SMSF: FY18, Q1 Performance

Thanks largely to Kogan, my first full quarter running my SMSF was an absolute cracker.  The portfolio finished up 21.6%* against the benchmark (The Vanguard ASX300 index) of 0.77%.  Without Kogan, performance still would have been a respectable 4.52%.

 

I don’t have any big plans to add anything new, but will add to my portfolio if stocks I already hold become cheaper, or if something well-priced appears on my radar.

 

Here is my current portfolio breakdown:

KGN 28.6%

JIN 3.7%

AVJ 18.9%

REH 15.5%

DTL 1.8%

DDR 4.1%

FMG 4.1%

ST1 6.6%

Cash 16.7%

 

I’m aware that almost 2/3 of my total portfolio is concentrated on 3 stocks.  Here is Warren Buffett’s take on diversification.

His business partner Charlie Munger says that the surest way to succeed is to avoid doing dumb things, rather than attempt brilliance.

 

Some of my dumbest moves this quarter:

Buying FMG because it was so cheap on a P/E basis, without modelling forward P/E based on current IOP (Would not have affected my decision which is why I still hold).

Buying DMP the day before it dropped 20% on earnings release, then tripling the size of my position, before coming to my senses and exiting at a small loss 2 days later, because I realised I should never have bought them in the first place, because they are overpriced based on earnings growth and are borrowing $300m to buy back shares at these prices.

Overloading my JIN position blithely ignorant of the fact that they lacked any significant moat.  I still hold, but it’s now a smaller percentage of my portfolio.

 

I have high hopes that the mistakes I make over the next 3 months will be better than the previous 3.
*Originally reported as 17.7% in error.  17.7% is the percentage of current portfolio value at quarter end which was profit.  The percentage return on start of quarter portfolio value was 21.6%

Some thoughts from this week

One of the key things we need to do if we are to make good quality decisions, is to be aware of our own internal biases and not let them cloud our judgement.  This last 2 months, I’ve really gotten into Charlie Munger’s wisdom (a starting point here).  For the uninitiated, Charlie Munger is Warren Buffett’s friend and business partner.  I’ve collected a number of his quotes, some examples below:

The worst thing to anchor to is your previous conclusion. Do the best you can to destroy your current ideas.

You don’t need to be the smartest or the most diligent to succeed. You need to be a learning machine, and go to bed smarter than you were the night before.

Not many people integrate multiple disciplines. If you do that you’re in a territory with not a lot of competition.

If you want to disagree with somebody, you should be able to state their case better than they can. Otherwise you should keep quiet.

It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. There must be some wisdom in the folk saying, “It’s the strong swimmers who drown.”

Any single one of the above quotes is enough to make you measurably more successful, and they all refer to certain biases and assumptions we all make as human beings.

I was reminded of that this week when Jumbo Interactive started dropping in share price, presumably off the back of the market becoming more aware of competitive lottery apps.  Jumbo are by no means the lowest cost player, they charge a large premium over The Lott (in the case of Ozlotto, $1.45 per game vs $1.30) and Lottoland charges $1.45 also but offers a $1m bonus on any winning jackpot.

The problem being, while Jumbo is a cash machine, they don’t have a significant moat (They do have an existing customer base and are part-owned by Tatts Group).  Looking at the current market price, I started my decision process in context of my buy price, which should not have been relevant to my decision.  What I should be asking myself is this: Is the company now a buy based on new information? (or in my case, information I always had at hand, but was too blinkered to pay attention to).

I concluded that while I wanted to continue holding JIN, I had too many shares (~10% of my total portfolio), so sold down about 60% of my holding at what was basically breakeven.  It feels good to have gone through a more logical thought process and to have had the self-awareness to make a better decision than I would have normally.  I am learning!

 

 

Bulletproof Networks (BPF) – How I reacted to new information

One of the decisions I am most proud of this year is my call to sell off my BPF shares in February after some disappointing HY numbers.  Previous articles on BPF have extolled the virtues of their annuity business and their high revenue growth rate.  I’d been cheering BPF for the previous year after seeing the stock price hit the mid 50s.

 

Then the HY17 results hit. What a shocker!  Revenue growth was only 13% YoY, and the company had moved from profit to loss.  Rather than procrastinating, I took action.  Despite being a fan of BPF, I was a fan of the BPF that was growing at 50% and had just gone profitable.  This was a different company.  I sold the next day for 21c

 

Since then, the share price has slid to around 8c, vindicating my decision to dump the losing stock.  My loss was small in comparison, having bought in at 25c.

 

Looking at FY17 numbers, there are some encouraging signs.  The company has returned to a positive EBITDA, and is nearly back to breakeven.  Unfortunately, they have had significant management changes and severely damaged their reputation.  We’ll see what HY18 numbers bring, but I have plenty of good opportunities to deploy capital elsewhere.

Jumbo Interactive – Lottery tickets for millenials (JIN)

Jumbo has been on my radar for a long time, but I’d been leery about their business.  Since the FY16 numbers were released, the share price has zoomed from $1.60 to $2.90, and I’m ashamed to say my decision to buy around the $2.80 level was driven by the FY16 numbers, so I was slow off the mark and it cost me dearly.

What I like about Jumbo’s business is their fixed cost base, with a growing group of users who have a reliable habit of buying lottery tickets, which increases markedly during jackpots.

This is similar to the Kogan model for travel and insurance, where they leverage the existing asset, in this case a lottery license, and act as a sales agent, using digital efficiency to acquire and keep customers at a lower cost than the asset owner can.  Most lottery tickets are currently sold at newsagents who also collect a commission, albeit with less scale and a higher cost base.

Jumbo’s customer base is also to be envied – it is tilted to a younger demographic of users, who one presumes will be longer-term customers.

As we have seen with the proposed merger of Tatts and Tabcorp, a lotteries business is quite literally a license to print money, with a base of habitual players, with many casual players who only play jackpots.

But let’s turn to the business, which recently released FY17 results.

Although TTV and Revenue were both down around 5%, FY17 had less jackpots than a typical year, which adversely impacted total volume.  However NPAT for continuing operations was slightly up, from $7.3m to $7.6m.

Jumbo also generates float, carrying $7.7m in players funds, as well as $28m in cash after the special dividend was paid.

The major risk I see to Jumbo’s future prospects is Tatts dropping their license to sell Oz Lotto tickets in 2022, but with Tatts investing $15m into the business, they are more likely to be acquired.

Subtract the $28m cash from the $149m market cap, and JIN is selling on a PE for FY17 of around 16.  When you consider that with a fixed cost base, any revenue growth will flow directly to the bottom line, it becomes obvious that Jumbo will continue to be a river of money for years to come.

Spirit Telecom: WWW Acquisition (ST1)

Spirit Telecom went into trading halt this week, prior to announcing the acquisition of World Without Wires (WWW), a consumer WiMax service provider operating across South East Queensland.  The purchase was funded by a mix of cash and new shares, for a total consideration of $4.6m.

This acquisition will increase revenue by 23% and GP by 26%, while increasing shares outstanding by 12.5%.  Prior to the acquisition, the market cap at 12c equalled $22m, so we have increased market cap by 21%, a good deal for the original shareholders.

Looking at Spirit YoY, we see revenue of $11.45m (30% up from FY16’s $8.8m) and GP of $7.2m (60% up from FY16’s 4.5m).  The entity is now profitable, with NPAT of $809k, or 0.44c per share – equating to a PE of 27.

I had actually taken up the opportunity to increase my holdings this week when the share price dropped to 10c.  As Spirit is now profitable, with earnings accretion from the acquisitions, Spirit’s business is now “in orbit” (That is, run rate revenues deliver profitable amounts of revenue on a semi-fixed cost base, meaning that the incremental revenue from new customers will almost fully flow to the bottom line).

Management appear to be pretty trigger-happy with acquisitions but these last 2 have seemed pretty sensible to me.  It’s only a matter of time until the market wises up to this great deal, who will likely be the most profitable consumer broadband provider when NBN is fully rolled out.

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.