How My Deep Value Stocks Fared From 15 April 2019

Summary

• For subscribers of my Marketplace newsletter I discuss about 10 deep value stocks based on quantitative rankings twice a month.
• In this article I share information on stocks discussed in my newsletter from 2 years ago. While some information is outdated most information can still be useful.
• I will also do a quick follow up on each stock. In particular I compare them with recent quantitative stock rankings. Several stocks are still cheap.

Need recent ideas? For more information on my quantitative deep value newsletter see here.

Let's start with the stocks I looked into but I did not recommend based on what I found. Then I will give the average return of the 10 stocks I discussed in more detail and did not warn against, followed by a list of stocks that are still good picks and/or interesting. Finally you will find the detailed descriptions of 10 stocks. At the end of each of these descriptions you will find a short update.

The share prices mentioned in the short company descriptions are from the day I wrote these notes. That is before Monday 15 April 2019, which is the date of publication of my research. I use the closing prices of Tuesday 16 April 2019 for computing returns. The end date for computing the returns is 23 March 2021. Because of the time difference between research and publication the prices mentioned in the tables are different from the prices I use for computing returns.

The stocks I did not discuss in detail was Trillium Therapeutics:

Trillium Therapeutics (April 2019, US:TRIL, TRIL or TSE:TRIL): according to my screener this is a net-net but it is not because the company just raised 15 million USD in new shares (commons and preferreds).

Update 24 March 2021: the stock price went through the roof: from about 0.649 USD to 10.47 USD now. While this was not really a deep value stock it was probably still a cheap stock. Two years ago it might have been priced around book value, which is cheap for biotechs with lots of intellectual property. Because of outliers like this one purely quantitative investing in net-nets, so without research, might beat investors who are investing based on research.

I now continue with 10 stocks I discussed in more detail 2 years ago. This was the first newsletter of April 2019. After publishing this newsletter I added 4 of these 10 stocks to the Selected Stocks list I had started at the end of January 2019. Initially I was very careful and added only the stocks I had a strong preference for. At the moment it is the other way around: I add every stock to the Selected Stocks list unless there are very strong signs governance is terrible or if there is much financial distress.

Nearly 2 years ago I added the following 4 stocks to the Selected Stocks list: Sterling Energy Plc, Vietnam Manfng and Exp Prcsng Hldng, Strong Petrochemical Holdings and Griffin Mining. I moved the last 2 stocks to the Played Out list on 15 April 2020, so I use 16 April 2020 as their end date for computing returns.

I compute an average return of 0.95% for the 4 stocks. The average annualized return was -6.45%. The average return for all 10 stocks discussed below was -7.49% and -5.05% annualized. So I some alpha with my picks, but not much. It was not a good month to find new quantitative deep value stocks. 

Since we have been spoiled during the last 12 months we may have forgotten this: In the stock market loss making stocks and bad luck are quite common. Not always everything goes up. If something always worked everybody would do it. And then it would not work anymore because everybody would be bidding up the same stocks.

Before I continue with more detailed stock research I give the list of stocks that are still cheap:

1. Vietnam Manufacturing and Export Processing Holdings or VMEPH (HKG:422) has a excellent ranking in my net-net list.
2. Hs Optimus Holdings (SIN:504): this stock has still a good ranking in my net-net list.

1. Vietnam Manufacturing and Export Processing Holdings: net-net, 5-year low

Ticker, Fin Strength	Share Price Analyst target	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
HKG:422 4	0.295 HKD 0.285 HKD	34.1 USD -25.9 USD	- -0.28	0.3 -	2.7 2.3
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-09-30	-20.0 USD	-23.4 USD	-16.7 USD	-	-

April 2019: Vietnam Manufacturing and Export Processing Holdings or VMEPH manufactures motorbikes and scooters and sells them in Vietnam and other Asian countries. Almost half of the revenue comes from outside Vietnam. The main export markets are Malaysia and The Philippines. A tailwind is a growing economy in Vietnam.

Revenue is decreasing due to increased competition both in Vietnam and abroad. Also costs are increasing, even to the point that gross margin is negative!

In May 2018 the CEO was replaced. Unlike before the new CEO is not a director.

In the second half of 2019 the company “plans to roll out a number of new or modified motorbike models” and will also try to save on distribution costs. To increase sales the company will “open flagship stores in four major cities in Vietnam and execute holistic sales strategies to promote its brand image”.

See also my previous note on VMEPH from March 2018. The stock went down from 0.42 to 0.295 HKD, again close to a 5-year low.

A search on the company name and keyword “fraud” did not reveal any relevant links. David Webb does not report anything worrisome on the company either. Also director and executive overlaps suggest low probability of fraud. The only overlap with other companies is Ng Wing Shan. He is company secretary for many other public companies including 3 companies with governance issues. One of these 3 other companies is a company in the Enigma Network.

My screener does not display interim results. Therefore the stock may be overlooked by other investors. In the table above I computed the EBIT, cash flows and NCAV/Market cap directly from the reports.

According to the cash flow statements in my screener the company paid dividends until 6 years ago. During the last 10 years the company did not raise cash from selling shares.

See the annual report over 2017, the interim report over the first half of 2018, the recent quarterly report (September 30, 2018) and the more recent profit warning for 2018. Last quarter operating loss was about 5 million USD, against 8 million USD in the first half of 2018. Last quarter gross margin was slightly positive while it was minus 550k USD in the first half of 2018. Considering the ongoing losses a key audit matter for 2017 was the book value of the non-current assets.

In the profit warning the company writes net loss over full 2018 will be 42 million USD, which translates to an operating loss over almost 50 million USD. This loss includes impairments on lease prepayments, on goodwill and on property, plant and equipment.

There are no retained earnings, just accumulated losses instead.

The balance sheet is still very strong with hardly any leverage, a big cash pile but also some current debts. The current ratio is very high: over 3, so that is positive as well. So no financial distress at VMEPH.

The book value of the current assets is 136.9 million USD including for about 30 million USD of not so valuable assets such as prepayments and inventory. The book value of the liabilities is 42.5 million USD. Therefore my estimate of liquidation value = 136.9 -0.5*30 -42.5 = 79.4 million USD. Therefore Market cap/Liquidation Value = 79.4/34.1 = 2.33. This estimate does not include 4.5 million USD of non-current lease prepayments (real estate).

Substantial shareholders: Taiwanese Sanyang Motor Company (stock code 2206 in Taiwan) owns 67.07%. Sanyang Motor Co (formerly known as Sanyang Industry Co) seems to be a shareholder friendly company paying a dividend and having bought back small amounts of shares as well. I like this shareholder structure: it suggests trust in VMEPH. Non-executive director Ms. Wu Li Chu also owns 2.0% of Sanyang Motor Co. She is from Taiwan and was an executive director from August 2015 through June 2016.

Related-party transactions: just after I published my previous report on VMEPH the company bought a factory from its main shareholder for 2.7 million USD. The company said it expected the transaction to close in September 2018 but it has not been announced yet. This company bought this asset because the company thinks it has to relocate to make room for ongoing urbanization in Vietnam. Relocating may also save costs longer term.

The company also buys motorbike parts from its main shareholder. The company says its main shareholder passes the volume discounts it gets to the company. In addition it saves shipping costs for certain other motorbike parts that are produced close to the company’s production facilities. The total of this parts purchases is about 14 million USD per year. The company has a 31% stake in one of the Vietnamese spare parts suppliers.

In addition the company pays the main shareholder about 2 million USD per year for distribution services and about 1.5 million USD per year as a technology license fee.

See also the overview of related-party transactions in 2017.

Executive directors earn low salaries including low bonuses. The highest earning executive director got 94.2k USD in 2017, up from 86k USD in 2016.

Update 24 March 2021: The dividend adjusted stock price decreased from 0.275 HKD to 0.265 HKD. In USD the return was -2.74% or -1.42% annualized.

This stock is still a net-net with a very good ranking in my net-net list. So this stock is very cheap.

2. KLW Holdings: net-net, 5-year low, nanocap, update

Ticker, Fin Strength	Share Price 5-year low	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
SGX:504 2	0.005 SGD 0.003 SGD	26.9 SGD 27.7 SGD	- 0.9	0.38 -	2.0 1.0
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-12-31	-9.7 SGD	-30.6 SGD	-34.3 SGD	-	-

April 2019: KLW Holdings manufactures doors with factories in the PRC, Malaysia and Singapore and acts as a property developer with projects in Indonesia and Australia. The company does not earn substantial rental income so it is not a property investor. About 90% of the manufacturing revenue comes from the UK and the rest mainly comes from Ireland.

See also my notes from November 2017.

A search on the company name and keyword "fraud" revealed relevant links. In 2015 the auditor, PwC, found issues with internal control and disclosure. It seems a financial controller took money from the company. Back then there were also issues with director independency combined with fears for implicit self-dealing. See also my notes from November 2017 for more information.

According to the cash flow statements in my screener the company diluted much until the end of 2015. During the last 10 years the company did not pay any dividends.

See the recent quarterly report (December 31, 2018) and the annual report for the year ending on March 31, 2018.

There are no retained earnings, just accumulated losses instead.

The balance sheet is very strong with hardly any leverage, enough cash but also some current and non-current debts. The debts may be at subsidiary level in non-wholly owned subsidiaries, explaining the combination of debts and excess cash.

In November 2017 I wrote about a disputed claim on another company. See also here. It seems some progress has been made. In April and May the company will receive 3.5 million SGD. It is still uncertain whether this can or will be paid though since a cheque of 1 million SGD was dishonoured in December 2018. Probably the other party will be declared bankrupt.

The book value of the current assets is 75 million SGD including 54 million SGD of not so valuable receivables including the receivable of 7.8 million, inventory and development properties. The book value of the liabilities is 21 million SGD including for 10 million SGD of non-controlling interest. Therefore my estimate of liquidation value = 75 -0.5*54 -21 = 27 million SGD. Therefore the company trades roughly at liquidation value.

Substantial shareholders: non-executive chairman and Prince of Brunei Pengiran Muda Abdul Qawi owns 500 million shares or 9.29%. Outsider Mr. Wong Ben Koon owns 1.0442 billion shares or 19.41%. There are 5.3806 billion shares. Several individuals own stakes between 0.58 and 1.44%.

Related-party transactions: the company sold for slightly more than 500k SGD to another company controlled by the directors.

Directors earned about 1.1 million SGD in last fiscal year including about 200k SGD for directors of subsidiaries. In total directors and key managers earned 2.3 million SGD during last fiscal year.

Update 24 March 2021: The stock price increased from 0.004 to 0.005 SGD. In USD the return was 25.82% and 12.58% annualized.

According to my rankings the stock is still a good net-net but not one of the best net-nets. It is also in my ranked nanocaps list, somewhere in the middle of this list. So as a nancap it does not have a good ranking but it does not have a bad ranking either.

3. Sterling Energy: net-net, nanocap

Ticker, Fin Strength	Share Price Analyst target	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
LON:SEY 4	0.11 GBP 0.102 GBP	32.0 USD -14.9 USD	- -5.4	0.67 0.82	1.44 1.44
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-12-31	-3.0 USD	-34.7 USD	-36.1 USD	-	-

April 2019: Sterling Energy develops oil and gas fields with a 34% stake in a "high potential exploration asset", onshore in Somaliland. See the investor presentation for January 2019.

A search on the company name and keyword "fraud" revealed links that seem to be relevant but are not. In 2016 an oil company with almost the same name but led by 2 Indians was part of a scandal. See also here. This is a different company since our Sterling Energy does not own any assets in Nigeria and does not have Indian management either. Moreover the Indian company in Nigeria seems to be privately held.

The non-executive chairman of Sterling Energy is the Russian Michael Kroupeev. Allegedly he has close ties with the Kremlin which could become a problem in future.

According to the cash flow statements in my screener the company did not pay any dividends during the last 10 years. The company did not dilute significantly either except for a huge dilution 10 years ago.

See the annual results announcement over 2018 and the annual report over 2017. In my screener (based on Reuters/Thomson database) many numbers from the annual results announcement are missing. Therefore the stock might be overlooked by many investors. I computed missing metrics by hand except for Financial Strength, which I took from the spreadsheet (probably using numbers up to June 30, 2018).

The 21 million USD of non-current assets are intangible assets. The intangible asset is a 2D seismic dataset for the exploration license in Somaliland. See also here.

Cash flow from operations is deeply negative because the company had to pay 32 million USD of decomissioning costs for an abandoned asset in Mauritania. This is almost certainly a non-recurring payment that was paid from a provision made in 2017 and before.

Retained earnings are 39.2 USD, so Market cap/Retained Earnings = 32/39.2 = 0.816. Over the last 8 years retained earnings were negative.

The balance sheet is very strong with hardly any leverage, lots of cash and no debts. Since almost all current assets are cash my estimate for the liquidation value is equal to current assets minus all liabilities.

Substantial shareholders: the chairman via Waterford Finance and Investment 29.45%, Zion SPC - Access Fund SP 16.64%, Mistyvale Limited 15.66%, Denis O'Brien 7.16%.

I do not think the chairman controls Waterford Finance. Probably ultimately Putin and other people in the Kremlin control Waterford Finance. Allegedly Waterford Finance paid money to conservative British politicians, see here. Also Mistyvale Limited is controlled by the Russians. They have Ilja Belyaev as non-executive director in the board.

Related-party transactions: in 2017 the only related-party transactions were salary payments of 708k USD. See also here. Bonuses are small (which is good).

All share options lapsed or were forfeited in 2017.

Update 24 March 2021: The dividend adjusted share price increased from 0.113 to 0.169 GBP. In USD the return was 57.23% and 26.30% annualized.

The company name changed to Hs Optimus Holdings. See the last business update. In short: the company has been moving its door operations to Malaysia. It is evaluating its property business in Melbourne, Australia and continuing property development in Jakarta, Indonesia.

4. Panevėžio statybos trestas: net-net, nanocap, close to 5-year low

Ticker, Fin Strength	Share Price 5-year low	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
VSE:PTR1L 6	0.85 EUR 0.75 EUR	13.8 EUR 0.48 EUR	7.0 0.0056	0.38 0.47	1.94 0.8-1.4
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-06-30	0.07 EUR	-1.1 EUR	-2.6 EUR	-	7.0

April 2019: Panevėžio Statybos Trestas AB is constructs, designs and maintains buildings, communications, sewage and does electrical installation works such as fire protection systems and video surveillance systems. The main revenue stream comes from large long-term construction contracts.

About 20% of the revenue comes from other businesses such as constructing steel structures and panel houses. Only the “general” construction business meaningfully contributes to the bottom line. This business is also in good shape when considering Segment Assets/Segment Profit. See also here.

The company also owns a 14-floor hotel with a book value of 1.3 million EUR.

About 85% of the revenue comes from Lithuania and the rest comes from Scandinavia. Russia used to generate a lot of revenue but after 2015 this revenue stream disappeared.

A search on the company name and keyword “fraud” revealed relevant links. Last year the company got a fine of 40k EUR for inadequate disclosure related to a investigation into a cartel agreement. For the cartel agreement itself it got a fine of 8.5 million EUR in December 2017.

I think governance is ok, although accounting might be too flexible. Internal controls might be weak. See the governance report. Unfortunately there are no independent directors and no supervisory board. All directors are affiliates of the main shareholder. I do not think shareholders can vote by proxy.

Disclosure in in English. See the interim report over the first half of 2018 and the annual report over 2017. Important key audit matters were the fine of 8.5 million EUR, for which no provision has been made, and revenue recognition using the percentage of completion method. Another key audit matter was an impairment for a project in Kaliningrad with a carrying value of 6 million EUR. This project was not impaired.

Retained earnings are 29.5 million EUR. Therefore Market cap/Retained Earnings = 13.8/29.5 = 0.468.

The balance sheet is strong with low leverage, lots of cash and insignificant borrowings. No financial distress here.

No provision was made for the fine of 8.5 million EUR so this is a hidden liability. This hidden liability makes a big difference for the Enterprise Value. It would be 9 million EUR with a proper provision for this fine. Because of this unrecognized fine I do not consider this stock a low EV/EBIT stock. But there is also a claim of net 2.3 million EUR. This might be a hidden asset. See here.

The book value of the current assets is 50.3 million EUR including 18.1 million of not so valuable assets like inventory (property under development). Then there is the hotel with book value 1.3 million EUR. Total liabilities are 23.1 million EUR. Therefore my estimate of liquidation value = 50.3 -0.5*18.1 +1.3 -23.1 = 19.45 million EUR. Therefore Liquidation Value/Market cap = 19.45/13.8 = 1.41. More conservative is adding the fine of 8.5 million EUR to the liabilities. Then the multiple is 0.8.

In total there are 16.35 million shares.

Substantial shareholders: Panevezio keliai AB 49.78%.

Related-party transactions: in 2017 there were for 1.3 million EUR of sales to the main shareholder and affiliates and 650k EUR of purchases. Payables and receivables from related parties were a small fraction of these amounts. Directors earned 1.3 million EUR in 2017.

Update 24 March 2021: The dividend adjusted stock price decreased from 0.73 to 0.555 EUR. In USD the return was -22.22% and -12.15% annualized.

The company has done a lot to avoid paying the fine of 8.5 million EUR. So far these efforts were not successful. It seems extremely unlikely it can avoid this fine. Because of the fine the stock was more expensive than it seemed in my screener. So I was right with not adding this stock to my Selected Stocks list.

The stock is still in my nanocaps list but not with a great rank. According to data from my screener EBIT and cash flow from operations are negative. That is a good reason to sell this stock. Remarkably the company still paid a dividend of 0.03 EUR per share in 2020.

5. Rand Mining: low EV/EBIT, more expensive than in screener

Ticker, Fin Strength	Share Price Anal target	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
ASX:RND 8	2.5 AUD -	150 AUD 72.9 AUD	1.05 0.73	1.56 1.9	- -
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-12-31	68.8 AUD	114 AUD	104 AUD	6.7	-

April 2019: Rand Mining owns stakes in several producing high grade gold mines in Australia. See this overview. Important mines are apparently the Raleigh high grade underground mine and the also high grade Rubicon underground mine. See the recent exploration report of these 2 mines.

The mines are part of a larger project in which the company has a 12.25% stake. This East Kundana joint-venture is controlled by Northern Star Resources (51% stake). The company also has a 50% stake in the Seven Mile Hill exploration project. At the moment drilling results for this project are being reviewed.

In 2018 an option to acquire an iron ore project in Liberia lapsed.

A search on the company name and keyword “fraud” revealed interesting links. There is a legal dispute on a stock transaction in Tribune Resources in 1996. See here and here. Tribune Resources is another partner in the joint-venture with Norther Star Resources.

One of the largest shareholders, Trans Global Capital incorporated in the Seychelles, owns shares of both Rand Mining and Tribune Resources. Tribune Resources is also a substantial shareholder with one non-executive director in the board.

See also the corporate governance statement. There are no independent directors in the board. The company says more directors is not appropriate considering the small size of the company.

In December 2018 Northern Star Resources made an offer to buy Tribune Resources and Rand Mining out of the joint-venture. However both companies turned the offer down mentioning it was too low. Rand Mining would receive 37.5 million AUD for its stake in the joint-venture, which is way lower than its current enterprise value.

The company sold most shares of Tribune Resources for 41.3 million AUD in February 2019. Rand Mining sold its stake in Tribune Resources for about 14 million AUD more than the offer from Star Resources. Because of this subsequent event the enterprise value is about 3 million higher than the one displayed in my screener (spreadsheet and table above) and most websites.

According to the cash flow statements in my screener the company did not dilute except for a small dilution 9 year ago. Four years ago the company spent a small amount on buybacks.

About a year ago the company paid its first dividend. In the second half of 2018 the company paid a huge dividend of 81.2 million AUD. This was a special dividend of 1.25 AUD per share. The regular dividend is 0.1 AUD per share. On all dividends 30% tax was withheld.

Note my screener (table above) does not display a dividend yield so the stock may be overlooked by dividend investors.

See the recent interim report over the second half of 2018 and the annual report for the year ending on June 30, 2018. The only key audit matter was 9.4 million AUD of capitalized mine development costs.

About 22% of the profits or 20 million AUD came from a gain on the stake in Tribute Resources. This stake was reclassified from non-current available for sale in the second half of 2018. My screener excludes this profit from the EBIT.

The company has also been accumulating gold from its mines throughout the years. This gold was sold in the second half of 2018. I estimate the company pumped its revenues and profits by 60 million AUD through this gold sale.

My screener reports an operating income and EBIT as 69 million AUD. So I think EBIT from continuing operations is really only 10-15 million AUD. So EV/EBIT is really only 5-7. Similarly I consider P/E and P/FCF to be much understated because of this one-off gold sale. Therefore this stock is not as good as it looks based on its statistical properties.

Retained earnings are 79.5 million AUD. Therefore Market cap/Retained Earnings = 150/79.5 = 1.89.

The balance sheet is strong with low leverage, lots of cash and hardly any debts. No financial distress at Rand Mining.

Insiders get modest packages consisting of mostly a fixed salary, see here. There is no equity based compensation.

Substantial shareholders: Tribune Resources 44.19%, Trans Global Capital 13.13%, Northern Star Resources 4.86%, Lake Grace Exploration 4.85%, Sierra Gold 3.49%, Resource Capital 2.67%.

Lake Grace Exploration shares 2 directors with Rand Mining.

Related-party transactions: mainly rent of the office, accommodation costs and royalties to shareholder Lake Grace Exploration for a total of about 140k AUD.

Update 24 March 2021: The dividend adjusted stock price decreased from 2.13 to 1.59 AUD. In USD the return was -21.03% and -11.48% annualized. I find that remarkable because the gold price increased much. Also in 2019 and 2020 the company paid a dividend of 0.10 AUD.

With high payouts to shareholders and a low multiple EV/EBIT I think this stock is still cheap. Unfortunately I cannot determine how cheap compared to other stocks. I do not think this stock is a very cheap low EV/EBIT stock because of a high multiple EV/Revenue and negative cash flows.

6. Griffin Mining: low EV/EBIT + quality

Ticker, Fin Strength	Share Price Anal target	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
LON:GFM 10	0.995 GBP -	223 USD 199 USD	3.2 1.55	1.1 1.7	- -
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-06-30	61.4 USD	64.8 USD	49.4 USD	4.5	-

April 2019: Griffin Mining is a Bermuda company owning a producing zinc project in Caijiaying, China (underground mining, about 90% stake). The company also mines lead, gold and silver as by-products. About ¾ of the revenue comes from zinc and the rest is mainly gold, some silver and a tiny bit of lead.

So this is a Chinese smallcap listed in the UK and therefore it may be a scary stock. What makes this stock different is that it is public already for much longer than many other Chinese smallcaps. Moreover this company is managed by 3 Australians, an American, British, Canadian and 2 Chinese instead of by Chinese people only.

Investors do not have much opportunities to invest in zinc. Zinc investments could be very attractive because the metal is pretty scarce compared to world-wide demand. See for example here. However as a rule of thumb it is best to invest in a miner when the underlying commodity price is at a 5-year low. Currently zinc trades above its 5-year average and even for almost twice the 5-year low.

Here there is another event that might unlock much value. The company is trying to get a mining license for a bigger area: “zone II”. That expansion will improve economics of existing transport and processing facilities much. Existing facilities can handle the required doubling of ore processing capacity. I believe the current but restricted mining license is valid until January 2026. Although the company is waiting on the expanded mining license already for a couple of years it keeps trying. I am not sure what the problem with the mining license really is, probably just slow bureaucrats.

Apart from increasing revenue through this extra license the company also explores surrounding areas and other areas close to its existing mine. The company also analyses potential projects elsewhere, in China and even outside China.

A search on the company name and keyword “fraud” did not reveal any relevant links.

According to the cash flow statements in my screener the company bought back shares several times: 3, 6, 8 and 10 years ago. These were small but substantial buy backs except for the huge buy back 10 years ago. The company also did a small dilution 5 years ago and in the first half of 2018. The dilution in 2018 was related to an option exercise of the main shareholder. In August 2018 the company bought back 375k shares for prices above 1 GBP.

During the last 10 years the company did not pay any dividends. The company reduced borrowings much in the second half of 2017. Therefore my screener computes a high total yield (cash flow related to buy backs, debt repayments and dividend payments together): about 20% of the market cap.

Favorable multi-year metrics for measuring quality are 8-year cash flow generation, a growing gross margin and the 8-year geometric mean of return on assets. The growing gross margin is consistent with the thesis more zinc is used globally than miners can provide.

See the interim report for the first half of 2018 and the annual report over 2017. Key audit matter was the book value of the mine.

Retained earnings are 132.6 million USD. Therefore Market cap/Retained Earnings = 223/132.6 = 1.68.

The balance sheet is very strong with low leverage, lots of cash and no debts. No financial distress at Griffin Mining.

There are 172.5 million shares plus 17.4 million options at 0.3 GBP and 4.35 million options at 0.4 GBP which can be exercised until December 31, 2022. BTW, these options have been extended recently, which is bad governance. So the total is equivalent to about 188 million shares. Therefore screeners underestimate the market cap by more than 10%.

Substantial shareholders: director and hedge fund manager Adam Usdan owns 33.24 million shares plus 1.167 million options at 0.4 GBP. So in total about 20%. In 2018 he bought at least 250,000 shares on the open market for prices approximately between 0.8 and 1 GBP.

The CEO, Roger Goodwin, owns 877.8k shares plus 2 million options at low exercise prices. Another directors owns 900k options and yet another director owns 397k shares plus 900k options. A third of the options will only vest after the company receives the mining license for zone II.

Outsider Richard Griffiths and affiliates owns 10.21% including 2.76% via derivatives. He has been buying as well. His affiliates are Seren Capital Management Limited, Blake Holdings Limited and Oak Trust Limited.

In the annual report over 2017 I could not find a separate description of the related-party transactions.

In the first half of 2018 Adam Usdan prematurely exercised options at 0.4 GBP. He kept the shares. He might have done it to provide extra funding for the company. I have seen this before with another company. I do not understand why this option exercise was necessary especially since the company seems to have used these funds to buy back shares in August 2018. It may suggest the company has problems getting cash out of the PRC, but this is not mentioned in the risk factors.

Related-party transactions: The company of chairman Mladen Ninkov, Keynes Capital, received 2.2 million USD for “the provision of advisory and support services”. He is the only director not owning options or substantial shareholdings.

Director compensation is between 86k and 199k USD, with 86k USD for the main shareholder. The CEO gets a salary and pension of 537k USD on top of his 125k director compensation. I consider both director compensation and CEO compensation very generous.

Update 24 March 2021: I kept this stock for one year on my Selected Stocks list. During this period the EV/EBIT multiple worsened causing the stock to lose much of its value. I think demand for commodities would be lower because of the coronavirus. Because of excessive money printing and temporary government support all over the world that did not happen. Instead commodity prices increased last year and the stock price too. So over a 2-year period this was a good stock but not over the one year period on my Selected Stocks list. During that period the stock price decreased from 1.10 to 0.47 GBP. The return in USD was -59.34% and -59.27% annualized.

I do not think this stock is still cheap.

7. Gamco Investors: low EV/EBIT + quality, close to 5-year low

Ticker, Fin Strength	Share Price Anal target	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
US:GBL 8	20.5 USD 31 USD	593 USD 580 USD	3.2 1.7	101 2.1	- -
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-12-31	187 USD	118 USD	118 USD	-	0.4

April 2019: Gamco Investors (GBL) is the asset management company of famous American value investor Mario Gabelli, who is still using the good old principles of Graham and Dodd. The company had 34.4 million USD of assets under management as of December 31, 2018. The company provides advisory services (asset management) to institutional investors and to big private investors and to 34 open end funds and 16 closed-end funds and 4 ETFs.

The company depends for a large part on relations with distributors that promote the funds to their investors.

On Seeking Alpha there is a bearish article from May 22, 2018 on the stock. The author, Michael Boyd, mentions 20 USD per share as fairly valued. At the time he was short the stock, at about 25 USD per share. He mentioned ongoing redemption and the risk of decreasing asset under management because of a bear market. Indeed assets under management are about 15% lower in 2018 than in 2017. Also he mentioned though Gabelli has an excellent long term track record more recent results were well below the market, despite high fund fees.

A search on the company name and keyword “fraud” revealed several links. In 2006 the Gabelli and affiliates (not the company) settled a civil fraud lawsuit for 130 million USD. This was related to an auction of cellphone licenses. The same NY Times article also mentions Gabelli losing a shareholder rights lawsuit with the first investor in his fund.

In case you hit the NY Times paywall the same lawsuits are also described in this Wikipedia article (retrieved end of March 2019). According to this article Gabelli is also known for being excessively paid by his investment management firm before the financial crisis in 2008. This was also an issue in the lawsuit with Gabelli’s first investor (in 1976).

According to the cash flow statements in my screener the company bought back stocks and paid a dividend every year during the last 10 years. Dividend payments during the last couple of years were minimal.

This company has beautiful multi-year quality metrics, in every way and the best I have ever seen. So it must have a moat. I am not sure whether this moat is the CEO and executive chairman Mario Gabelli, who is already pretty old. On page 18 the annual report mentions 2 other co-chief investment officers.

See the annual report over 2018 and the proxy document (April 2018). Though fundamentals such as revenues and assets under management deteriorated in 2018 operating and net income increased much. Most costs in this business are salaries of investment professionals of 93 million USD. Another cost is distribution costs, so payments to the distributors, of 39 million USD. Unlike in 2017 and 2016 the company booked losses from its own investments in 2018: 25.1 million USD. But because investment results were not great compensation costs were so much lower than in 2017 that operating income increased in 2018.

One could argue these 25.1 million USD of losses on investments should be added to operating income. My screener does not include these losses in the EBIT. When including them EBIT would be 162 million USD. Also enterprise value should be corrected for investments in securities (mostly common stocks and all “level 1” assets). In that case enterprise value is 34 million lower than market cap, so 559 million USD and therefore EV/EBIT = 3.4.

Retained earnings are 282.7 million USD. Therefore Market cap/Retained Earnings = 593/283 = 2.1. This is so much lower than Market cap/Tangible Book because book value is reduced by 287.3 million USD of treasury stock.

The balance sheet is very leveraged with Tangible Assets/Tangible Equity around 20. Leverage is mainly operational with much more cash than non-current debt. Therefore I do not think the company is financially distressed. But I cannot compute a current ratio because the annual report does not clearly distinguish between current and non-current assets and liabilities. The company pays 5.875% interest on in total 24.2 million USD of debt. This debt has to be repaid on June 1, 2021.

There are 2 types of shares: 9,858,599 class A shares with one vote per share and 19,024,404 class B shares with 10 votes per share. So in total there are 28,883,003 shares.

Substantial shareholders: Mario Gabelli owns almost all class B shares and has in total 80.25% economic interest. Frederick J. Mancheski owns 3.94% and E.S. Barr & Company owns 1.81%. Gabelli also owns for 121 million USD of restricted stock and alike but might have waived part of this compensation, see below.

Related-party transactions: Gabelli is subject to non-compete agreements except for personal accounts and a few other accounts. These other accounts (excluding personal accounts) have about 240 million USD asset under management. He is also a manager of a fund spun of Gamco Investments in 2009.

The company issues restricted stock that can be settled either in shares or in cash. In 2018 the company paid out 28.3 million USD to Gabelli instead of shares. This was probably mostly compensation over 2017 because Gabelli waived 56.5 million USD of compensation over the period from March 1 to December 31, 2018 (page 78 of the annual report). So this one-off event explains the good results over 2018. He also waives all compensation for the first 3 months of 2019. His total compensation over 2017 was 69.4 million USD.

The company does not disclose how much the 2 co-chief investment officers of the value team, Christopher Marangi and Kevin Dreyer, get paid. The median pay within the whole company excluding Mr. Gabelli was 215.6k USD. My impression is Gabelli gets about 5 times as much as all the other investment professionals together.

The company leases the head office in New York from Gabelli and family members for 1.2 million USD in 2017. The company also had 11.7 million USD of outstanding notes in lieu of compensation of insiders in 2018. These were paid off in January and February 2018.

The 3 sons of Gabelli work for an affiliate of the company but also earned together 1.9 million USD with Gamco in 2017. His daughter did not earn anything because in 2017 she was on extended unpaid leave since 2004. His wife (since 2002) earned 5.5 million USD while working with Gamco in 2017. The brother of Gabelli earned 418k while working for the company in 2017.

My take: great company but I don’t doubt there is also self dealing and probably much self-dealing. Right now people may have a lot of trust in the company because Gabelli is still the chief investment officer. But with 75 or 76 he is old so what happens when he leaves? I suppose one of the 2 co-chief investment officers could succeed him and continue his high returns. But it will take any new CIO a long time getting the same level of trust as Gabelli.

Update 24 March 2021: The stock price decreased from 19.4 to 18.8 USD. The return was -3.18% and the annualized return was -1.65%.

The stock is still in my low EV/EBIT list but not with a great ranking anymore. Because the score for Financial Strength decreased the stock does not quality for my list US-listed low EV/EBIT + quality.

8. Carr's Group Plc: microcap + momentum + high retained earnings

Ticker, Fin Strength	Share Price Anal target	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
LON:CARR 6	1.41 GBP -	130 GBP 161 GBP	9.8 0.4	1.65 1.41	- -
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-09-01	16.4 GBP	11.5 GBP	6.7 GBP	45	2.4

April 2019: Carr's Group Plc provides “industrial services focused on the agricultural and engineering sectors.”

See the company’s factsheet and the corporate structure. The company was founded in 1831, by someone with surname “Carr” and went public in 1972.

In the agriculture division the company owns 43 “country retail stores and fuel depots” for farmers and other locals. The company also manufactures animal supplements in the UK, US and Germany. In the agriculture division much business is done via joint ventures. In September 2018 the company acquired Animax. Animax produces high added value animal food supplements containing trace elements. This business was bought in a subsequent event for 6 million GBP plus a contingent payment of 2.5 million GBP.

In the engineering division the company “designs and manufactures bespoke equipment and provides technical engineering services into the nuclear, petrochemical, oil and gas, pharmaceutical, process and renewable energy industries, including robotic and remote handling equipment.” In practice the company specializes in robotics and remote handling via one UK company, 2 companies in Germany and one in the US. The company markets its robots and remote handling products for doing work in nuclear plants.

Almost all revenue (close to 90%) comes from the agricultural segment. The agricultural division is a good business in terms of Profit/Assets. The engineering division has a much higher gross margin but is much less profitable in terms of Profit/Assets. See page 68 of the annual report.

The company might suffer from a (no-deal) Brexit. To what extent is unclear. The company should be in a good position to deal with a Brexit since for each segment the company has operations on both sides of the North Sea.

A search on the company name and keyword “fraud” did not reveal any relevant links.

Multi-year metrics measuring quality are around average, so they do not suggest much durable competitive advantages. The company spends about 1.5 million GBP per year on research and development.

See the annual report for the year ending on September 1, 2018. Key audit matters were goodwill, aged accounts receivables, fraud risks with agricultural revenue recognition, accounting of long term contracts, and the pension plan with 70.6 million GBP of post-retirement assets and 60.5 million GBP of post-retirement liabilities. A new High Court ruling in the UK might change accounting for pension assets and liabilities.

The balance sheet is moderately leveraged with Tangible Assets/Tangible Equity = 2.2 and a current ratio of 1.34. On the balance sheet 24.6 million GBP of cash is offset by 40 million GBP of mostly current debt. These debts are secured by accounts receivables. About 24.5 million GBP is debt from a revolving credit facility which has been renewed until November 2023 in a subsequent event. So I do not think the company is financially distressed.

My screener comes up with the wrong number for the EBIT but it still comes up with the correct value for EV/EBIT. I have corrected the value for EBIT in the table above.

Retained earnings are 92.4 million GBP. Therefore Market cap/Retained Earnings = 130/92.4 = 1.41.

Substantial shareholders: private agricultural company Heygate & Sons 13.84%.

Non-executive chairman C. N. C. Holmes (Chris Holmes) owns 739,000 shares. He sold some shares recently and also in November 2018. The 2 executive directors own 736k and 566k shares including unvested restricted shares. See page 44 of the annual report.

The 2 executive directors are very well paid with a bonus equal to their base salary. Also equity based compensation is roughly equal to the base salaries. Such high variable pay increases probability of excessive risk taking.

Related-party transactions: there were for 144k GBP of receivables from businesses controlled by insiders (166k GBP of revenue last fiscal year). There were 27.1 million GBP of payables to companies where Carr’s Group has a minority stake with 114 million GBP of purchases from these companies. The company also did transactions with its joint-ventures: 696k GBP of revenue and 1.1 million GBP of purchases.

Update 24 March 2021: I do not recommend holding momentum stocks for more than a year. In the year after I discussed this stock the stock price decreased from 1.34 to 0.988 GBP. In USD the return was -29.07%.

In hindsight momentum was not smooth enough. Since March 2020 I have better quantitative tools to analyze momentum. So now I am able to find stocks with better momentum. I do not think this stock is still cheap.

9. Strong Petrochemicals Holdings: falling knife, net-net

Ticker, Fin Strength	Share Price 5-year low	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
HKG:852 3	0.43 HKD 0.33 HKD	913 HKD 579 HKD	1.8 0.03	0.67 1.67	1.33 1.12
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-06-30	331 HKD	262 HKD	260 HKD	7.6	-

April 2019: Strong Petrochemicals Holdings trades and stores crude oil, petroleum products, and petrochemicals. Almost all revenue comes from trading crude oil. Over 80% of its revenue comes from the PRC but the company also gets revenue from among others Egypt (8%), Vietnam (3%), India (1.6%) and Japan (1.2%).

A search on the company name and keyword “fraud” did not reveal any relevant links. David Webb does not report anything worrisome on these other companies either. Also insider overlaps with other companies suggest low fraud risks. The company shares its company secretary with a couple of other Hong Kong listed but “clean” companies.

According to the cash flow statements in my screener the company did a big dilution through a private placement in July 2017 for 0.658 HKD, so around book value. The shares were placed at a discount but with a 6 months lock-up period. Five years ago the company did a smaller but still substantial dilution. In 6 of the last 10 years the company paid a dividend. It also paid a big dividend 2 years ago, in the same year it diluted much.

The company intended to invest the proceeds of the private placement in 2017 in new energy. I do not think this happened. Instead the company has used the proceeds as extra working capital. Just before the private placement an independent director resigned and was replaced.

In September and October 2018 the company did a minimal buy back of 1.31 million shares. In December 2018 the company adopted a dividend policy.

Multi-year metrics for measuring earnings and asset allocation quality look really horrible. Cheap but not a quality stock!

See the annual results over 2018, the interim report for the first half of 2018 and the annual report over 2017. Key audit matters were the trade receivables of 1.7 billion HKD and the book value of interests in associates of 102 million HKD.

Over 2018 the profit was extremely low because of a large loss on derivatives held for hedging.

Retained earnings are 546 million HKD. Therefore Market cap/Retained Earnings = 913/546 = 1.67.

The balance sheet is somewhat leveraged with Tangible Assets/Tangible Equity = 3.66/1.37 = 2.67. Debts are minimal and all current. There is much more cash than debt, but no big cash pile. So no financial distress at Strong Petrochemical Holdings.

The book value of the current assets is 3.5 billion HKD including for 78 million HKD of available for sale assets. Current receivables and cash are 3.12 billion HKD. Total liabilities are 2.29 billion HKD. Therefore my estimate of liquidation value = 3.5 -0.5*(3.5 -3.12) -2.29 = 1.02 billion HKD. So Liquidation Value/Market cap = 1020/913 = 1.12.

Completion of the disposal of 78 million HKD assets available for sales is unconditional. See here. It seems the company reinvests the proceeds in property, see here. The company also provided a secured high interest loan of 20 million HKD.

There are 2.1244 billion shares and 29 million options with an exercise price of 0.655 HKD and 138 million options with an exercise price of 0.78 HKD. See page 36 of the annual report.

Substantial shareholders: executive chairman Mr. Wang Jiang Sheng and executive director Mr. Yao Guoliang own together 49.01% with each a 50% stake in the entity holding 49.01%. Mr. Yaio Guoliang also owns 5.84% directly. Furthermore outsider Mr. Chang Liang owns 16.63%. I think he got the shares through the private placement in June 2017.

Related-party transactions: the company pays almost 2 million HKD annual rent to the main shareholders.

It seems the 2 main shareholders/executive directors do not get paid anything, see page 77 of the annual report over 2017. The 2 best earnings employees earned between 1 and 2 million HKD in 2017. The 5 best earning individuals together earned 12 million HKD in 2017. In 2017 their bonus was only a small part of their basic salary but in 2016 their bonus was about 50% of their basic salary. I suppose these 5 people were fuel traders. None of these 5 individuals was a director.

Update 24 March 2021: I added stock to my Selected stocks list and moved it to the Played Out list on 15 April 2020. I use the closing price of 16 April 2020 as the end date for computing the return. In this period the dividend adjusted stock price increased from 0.405 to 0.435 HKD. In USD the return was 8.64% and 8.59% annualized.

This is still a net-net but not with a high discount to NCAV. So it is not in any of my quantitative lists anymore. Therefore there are probably better stocks for your portfolio than this one. That said: my screener displays a "Strong buy" analyst rating.

10. HollyFrontier Corp: US listed low EV/EBIT + quality

Ticker, Fin Strength	Share Price Analyst target	Market cap EV, in millions	EV/EBIT EV/Revenue	P/Tan B P/Ret Earn	NCAV / MC Liq Val / MC
US:HFC 10	50.05 USD 61 USD (17x)	8547 USD 10344 USD	6.3 0.58	2.63 2.0	- -
Date cash flow	EBIT, ttm until mrq	Cash flow from ops	Free cash flow	P/FCF	Yield %
2018-12-31	1642 USD	1554 USD	1243 USD	8.5	2.6

April 2019: HollyFrontier Corporation (HFC) operates refineries and storage tanks, terminals and pipelines (57% stake in Holly Energy Partners with ticker HEP) in the US. Furthermore the company produces lubricants through a subsidiary Petro-Canada. Almost all revenue comes from the refinery business. Slightly more than 10% of the revenue comes from the lubricants business.

The refinery business used to depend on a ban on crude oil exports from the US. That made US crude cheaper than international crude. Refineries were able to benefit from the price difference by exporting refined oil products. In December 2015 this ban was lifted impacting the results of the company in the following years. At the moment the company only exports a small fraction of its refinery output to Europe and Asia. It still gets about 5% of its revenue from exports to Canada.

A search on the company name and keyword “fraud” revealed one relevant link. Unfortunately the link is behind a paywall, but the page is also in the Google cache. In 2006 the company sold a refinery but did not say the site was contaminated with lead. In 2007 the contamination was discovered but HollyFrontier refused to pay 14 million USD of cleaning up costs. The lawsuit started in 2015 and is still ongoing. See the incomplete docket in courtlistener.

In the second half of 2018 a big fire at one of the refineries that also will lead to some clean up costs.

Multi-year metrics for measuring quality are all very good, see the spreadsheet for details.

According to the cash flow statements in my screener the company is a reliable dividend payer. I should add the company cut the dividend in 2015. In years with low oil prices dividends were lower than in years with high oil prices. Because earnings were higher in the last 2 years there are good chances the company will increase the dividend again.

During the last 10 years the company has done several small dilutions but also made larger share repurchases. Last year the company spent 249 million USD on buybacks. In September 2018 the company started a 1 billion USD buyback program. In 2018 it spent 167 million USD on this program.

See the annual report over 2018 and the recent proxy filing.

Retained earnings are 4.21 billion USD. Therefore Market cap/Retained Earnings = 8.55/4.21 = 2.03.

The balance sheet is strong with low leverage, a high current ratio, lots of cash and no current debts. There is 2.4 billion USD of non-current debt however. I estimate the company can repay the non-current debt in about 2.5 years.

This debt includes 1.4 billion USD of debt of the storage and pipeline 57% owned business. This storage and pipeline business is much smaller than the refinery segment. It has only 506 million USD of revenue in 2018 including 398 million of inter-company revenue. The transportation and logistics segment has very stable earnings because it mainly earns its revenue from fixed fees based on the volume of oil put through its pipelines. Furthermore about 80% of the pipeline and storage business comes from the company itself.

Substantial shareholders: The Vanguard Group 12.39% (statistical investor), BlackRock 9.56% (statistical investor), TCTC Holdings 7.36%, AQR Capital Management 5.87% (statistical investor), State Street Corporation 5.6%. Insiders do not have substantial stakes but have probably invested a substantial part of their wealth in the company. The top 3 insider holders each own more than 100k shares. Also 7 other insiders each own between 22k and 62k shares.

Related-party transactions: there are many related-party transactions between the company and its 57% owned Holly Energy Partners. Most importantly HEP pays a annual administration fee of 2.5 million USD, which is increased annually with inflation. In 2017 there was an equity restructuring at HEP: the company gave up dividends and certain rights in return for shares.

Furthermore the wife of the CFO is Vice President Commercial Analysis and Pricing earning 502k USD in 2018.

The 5 main executives are well paid: 21 million USD together in 2018 including 11.4 million USD for the CEO. About half of the executive pay consists of stock awards.

Update 24 March 2021: The stock price decreased from 44.8 to 35.0 USD. The return was -21.8% or -11.9% annualized. In my screener I see negative EBIT and net earnings for this stock. Other multiples are not so good either. So I do not think this is still a good stock to own.

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