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A Swing & A Miss! (No. 1)

|Includes: Ace Aviation Holdings Inc. (ACAVF)

"I call investing the greatest business in the world because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There's no penalty expect opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it. The problem when you are a money manager is that your fans keep yelling, 'Swing, you bum!'" Warren Buffett

It is really difficult to find good investment ideas and when you do it is even harder to have the conviction and fortitude to size them appropriately. I read a lot of annual and quarterly reports in a given week and a vanishingly small number show characteristics that warrant further work. Of those that do a depressingly small amount withstand further analytical scrutiny and make it into my portfolio.

This post is intended to be a regular feature of securities that initially peaked my interest but fell down after further analysis. I hope people will find it interesting and hopefully spot things that I have missed in my review that may make them hidden gems.

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ACE Aviation (ACE/H CN)

Insufficient upside / downside profile

ACE Aviation is the liquidation of the historic Air Canada holding company. I absolutely love liquidations due to locked box nature of the balance sheet and the aversion they seem to cause in most investors. Alongside determining the asset side you often have to assess a set of associated liabilities, the costs of realising the assets and finally the weighted average life to realise the assets.

Taking a quick read of the ACE reporting the estate is now effectively a cash box with a market cap trading at a c. 12.4% discount to ultimate realisation (when I was looking it was at CAD$ 0.50 vs 0.52 today). Obviously this is not a prospective investment that would set the world on fire but given the difficulty finding good value candidates I was thinking it could have a place in my portfolio as a substitute for cash.

The reason for ACE being a miss is rather embarrassing and relates to me miss reading the units in the discussion section of the reporting believing that the only remaining contingent liabilities, the tax indemnities, were being quoted in CAD$ when in fact they were in CAD$ 000s.

Post dividend I estimate the expected realisation and associated returns for shareholders from the ACE estate as follows:

ACE Aviation (Investment Summary)

What this analysis doesn't capture is a remaining contingent liability that relates to a tax indemnity ACE provided to Air Canada in 2010 totalling CAD$ 50.1m. The reporting states that "the large majority of the input tax credit claims covered by the indemnity in favour of Air Canada expired at the 2014, with the remaining reassessment periods gradually expiring by 2016." Given this the timing of the estate's first dividend since entering voluntary liquidation (April 2015) makes sense in conjunction with the dismissal of other contingent claims. The liquidator also states that "Future distributions of ACE's remaining net cash to its shareholders are subject to the expiration or settlement of any contingencies."

I cannot find in any disclosure exactly how much of the CAD$ 50.1m indemnity expired in 2014 but my guess that something close to the cash retained remains outstanding. This investment is a miss for me due to the lack of downside protection. Whilst no tax claims have been made for c. 4/5 years if any did arise between now and 2016 you could get wiped out and a c. 10% return is no enough to take that risk.

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South African Property Opportunities Plc (SAPO LN)

Illiquidity, currency risk

SAPO is a listed property fund that is in the process of liquidating. The fund invested in development land in South African focused on Industrial, Retail and residential purposes. The equity is listed in the UK but all the assets are denominated in ZAR. The board changed asset manager in the middle of 2014 to try and manage the costs of the wind down.

See below for my valuation:

South African Property Opportunities Plc

What I really liked about this potential investment is the fact that cash, unconditional sales, and properties under offer net of the non-controlling interest, loans from third parties and the 1.5% performance fee on the expected sale price equates to c. 80% of your purchase price which provides a good level of downside protection.

The problem with the investment is that the upside after taking account of expected cost to realise the assets is not very compelling at 1.42x. Given that jurisdiction and the fact that it is undeveloped and in certain cases non- permitted land I would want 1.75 - 2.00x expected return. Also whilst not having any macro views the ZAR/GBP exchange rate is extremely volatile and has been going the wrong way. It never feels good to be buying a company in a currency different from the currency of its underlying assets and is clearly much harder to hedge.

Finally all of this is pretty academic as it is one of the most illiquid stocks I have ever seen trading only once or twice a month which further points to the need for a meaningful return. I would be a buyer at c. GBp 14.00