April portfolio update

The G&W portfolio gained 0.94% in April, while the benchmark gained 2.37%.

	August 3, 2017	April 30, 2019	Since July 1, 2018	Since Inception	Annualised
G&W Portfolio*	1.0000	1.3415	26.06%	34.15%	18.40%
Benchmark (SPAX2F0)	61,250.80	74,029.72	7.21%	20.86%	11.51%

*Returns are pre-tax, include franking credits, and assume dividends are reinvested. The SPAX2F0 is simply the total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. N.B. I do not account for cash in the portfolio. The net result is that my returns are somewhat overstated (though I am nearly always close to fully invested).

I spent much time this month trying to purchase a new position for the portfolio. I identified two statistically cheap stocks listed in Singapore, but was unable to get a full position in either. (Thankfully, one of my orders has nearly been filled since month end.) I received a substantial fully franked dividend from my largest holding in April, which boosted the portfolio's performance. (The stock did not trade in April, so there was no ex-dividend effect.) Otherwise, the portfolio remained largely flat.

There have also been some developments in Yowie (ASX:YOW), which I discussed in last month's report. In late April, the takeover panel found Wilson Asset Management's purchase of ~27 million Yowie shares in March and Keybridge's purchases of ~1 million shares in April were unacceptable. Consequently, approximately 28 million shares — 12.92% of the company — have been vested with ASIC for sale. On April 30, Yowie also released its 4C for the quarter ending March 31. The company burned ~US$1.8m cash during the quarter, which was in line with my expectations. More concerning was the drop in receipts from customers: $2.4m for the quarter, compared to $4.2m and $4.4m for the first two quarters. Additionally, because the company's cash balance dropped below US$17 million, it triggered one of the defeating conditions for Keybridge's takeover offer. On Thursday, Keybridge announced it would not proceed with its offer, and the stock dropped sharply.

It is clear that there is still some story to play out with Yowie. However, these developments reinforced that — due to the forces at play, and antagonism between Keybridge and Yowie's board  — there is a substantial risk that smaller holders like myself could be left holding the bag. Nevertheless, there appears to be value in Yowie's assets, at least at the current price. With 217,748,987 shares outstanding, the company's market cap is $15.46m at the current price of 7.1c. At March 30, the company had a cash balance of US$16.982m — A$24.2m at current exchange rates. The March 4C doesn't give us an up-to-date picture of the company's liabilities, so we have to make an educated guess. At December 30, Yowie's had total liabilities of US$2.90m, largely comprising trade payables. If we err on the side of caution and assume that Yowie's liabilities have increased to $US4m, we would be left with approximately US$12m (A$17.1m) in net cash — equal to 7.85c per share. If we add in value for Yowie's inventory (discounted by 50%) and receivables (discounted by 25%) at December 30, we are left with net current assets of 10.14c per share. 

In terms of risks, there is the possibility the directors run the company into the ground. (Indeed, it seems they would rather do that then sell the company to KBC.) There is a risk that cash burn increases substantially. There is the risk that KBC or another party makes an even more opportunistic takeover offer in future that would lead to me losing capital permanently. Yowie is also involved in a legal matter, which is discussed is the December half yearly and elsewhere. Considering all of this, it may turn out that Yowie is priced fairly. While Yowie deserves to be discounted, my sense — which may well turn out to be unfounded — is that the stock is too cheap. I do not have plan to add to my position (currently 4.77% of the portfolio), but I will continue to hold the stock while it remains at depressed prices.

March portfolio update

The G&W portfolio gained 0.07% in March, while the benchmark gained 0.73%.

	August 3, 2017	March 31, 2019	Since July 1, 2018	Since Inception	Annualised
G&W Portfolio*	1.0000	1.3290	24.88%	32.90%	18.72%
Benchmark (SPAX2F0)	61,250.80	72,316.67	4.73%	18.07%	10.54%

*Returns are pre-tax, include franking credits, and assume dividends are reinvested. The SPAX2F0 is simply the total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. N.B. I do not account for cash in the portfolio. The net result is that my returns are somewhat overstated (though I am nearly always close to fully invested).

March was a quiet month in terms of activity. I bought one new stock, Yowie Group (ASX:YOW), early in the month. At my purchase price of 7.3 cents, Yowie was a classic net-net with a decent margin of safety. At that price, the company's market cap was approximately $16m. The most recently half-yearly reported showed NCAV of approximately $26m. (This calculation was based on the prevailing USD/AUD exchange rate and included haircuts of 50 per cent for inventory and 25 per cent for receivables.) Shortly after my purchase, Keybridge Capital — one of Yowie's major shareholders — announced it intended to make an off-market takeover bid for all of the company's shares. The consideration is 9.2 cents: the first $9 million will be paid in cash, the rest in junk bonds. 

The bid is highly opportunistic, considering that Yowie had about 11.8 cents in net current assets as of December 31 (of which the majority was cash). It appears I am not alone in my view: Geoff Wilson, a vocal critic of KBC and its associates, bought 25 million Yowie's shares in March, bringing his voting stake to 13 per cent. In response, KBC's lawyers referred Wilson's purchases to the takeover panel, alleging they were in contravention of s606 of the Corporations Act. Due to my ignorance of the finer details of Australian corporate law, I have no idea as to the merits of KBC's allegations. I will be watching keenly from the sidelines (with popcorn in hand).

Despite the boost from Yowie, which closed at 8.7 cents on Friday, the portfolio remained flat over the month. Many of my positions drifted lower on no news. I currently hold 18 stocks in the portfolio. Ten of these (including Yowie) are net-nets, and six are illiquid stocks with strong balance sheets and high dividend yields. The remaining two are ASX-listed deep value plays: Capral (ASX:CAA) and Spicers (ASX:SRS), which I have discussed in earlier blogs. I intend to add another net-net to the portfolio in April.

February portfolio update

The G&W portfolio gained 2.95% in February, while the benchmark gained 5.98%.

	August 3, 2017	February 28, 2019	Since July 1, 2018	Since Inception	Annualised
G&W Portfolio*	1.0000	1.3280	24.79%	32.80%	19.77%
Benchmark (SPAX2F0)	61,250.80	71,789.85	3.96%	17.21%	10.62%

*Returns are pre-tax, include franking credits, and assume dividends are reinvested. The SPAX2F0 is simply the total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. N.B. I do not account for cash in the portfolio. The net result is that my returns are somewhat overstated (though I am nearly always close to fully invested).

February was kind to my portfolio, but kinder to the benchmark. This is not cause for consternation. During the month, I reduced my position in OneMarket, previously one of the portfolio's largest holdings. I purchased more shares in late January, while the stock was trading at 61 cents. While the share price has improved modestly since then, the company subsequently reported increased cash burn — which considerably increases the risk of the investment. I underestimated the chance that the business would continue to deteriorate. As a consequence, I sized the position poorly. There are a number of lessons to take from the experience. Firstly, I should have waited to have an update from the business before adding further to the position (which was already above 5 per cent of the portfolio). Secondly, I suspect at least part of my overconfidence stemmed from the fact that Samuel Terry Asset Management — a fund management firm I admire greatly — was involved. As those who lost money coat-tailing Buffett into Kraft Heinz found out, following your heroes into an investment can be costly — and cloud your judgement. At the end of February, the OMN position was roughly 5 per cent. While OMN trades below net cash, it could go to zero. For that reason, a 10 per cent position is inappropriate.

During the month, I added four new net-nets to the portfolio: Aberdeen International, Katsuragawa Electric Co, HG Metal Manufacturing and Merchant House International. I was unable to get a full position in MHI, which quickly appreciated after my purchase to a price I was unwilling to pay. I also received reports from a number of holdings, which in the main have performed as expected. The portfolio now contains 17 stocks. I expect to add at least one new position in March.

On benchmarking

The recent changes to the portfolio raise questions about the adequacy of the ASX200 accumulation index as the benchmark. More than 40 per cent of the portfolio is now held in stock of companies listed outside Australia. While the portfolio in no way resembles the ASX200, it is similarly vastly different from the various international stock indexes. Considering this, I have decided to stick with the SPAX2F0, which remains a proxy for the experience of most Australian stock market participants. If you have a more elegant solution, I would love to hear from you.

January portfolio update

The G&W portfolio gained 9.73% in January, while the benchmark gained 3.87%.

	August 3, 2017	January 31, 2019	Since July 1, 2018	Since Inception	Annualised
G&W Portfolio*	1.0000	1.2900	21.22%	29.00%	18.56%
Benchmark (SPAX2F0)	61,250.80	67,739.78	-1.90%	10.59%	6.96%

*Returns are pre-tax, include franking credits, and assume dividends are reinvested. The SPAX2F0 is simply the total return of the S&P ASX200 Index adjusted to include any franking credits received. N.B. I do not account for cash in the portfolio. The net result so far is that my returns are somewhat overstated (though I am nearly always close to fully invested).

On an absolute basis, it was the portfolio's best-ever month. January was a continuation of a trend that started some months ago: many good things happened to my stocks, and nothing bad. This is unusual, has nothing to do with my abilities as a stock picker, and is unlikely to continue. During January, Spicers, one of my largest positions, announced that it had entered a scheme implementation agreement with Kokusai Pulp & Paper Co. Should the scheme proceed — which seems highly likely — Kokusai will acquire all Spicers shares at an estimated price of 7 cents each. The proposed scheme will involve a return of capital, which will attract a favourable tax treatment, and is scheduled to be implemented mid-year. My current intention is to hold my shares until then.

During the month, I received consideration from Lifull for my Mitula shares. This money was subsequently reinvested in four net-net stocks, which are all based overseas: Minco Gold Corp, Sulliden Mining Capital, Venn Life Sciences and Vical Inc. These stocks were selected on a quantitative basis: they all trade at a substantial discount to their net current assets minus total liabilities. If you are interested in learning more about net-net investing, I suggest you read this blog post from Socks and Stocks from some years back. (I am deeply indebted to Chris for writing this post and for helping me avoid some early mistakes.)

The net-net strategy has a number of attractive characteristics: it should provide exceptional returns over time; there is little to no risk of permanent capital loss; it is feasible for me to find and research companies while working full-time; it is firmly within my circle of competence; and a diversified portfolio should provide more liquidity than some of my current holdings.

I will purchase more net-nets in February, and plan to continue to add more stocks as funds become available. I intend to sell my net-net stocks after holding them for approximately one year. The early results have been promising: the four stocks I purchased have gained more than 10 per cent in aggregate since the first purchase on January 22. (Keep in mind they could have just as easily lost 10 per cent.)

There was not much movement otherwise, except for a further purchase of shares in OMN (now 10.18% of the portfolio), which is also a net-net. The portfolio now consists of 13 stocks.

December portfolio update

The G&W portfolio declined 1.37% in December, while the benchmark declined 0.12%.

	August 3, 2017	December 31, 2018	Since July 1, 2018	Since Inception	Annualised
G&W Portfolio*	1.0000	1.1756	10.47%	17.56%	12.15%
Benchmark (SPAX2F0)	61,250.80	65,216.81	-5.56%	6.48%	4.55%

*Returns are pre-tax, include franking credits, and assume dividends are reinvested. The SPAX2F0 is simply the total return of the S&P ASX200 Index adjusted to include any franking credits received. N.B. I do not account for cash in the portfolio. The net result so far is that my returns are likely somewhat overstated.

The wider market declined for a fourth consecutive month in December. Since the end of August, the benchmark has fallen 9.4% while the G&W portfolio has gained approximately 9.65%. While I am satisfied with the way the portfolio has performed in the recent market ructions, I do not place any real importance on short term results. The portfolio's success will only be apparent over a period of years (five being the minimum). Over such a period, I expect the benchmark will prove to be a formidable opponent — and one that will better most stock pickers.

During the month, the Mitula transaction was approved by a meeting of shareholders. I elected for the cash consideration, which I will receive in January. While the scrip consideration was superior on face value, it entailed exposure to movements in Lifull's share price and the Yen. When transaction costs were factored in, I decided the extra risk was not worth the price of the premium. As it stands, the value of the scrip consideration is about 0.7% higher than the cash consideration (although this does not take into account any transaction costs).

I purchased additional shares in OneMarket (OMN) this month as they continued their decline. I also purchased additional shares in the portfolio's second largest holding, which is currently undisclosed. Additionally, I have been investigating a number of apparently undervalued securities that have been affected, amongst other things, by the broader market's recent decline. When the consideration for my Mitula shares is paid, I'm confident there will be opportunities to redeploy capital into such situations.

Finally, to any readers, Merry Christmas and a Happy New Year! I've had a fulfilling and enjoyable break — I hope you have, too.

November portfolio update

The G&W portfolio rose 6.62% in November, while the benchmark declined 2.21%.

	August 3, 2017	November 30, 2018	Since July 1, 2018	Since Inception	Annualised
G&W Portfolio*	1.0000	1.1920	12.01%	19.20%	14.16%
Benchmark (SPAX2F0)	61,250.80	65,294.78	-5.44%	6.60%	4.94%

*I do not account for cash in the portfolio. The net result so far is that my returns are somewhat overstated.

The portfolio had another excellent month on both an absolute and relative basis. In each of the last two months, the portfolio has outperformed the benchmark by more than 8%. This is highly improbable and unlikely to be repeated.

There were two key drivers for the good result this month. Mitula (MUA), the largest holding in the portfolio with a weight of 30 per cent, started the month at 0.68 and ended at 0.775 —a gain of 13.97%. During the month, Lifull, the Japanese company which is seeking to acquire Mitula, rose 15% on the Tokyo exchange. Additionally, the scheme was amended to provide additional downside protection for shareholders receiving Lifull scrip. As of the end of the month,  the implied scrip consideration is 0.85, about 6 per cent above the 0.80 cash consideration I'm entitled to should the deal close. The final scrip price will be based on the 10-day VWAP as of December 7. I have until December 13 to lodge my election. At current prices, I am still inclined to take the certainty of the cash offer. I will continue to monitor the situation carefully. 

The other major contributor was the 10.5% gross dividend paid out by the portfolio's second-largest holding, which is undisclosed. This company is unlisted, and its shares trade via appointment, usually only a few times a year. The shares have not traded since the dividend was paid, so there was no ex-dividend effect. 

In other developments, OneMarket (OMN) released its financials for the nine months to September, and announced that CEO Don Kingsborough was stepping down for health reasons. The share price remained flat, and I added to my position during the month. One of the smaller positions in the portfolio, Capral, also issued a downgrade. The shares were initially sold down significantly but recovered somewhat by month's end. Capral had current assets less total liabilities of $83.47 million at June 30 (if we include the expense for the most recent special dividend). It last traded at 0.13, which puts it on a market cap of $62.44 million. It is still continuing to generate profits, and I am happy to stay on the register at current prices.

October portfolio update

The G&W portfolio rose 2.74% in October, while the benchmark declined 6.05%.

	August 3, 2017	October 31, 2018	Since July 1, 2018	Since Inception	Annualised
G&W Portfolio*	1.0000	1.1235	5.57%	12.35%	9.81%
Benchmark (SPAX2F0)	61,250.80	66,769.61	-3.31%	9.01%	7.18%

*I do not account for cash in the portfolio. The net result so far is that my returns are somewhat overstated.

The result this month was obviously very good though it didn't come as a complete surprise. On a relative basis, I expect to make my money in months like October where the broader market suffers. (Though I won't ever expect another month of 8 per cent outperformance.)

There was quite a bit of activity this month, so this update is a bit longer than usual.

Mitula

In the first week of October, I bought more shares of Mitula (ASX:MUA), which I have talked about in the past. Mitula is being taken over by a Japanese company, Lifull, in a transaction that presented an interesting opportunity for investors with small amounts of capital. Under the scheme agreement, holders of less than 20,000 shares were entitled to a cash consideration of $0.80 per share should the takeover go ahead. Holders of more than 20,000 shares, meanwhile, receive scrip. Lifull's price declined significantly between the time the deal was announced and early October, and the timelines of the deal blew out; Mitula's share price declined to reflect the reduced value of the scrip consideration and the added uncertainty. I spent some time reviewing the situation, to make sure I hadn't missed anything in my research. In the end, I decided to purchase additional shares between 0.635 and 0.645 to top up my holding to 20,000 shares.

I figured that while there was a heightened chance the deal might break, the risk-reward was extremely compelling. At 0.635, the 0.80 consideration implied a return of approximately 26% in a number of months. It is important to keep in mind that Lifull shareholders had approved the issue of additional shares and that Mitula's board and management own approximately half of their company's shares, meaning the deal was unlikely to be voted down. Before the takeover was announced, Mitula traded at 0.45, which implied those managers could potentially lose 30% of the value of their investment in the event the deal fell through. There was also the chance that the scrip deal could be sweetened to appease any disgruntled MUA shareholders. Finally, MUA had released a strong trading update, which suggested that its shares would trade above the pre-takeover price should the deal break.

MUA’s share price continued to drop after my purchase, which caused some anxiety. Compounding this, on October 16, the company released a statement in which the directors threatened to revoke their endorsement of the scheme if the scrip consideration did not improve. There was some positive news about a week later, when Lifull released positive results. Its share price rallied approximately 30 per cent by the end of the month, which means the deal is (again) highly likely to proceed. At the end of the month, MUA closed at 0.68. (Unfortunately though, the scheme has been amended to prevent any new shareholders for receiving the cash consideration.)

While I think my thinking on this situation was mostly correct, I clearly made an error with my position sizing. After purchasing the additional shares in October, the MUA position was approximately 30 per cent of the G&W portfolio, or about 15 per cent of my net worth. In hindsight, this was a mistake. I feel I should have capped the position at somewhere between 5 per cent and 8 per cent of my net worth. Luckily for me, it appears I will profit. I have nevertheless learned my lesson.

Spicers

In October, I sold down half of the portfolio's Spicers shares at 0.059. I discussed my feelings about Spicers in last month's report.

OneMarket

I also bought some shares in a new company. OneMarket (ASX:OMN) is a technology company that was spun-off from Westfield. It came to my attention via a fellow investor, so I can't claim any credit for uncovering it. The thesis for this company is pretty simple. I bought my first parcel of shares at 0.88 and have since bought more at 0.81. At 0.88, the market cap of the company is about $90 million. The company has $US152 million in cash and money market deposits, equivalent to $212 million. So, at that price I am buying a dollar of cash for less than 50 cents. The company is currently burning cash but recently announced its reserves will last until at least late 2020 (and that is excluding any revenue it will generate between now and then). The company appears to have good management and bright prospects. In the event that it doesn't work out, shareholders could quite rightly demand the company be wound up. OMN now represents about 6% of the G&W portfolio and I intend to buy additional shares if prices remain depressed. If this has piqued your interest, you might like to check out this write up on VIC.

Dividends

I also received some substantial fully-franked dividends which boosted my performance this month. I have more of these to look forward to in the coming months.

There have also been some developments in the OPUS Group/Left Field Printing Group situation, which I'll have to get to in another update.