for unitholders.. I have a roughly 9% position in URFPA units across my PA and SMSF.

I sold my small position in Fenix Outdoor International (STO:FOI-B) for a small loss when it was trading around 1,070 SEK. While I am optimistic about the Fenix's long-term prospects, I felt the money was better deployed elsewhere. I also sold my position in Destination XL (NASDAQ:DXLG). 

Naked Wines

In late June, Naked Wines released its full year results, which showed that the business has significantly deteriorated. Naked is now guiding to basically no growth for the coming year. Unfortunately, that wasn't the worst of the news. Firstly, Naked's auditors highlighted a "material uncertainty" about Naked's ability to continue as a going concern. Naked also revealed that it had taken out a loan secured by inventory with the Silicon Valley Bank, and it was at risk of breaching covenants. Understandably, the market did not take this news well, and the stock ended the quarter at 1.713 GBP — down 52% for the quarter. Naked has continued to fall since the report, and is now trading around 1.30 GBP. 

Clearly, I have been very wrong on Naked. In hindsight, it's clear I did not pay enough attention to the downside risks. In the frothy market of 2021, I think it was fair to say I was caught up in the euphoria and was worried about selling (what was at that time) a big winner too early. While I have clearly made big mistakes on Naked, at current prices, if it simply survives, shareholders should do well. While the auditor's concerns are clearly worrying, it seems to me that the only plausible way for Naked to go bust would be for customers to withdraw their deposits en masse. (Customers deposit money each month which goes into a "piggy bank" that is used for future wine purchases. Naked uses this money to fund its operations.) I think this scenario is unlikely. I'm taking the time to look at Naked with a fresh set of eyes, and trying not to let my previous poor decisions influence my thinking. I have neither added to my position or sold my shares as yet.

TTJ Holdings

The other significant event in the quarter was the takeover of TTJ Holdings, a Singaporean structural steel business that was one of my largest holdings. Mr Teo, TTJ's founder and executive chairman, made a lowball bid for 23 cents per share. This opportunistic offer was made at a huge discount to TTJ's unaudited NAV as of January 31 of 36.79 cents per share. In other words, shareholders would have received 60% more if the offer was made at the most recent reported NAV. To make things worse, TTJ's true asset value was even higher. The IFA report found TTJ's true asset value was 46 cents per share, double Mr Teo's offer. 

I was very upset about the situation, and I tried my best to seek a better offer from Mr Teo. In the case of TTJ, there was only one major shareholder, Samarang. Despite my efforts, I was not able to reach anyone at Samarang. As TTJ's remaining shareholder base was fragmented, I figured the best approach was to make my case in the media. While I may have succeeded in raising awareness about the unfair offer, I may have had more luck using a less confrontational approach. We will never really know if that would have changed things. The truth of the matter is that I had zero leverage in the situation, so I wasn't in a position to negotiate myself. And while I did my best to coordinate efforts with other shareholders, it did not change the outcome. Mr Teo eventually made his offer final, ruling out the prospect of a price increase. In the end, I decided to tender my shares, as I did not want to risk hanging around with a hostile majority shareholder.

While the exit offer was egregiously low, I still made good money on TTJ, except for a small purchase above the offer price after the release of the IFA report. (I figured a bump was highly likely, but I was wrong.) On an annualised basis, most of my purchases were in the range of 30-40%, which is an excellent result. Considering the asset value backing, the risk was very low too. That said, I was very lucky in the timing of my purchases and the timing of the takeover. It's a good reminder of the importance of the margin of safety, especially when investing in companies such as TTJ with a controlling shareholder. Overall, I've learned some good lessons and made a bit of money as well. It could have been much worse.

New position: CEL Corp (5078.T)

After the TTJ situation resolved, I was left with a large cash balance. Thankfully, I found one new idea which I consider very attractive, CEL Corp (5078.T), a Japanese company that develops, builds and sells steel-framed apartments in the Tokyo metropolitan area and manages apartments for landlords.

The thesis for CEL is straightforward. CEL only listed in Japan this March. Shortly prior to listing, CEL recorded a huge gain on sale of a subsidiary in China. As a result, CEL has cash well in excess of its market cap. Management have said this cash will be used for acquisitions, and it may take some time to play out. I also asked if they had considered paying a special dividend, and the answer was no, so I think there is next to no chance the cash will be paid out soon.

On top of the huge cash balance, CEL has a decent operating business. In particular, the apartment management business creates recurring revenue and CEL should be able to add additional services to landlords over time. CEL currently trades around 1,950 yen, and has forecast earnings of roughly 192 yen, so the P/E is roughly 10. Management is investing significantly in the business, so I expect CEL will be able to grow earnings at a moderate rate, maybe 5-10 per cent over time. CEL has a policy of paying out at least 30% of earnings as a dividend, and the yield is currently over 4%. 

All that is not that exciting, especially in Japan, when there are plenty of cheap stocks. However, CEL's asset value is simply staggering. If you take CEL's cash less all liabilities, you are left with 2,932 yen of cash per share — 51% upside from the current price. CEL's NTA is 5,176 yen per share, meaning you are buying the assets (mostly cash) at a 62.44% discount. Even if you apply zero value to the excess cash, the operating business alone supports the current valuation. Finally, CEL's founder and president, Masatsugu Shinno, still owns 60% of the company after the float, which aligns our interests.

The results of my private investment account and SMSF are summarised in the table below. The portfolios are constructed differently and performance will vary. 

My PA was up 3.50% in April, up 3.18% in May and down 11.27% in June. The cumulative return for the period was -5.24%. The S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt) fell 11.90% over the same period.

	August 3, 2017	June 30, 2022	Since July 1, 2021	Since Inception	Annualised
G&W Portfolio	1.0000	1.5910	-28.96%	59.10%	9.92%
Benchmark (SPAX2F0)	61,250.80	89,440.67	-5.59%	46.02%	8.02%

My SMSF was up 1.74% in April, up 3.85% in May and down 10.23% in June. The cumulative return for the period was -5.15%. The S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt) fell 11.90% over the same period.

	August 4, 2021	June 30, 2022	Since July 1, 2021	Since Inception	Annualised
G&W SMSF	1.0000	0.8687	-13.13%	-13.13%	-14.42%
Benchmark (SPAX2F0)	98,123.18	89,440.67	-8.85%	-8.85%	-9.74%