Portfolio as at 9/05/16

After completing the portfolio last week and writing an update yesterday, here it is:

Note I have spent closer to NZD20,000. Google finance doesn't account for currency swings very well (any better portfolio tracking websites/apps people use?)

Portfolio Complete

On Thursday 5/5/16 I put the remainder of the 20k to use. It wasn't in the way I had been planning, but an opportunity presented itself which I couldn't pass on.

Prophecy International (ASX:PRO) released updated guidance for FY16. The guidance was (on the face on it) a significant downgrade. After reading a bit further into the update however, it became clear this was just a blip on the radar.

Updated Figures:

Revenue $15-17.5m (down from $20m)

EBITDA $5-7m (down from $8.9m)

Management also gave a breakdown on the new guidance and where it differed from previous guidance. My quick analysis:

$0.7m is from a change in revenue model from upfront to subscription based. This is actually a positive as the lifetime value of the sale has increased.

$0.8m (possibly up to $1.3m for lower end of guidance) is from delayed orders that will now fall into FY17. I am first and foremost a long term investor (this one year timeframe makes things a bit tricky though), and the accounting period that revenue falls into is largely irrelevant as long as it is earnt.

The lower end of guidance allows for another $1.2m due to sales being below expectations. I see this largely as a safety net rather than actual guidance. Management have been stung by ambitious guidance once and I doubt they will do it again.

$0.4m comes from lost contracts. That is (assuming I am correct about the above point) actually the only negative part about the announcement. 

Now in a number of situations a downgrade is seen to be the first indication something is going wrong. I am always sceptical when these things happen. However, in this case I believe management. The chairman bought shares a month ago. They have overseen some seriously impressive growth and incorporated a new business into the company. The original guidance represented a forecast revenue growth of 67% but actual growth may be closer to 50%. That's still pretty impressive! If it wasn't for previous guidance the market may see this as a good result and have the SP a lot higher. I think management just got a little too ambitious after such great success, it happens. I will give them the benefit of the doubt here. 

Now let's look at the earnings:

Guidance is likely to be approximately 5-7cps once it reaches the bottom line. At the time of buying the SP was 103c. That's a PE of 20-15 for this FY (finishing in 2 months). The company is cashflow positive, paying a steady dividend and growing revenue and earnings at greater than 50%! I think next FY revenue will be >20m comfortably which will see the SP closer to $2 if not significantly higher, just a bit later than expected.

My 20k portfolio is now half PRO, which wasn't part of the original plan. However, when value presents itself as it did last week I had to take advantage. If the SP gains significantly I will reevaluate and consider taking profits. So far the SP is back at 118c so the market seems to be seeing the same value as I am.

The Portfolio as at 02/05/2016

Sorry for the lack of updates for those following. It's been an insane month or so and I've had no time to write anything. However, I've still been investing and doing the odd bit of research where I can.

I purchased Global Health Limited (ASX:GLH) on Friday 29 April at opening with a price of 37c because I liked the valuation (based on previous research I've done and then waiting). Over the past two days the SP has moved to 45c (on low volume). It was a complete fluke, nothing more scientific than that! Anyway, I wrote a bit about GLH a while back, and nothing has changed other than an earnings upgrade with guidance now at 3-4cps. There also appears to be a few irons in the fire with things looking positive for the company. 

On another front, I've tossed and turned about whether to add miners to this portfolio. In the end I have decided not to because I will be at the mercy of commodity prices. I can plan my investment around this, but with a one year timeframe it is rather risky if prices stay subdued.

I have added miners to my personal account however. I purchased Silver Lake Resources (ASX:SLR) on 08/03/2016 for 37c. SLR is a gold miner and explorer with no debt and a lot of cash on hand. They are cashflow positive at the current gold price. If the gold price doesn't appreciate they have enough cash on hand to survive in the mean time.

I also purchased Mt Gibson Iron (ASX:MGX) on 26/04/2016 for 22.5c. As they name suggests they are an iron ore miner and explorer. They also have loads of cash (approx 33cps which is more than the SP!) and no debt. They are currently about cashflow neutral with the iron ore price as it stands. They too will be able to survive a subdued market for long enough for the iron ore price to pick up.

Common theme with me and miners - wait until sentiment is rock bottom and valuations are very cheap. Ensure the company has loads of cash and no debt. Buy once there appears to be a resurgence in the underlying commodity price. If you are wrong about the commodity, then the company still has enough cash to survive. Then just wait until the commodity increases and the market starts liking miners again!

Hopefully I'll find the time to write more about these purchases because there's more detail I would like to add to justify my purchases.

Portfolio as it stands (current portfolio value 22k including 5.7k cash currently:

The Portfolio as at 22/03/2016

Latest portfolio position. I haven't had time to write about my recent purchase of Adacel Technologies (ASX:ADA) yet, but I bought on March 17. Once the cricket season is over I will have a lot more spare time! 

It should be noted my cost basis is only around NZD12,500 currently. The strengthening Aussie dollar has positively impacted my portfolio, but Google finance reports the cost basis at spot rates annoyingly. I'm currently in the green around NZD1,900. I need to put the remaining capital to work!

 

Closed Position in TFS Corporation

Today I sold down my position in TFS Corporation (ASX:TFC). 

My main reason for buying the company was for a company with very good long term prospects the share price had been hammered, and there were a lot of near term catalysts. I still believe in the long term prospects of the company (and continue to hold in my main portfolio), but the near term catalysts I listed when buying the company have largely played out.

New end market agreements have been announced, financial results have been announced, and all this years harvest has been forward sold meaning no substantial news post harvest.

The business has its risks which mainly relate to cashflow and debt now. In the long term I am happy with this. However, weighing up the near term catalysts and risks I have decided to lock in my 30% profit and look elsewhere. I held for a couple of weeks hoping for a short squeeze to play out, but have decided I've given it enough time.

All in all I look at this as a successful purchase and prudent sale given my one year horizon. 

I have a number of options I'm looking into and I'm close to purchasing a new company. I will write about these in due course. 

The Portfolio as at 01/03/2016

Latest portfolio summary. A bit of green this time - but that could be taken away just as quickly...

See previous posts for my thoughts on what has caused the price movements.

Prophecy International and TFS Corporation Limited release Half Year Report

Last week two companies I hold in the 20k portfolio released their half year reports. Both company's reports were very pleasing. The market's reaction however has been polar opposite.

TFS Corporation (ASX:TFC)

TFC's results were largely as expected, but there were a few crucial pieces of information that I think the market had flagged as key risks. Plantation sales are up 50%, cash EBITDA is up and royalties from Benzac sales has tripled. The market rewarded it with a 24% increase in the stock price.

The main highlight for me was that both this years and next years anticipated harvest volumes have been forward sold. This included new agreements with Chinese and Indian buyers for heartwood at comparable prices to USD4,500/kg of oil. I think this has reduced a key risk - the significant increase in sandalwood volume over the coming years will actually lead to cash generation. I have always thought this was a concern for the market, because otherwise the forward earnings can be relatively easily estimated and discounted (this isn't the only risk however).

Another thing I had mentioned previously was the amount of shorting of the stock that has been going on recently. This had reached almost 10% of the float. This equates to just over 30 million shares. That is a significant number of shares that need to be bought back at some stage. I think the rise on Friday was largely attributed to these shorters covering their position, leading to a potential short squeeze. There are still approximately 30m shares that need to be covered. I think this could lead to a significant rerate over coming weeks as shorters scramble to buy back shares. Very exciting times for the long shareholder after what has been some pain at the hands of these shorters.

Unfortunately, I decided not to complete my position in TFC for the 20k portfolio, but the 1,700 I picked up could produce a very good return. Especially if the short squeeze continues.

Prophecy International (ASX:PRO)

Prophecy's results were also relatively as expected, however, there was a key piece of information regarding already booked revenue that I assumed the market would reward. This was not the case though!

PRO's guidance for the year is $20m revenue. The half year produced 8m revenue. This was announced previously and some may have been concerned that this indicated they weren't on track to meet guidance. It should be noted guidance is 67% revenue increase for SNARE and eMite products, which even if missed will still represent very impressive growth.

The profit for the half year was subdued, but this was expected and management reiterated previous guidance. Guidance is for 8.8cps. At the current SP this is a forward PE of 16. That is for a company that will double earnings this year and likely continue at a significant growth rate going forward. PRO has the ability to leverage earnings without increasing the cost base. More sales staff have increased the cost base recently, but for a company growing at such a rate it is obvious why they went to do this. Growth funds more growth!

Interestingly, the commentary indicated that 3.8m of sales is already booked regardless of new sales in the half. That puts the revenue for the half at 11.8m. On top of this, a significant amount of existing revenue is reoccurring. Therefore, the new sales required to meet guidance aren't overly onerous. Remember when this report came out we were already two months into the second half. Management obviously like what they see from recent sales.

Management also updated the market on various initiatives such as product development and different sales avenues. This is positive and shows the company isn't resting on its laurels even with their tremendous recent success. To add to that a director has bought in the last few days (albeit a small amount relative to their 7.5m existing shares)!

Moving to the SP, the market has continued to hammer PRO. I put this down to a combination of profit taking (the SP was up around 600% in the past year) and PE contraction due to the global doom and gloom (I am of the opinion the world will not end and good companies will keep making money). PRO's trailing PE will all of a sudden be 16 come the end of June, and it has tremendous growth prospects ahead. I can't see the SP staying low for very long and one positive update could send it back up.

The long term investor in me unfortunately won out and I bought more during the sell off after the report came out. I figured the market would study up and realise it was a buy. This was not to be unfortunately! I will endure some short term pain, but the long term prospects have me licking my lips. I've missed out on this additional upside for the 20k portfolio (I don't want to be too overweight in any company), but I will add more to my personal portfolio if it keeps dropping. I should have used TA here, but the opportunity was too good to resist. I'd rather be in and not miss out on a significant rise given I am a happy purchaser at these levels.

All in all, a good report from both companies, and I'm confident there is significant upside to be had for my 20k portfolio timeframe and well into the future.