AV Jennings – FY17 Numbers (AVJ)

AV Jennings released numbers on Friday, and as anticipated by the market, reported a drop in both revenues and profits:

Revenue down 4.8% from 422M to 402M

NPAT down 12.7% from $40.9M to 35.7M

EPS down 13.1% from 10.7c to 9.3c

NTA up 4.3% from 95c to 99c

 

The drop in profits was mainly due to delays with project approvals and some construction.  The good news is that not only is AVJ still a very steady earner (selling for a ludicrous PE multiple of 7.8) and is trading at a 27% discount to net assets – based on cost price of those assets.

 

Considering that over 60% of AVJ’s land bank is in Sydney and Melbourne, significant further upside exists beyond this 99c NTA, in spite of the fact that most of the land is located on the urban fringe.

 

I’ll be looking to add over the coming months, while I expect AVJ to grow at a modest pace (Should be a big kick up in FY18 as delayed projects flow through) I’m happy to hold onto these, while I sit back and collect.  As a real estate investment, AVJ is like a $1M house selling for $730,000, with net rent of $961 per week, 0 vacancy, stable tenants and no stamp duty.

Kogan – Delivering well ahead of forecast (KGN)

Kogan released their FY17 numbers on Friday, and the market was delighted with the result – share price shot up nearly 9% to close at $2.61.  I wasn’t actually that surprised at the numbers, seeing as the revenue beat was in line with the HY17 result – information that was freely available to everyone back when the share price was hovering around $1.60.

 

The shareholder call foreshadowed more good times ahead, however:

  • Current staff of 129 is adequate to cater for growth due to automation
  • Unaudited July results show a revenue increase YoY of 34.9%
  • The mobile growth trajectory is expected to continue for years to come
  • NBN and Insurance revenue will commence this FY, at almost 100% of GP

 

If you remove cash from the balance sheet KGN is trading around 30x earnings, but I will be comfortable continuing to buy at these levels.

 

Spirit Telecom – ST1

The telco business model is one I like because it’s easy to understand.  Your network costs are semi-fixed – the only incremental costs are the connection cost and sometimes a small network extension to connect to the customer site (which is usually paid for as part of the connection fee)

 

The incremental profitability of new customers, once you have covered your current network cost, is therefore very high, so that once you break even, you should see significant profit growth, even if revenue is growing at a more moderate rate.

 

The introduction of NBN has hampered the profitability of most consumer internet providers, because most of the network is “off-net” (Leased from NBNCo), which levels the playing field but also limits the ability for service providers to achieve scale and better profitability.  Spirit generate most of their revenue from “on-net” services (as they operate their own infrastructure), increasing their profitability and allowing them to successfully compete against service providers who are using NBN infrastructure.

 

As of HY17, ST1’s gross margins are 61%.   They offer services up to 200/200Mbps, faster than NBN can provide, for $169 per month.  A 100/100Mbps option is also available for $96 per month, as well as several lower cost plans. The high margins are achievable because Spirit focus on high-rise apartments, which need a single physical link to service dozens of customers.  They also connect many sites using WiMax technology, which has a lower connection cost than fibre, but still provides an acceptable amount of bandwidth.

 

A case study which Spirit refer to is the Eureka Tower in South Melbourne, which was an NBN incumbent site before Spirit delivered connectivity in early 2017.  They now have over 100 customers connected in this building alone, and will repay their $70k capex within 11 months.

 

So, in effect, Spirit are delivering a double whammy of benefit – not only do they have a regular stream of high-quality revenue, but they have a reliable pipeline of high-density buildings they can deploy capital to connect, growing their revenue base and subsequent profits.

 

Current connected building penetration is around 18%, leaving huge upside if those customers coming out of contract decide to switch to Spirit.

 

The June 2017 quarterly cashflow report showed operating cashflow of $1m, good going for a $20M market cap organisation.  The share price has fallen over the last couple of days (last traded at 10.5c) but I intend to add to my position.  The company’s finances are now on a solid footing and they have plenty of upside as they connect more buildings and increase building penetration.

Kogan – Durable Competitive Advantage (KGN)

Kogan.com is a unique Australian business.  Founded by Ruslan Kogan in his parents garage in 2006, Kogan is now a publicly-listed sales analytics machine, which may not be immediately obvious until you examine the attitude of the owners.

 

Someone who doesn’t see KGN’s potential might think it just undercuts the retail on grey-market Apple products and sells Chinese knockoffs.  But the sales analytics and private label businesses offer 2 durable competitive advantages which positions KGN for a huge amount of upside with little downside risk.  The company was listed a year ago at $1.80 and had sat at a lower price for most of that time, until recently when it climbed to $2.70 before falling back to $2.25 on Friday.

 

Starting with the prospectus, several points stand out:

  • A statistics business masquerading as a retailer
  • Referring to their business as having a huge “moat
  • Use of automation to lower transaction cost for the customer
  • Use of predictive analytics to better serve customers

Kogan’s focus on using automation and big data to lower costs and cross-sell better to their customers are going to position them well, even against behemoths like Amazon, who have spread their attention across e-retail, distribution, cloud, and bricks & mortar.
Turning to the HY17 presentation, KGN smashed their forecast numbers – revenue beat by 16.7%, and EBITDA was nearly doubled – $7.3m vs a forecast of 3.8m!  They gross margins, normally razor thin in this business, were a massive 18% vs a forecast of 15.2%.  At the time of my initial purchase at $1.65, the whole of Kogan was valued at $150m.  An unbelievable bargain.  Currently 50% of KGN’s profits come from the private label business, which started with TVs, but now covers furniture, power tools, and 10 other categories

 

But it gets better.

 

Kogan now has mobile, NBN, travel and insurance products, which it markets to its existing database of 6 million Australian customers (1/4 of the population), which all carry a very low capital cost (Kogan earn commissions on every sale) and have a very low customer acquisition cost.

 

The looming threat is Amazon’s entry to Australia – which in my opinion is over-blown.  Currently 40% of KGN’s gross profits come from 3rd party products, which is the only component facing a threat from Amazon.  The rest of the business is either growing off a low base thanks to lower customer acquisition cost (Mobile, NBN, Travel, Insurance) or easily defended as the sole supplier (private label).  It’s difficult to quantify how much business Kogan will lose to Amazon when they set up in Australia, but I think that business will still be bigger than it currently is in 3 years time.  It’s also difficult to quantify how much growth Kogan will see in the Mobile, NBN, Travel and Insurance businesses, but I expect this to hugely offset any revenue losses to Amazon.

 

I look forward to seeing the FY17 result, and continue to accumulate KGN shares.  Due to their competitive advantage and ability to widen their moat by investing in better analytics and automation, I intend to hold my shares forever.

Update

It’s been almost 18 months since my last post.  A lot has happened since then, so here’s the portfolio at a high level:

  • Sold all my shares except for AVJ (still grossly undervalued)
  • Set up a SMSF which is now my main investment vehicle

Over the last 3 months I have bought shares in the below companies, split like this:

KGN – Kogan.com 19%

ST1 – Spirit Telecom 4%

AVJ – AV Jennings 9%

REH – Reece Group 5%

DTL – Data#3 2%

DDR – Dicker Data 5%

JIN – Jumbo Interactive 7%

Cash 49%

 

I will use the cash to accumulate bigger blue chips if there is a market crash, or continue buying more of the above (along with any other interesting stocks I come across).  My strategy is still value-based, with long holding periods, ideally forever.  As I work in the tech industry, many of my holdings are tech companies.

Safe as houses – AV Jennings (AVJ)

AV Jennings is an Australian institution, having been in the housing business for over 80 years, back when you bought a new house when you got married, and stayed there until one of you died.  Nowadays they are in the business of affordable family homes, mainly on the suburban fringes, as the inside of the Goats Cheese Curtain succumbs to 2 bedroom apartments bought by first time landlords (i.e. suckers).

 

For a bit of nostalgia, here’s an AV Jennings ad from 1982:

 

For me, AV Jennings is the ideal business.  They don’t have complicated tech or financial structures.  They build houses and sell them to people.  This is a business model I can understand. Let’s look at their numbers:

 

Market Cap: $219M

P/E: 6.3

P/Book: 0.64

Net Debt/Total Assets: 23%

Dividend Yield: 8%

 

A business selling this cheaply should be considered a cigar butt or value trap.  Surely, such a business is facing macro headwinds, or squeezing one or all of earnings, revenue, margins?  Let’s look at HY16 numbers, released yesterday:

 

Revenue up 58% to $187M

NPAT up 40% to $16.5M

Contracts up 14.6%

 

These guys are crushing it, and their current valuation is insanely low.  I am still looking for the red flags, the only one I can think of being a property downturn across Australia (AVJ are spread pretty well although weighted to Sydney and Melbourne).  But only 1% of their sales are to overseas investors, and their sale prices are 20-50% below median in each city.  These are family homes, and what family wants to raise their kids in an apartment, or take on a million bucks worth of non-deductible debt?

 

I am highly confident of AVJ’s prospects and have doubled my holdings on release of the HY16 numbers.  In my view this is worth at least $1, though hopefully stays cheap so I can load up even more.

 

December 2015 Update

Although I haven’t posted since March, there has been a fair amount of activity since last writing:

 

Sold REF, as I no longer believe Cigar Butts are a good investment strategy to find value

Added to BGL at 77c

Added to BPF during the recent capital raising at 25c

Exited some loss-making positions in companies whose prospects I no longer admire

Bought RNT and AVJ – articles to come

 

My forward strategy has refocused to target value, either main street companies selling at deep discounts, or rising stars in the tech industry, an area in which I have professional competency.  There are many more tech companies emerging on the ASX thanks to the ability to easily backdoor list via a listed shell company (although people have told me it is sometimes easier and cheaper just to list normally).