Sell Edgewell, adding to Nagacorp and other thoughts

When investing in a company I do my best to understand the products the company is selling. I want to understand the environment the company is operating in, competitors, brand value, together putting the company into a context. I try to understand the management of the company and where they want to take the business. I then try to look long-term if the industry has headwinds or tailwinds and how much sales is affected by the general market cycle. All this and more goes into my valuation of the company. But even when I try to cover all bases, the stock market keeps throwing curve balls left and right, I had my fair share and there will certainly be more in the future. The other day it felt like I was dealt another curve ball.

The management of Edgewell Personal care, went out bought a shaving company start-up called Harry’s for 1.37bn USD. Edgewell with an Operating Income of some 300m USD, net debt of 1.1bn USD and Market Cap (pre announcement) of some 2bn USD, thought it is in a good position buying a start-up for 1.37bn USD. Worse than that, they pay 1.085bn USD in cash and very little in stock. This brings debt levels to seriously tough territory, at a time when I at least believe we are close to the peak of the cycle. I thought I bought a low risk defensive company, it suddenly transformed into a equity position sitting on a huge debt rocket.

Deal details can be found here: Presentation

Harry’s is one of the competitors (Dollar Shave Club being the other) that I mentioned i my analysis of Edgewell when I invested. They are taking market-share from Edgewell, Gilette and BIC over the last years, particularly in USA. Harry’s top-line revenue is expected to be about 325m USD in 2019 (growing at 30% historically).

This article explains the Harry’s story quite well: https://www.inc.com/magazine/201605/bernhard-warner/harrys-razors-german-factory.html

They do own their factories and it has been an impressive growth case, so of course it isn’t a worthless investment, it’s just a combination of overpaying and overstretching Edgewell’s balance sheet.  I’m so disappointing in Edgewell throwing in the towel to create this themselves organically. By acquiring Harry’s it’s like admitting to not being able to compete with these guys. That speaks volumes to me about the management of Edgewell. At today’s close, I sell my full holding in Edgewell. Obviously I wish I never invested in the first place, given that I now take a -16% loss on the holding, but I never saw this coming. Investments really can surprise you in so many ways..

Other thoughts about my holdings and the market

Markets have come off a few percent from their highs and my portfolio has under-performed quite a lot the last few weeks. Some of that poor performance obviously is related to Edgewell, but there have been other holdings performing poorly too. Trade war is a big worry, especially for my portfolio that feels fairly exposed to this. I’m not very positive on us seeing a deal anytime soon, there is too much pride in China for that. At the same time I changed my mind about the so often cited coming China crash. I still think it will come, just not this year. My bets are on a pretty ugly 2020 in China, with serious deterioration in their economy in the later part of next year. These things are impossible to predict, but from everything I read and hear, it seems like we have already passed the peak. It will just take a while for slow moving things like the property market to start to wobble and finally fall.

My more defensive companies like Philip Morris, BATS, Swedish Match, Diageo, Dairy Farm, Gilead, Inditex and Essity has not really done that much lately. They have more or less performed in line with the market or slightly better. Below I instead focus on the more high risk holdings:

Tonly Electronics

One of my largest holdings, the quite illiquid company Tonly Electronics has traded down. This is quite warranted given the Trade War that to some extend will affect the company. I’m still hopeful that the company will be able to improve margins during this year, which really is the key thing to be watching in the next report for the first half year. The fairly good dividend yield, which was paid out yesterday, at about 5% yield is also reassuring. Tonly was an opportunistic investment where I see a very deep value case, but not necessarily something I want to hold for another 5 years, as long as some of that value is unlocked at some point.

Nagacorp

A holding that has been a long term holding, but where I numerous times discussed if it really should be. Nagacorp came through with how they plan to finance the third stage of their expansion in Cambodia. After reviewing the terms, I actually think they are quite fair this time. So I decided to increase my position size here and for now throw away my doubts and really firmly put this in my long term holding bucket. I increase my position size to a 7% holding, nearly doubling the position size, more or less back to where it was before I started to reducing my holding. Somewhat ironically the average selling price of my shares is exactly where the shares are trading at now, 8.96 HKD per share. But the situation was different then, I very much doubted that the majority owner would come through with a decent deal for everyone. Now that he did, it changes a lot for me. I many times stated I would be happy to have a very large holding here if I just could trust management. The trust gauge is not really at 100% yet, but it’s much higher than before and this money printing machine feels like a stable holding at 7% weight.

Coslight Technology

One of my original holdings since I started the blog. As explored the Electric Vehicle theme back 2015-2016 most signs pointed to that the real S-curve effect would start around 2020. I remember telling colleagues back in 2015, isn’t it cool that in just 5 years all big car companies most likely will be launching full EV line-ups. That more or less have come true, maybe with a 1 year delay until we really see them in every car dealership. Even if I got the EV theme correct, the company Coslight has not turned out as I planned when I invested more than 3 years ago. Now when EV sales numbers really are starting to climb, I don’t think its the right time to sell this company. I’m down significantly, on not really any news. The company still also has its game software development which is a profitable cash generating business. There is a lot debt here as well, which has been my main oversight when investing. So I might get wiped out from the debt, but somewhat stubbornly perhaps, I want to see this through.

Irisity

Finally my speculative holding Irisity has lately been on a bit of a roller coaster ride. But fundamentally on the company, I’m even more bullish than before. First quarter sales on Monthly Recurring Revenue was fairly solid showing continued strong growth (from low levels). The latest news about HikVision also being banned, just like Huawei, plays perfectly in the hands of companies like Irisity. The largest competitors in this space for sure are the Chinese, with companies like Sensetime having huge software development teams on video-surveillance. If western companies avoid or even are banned from using Chinese tech in this area, a lot of the competition in the market is removed. I’m considering to increase my holding further, but will stay put for now and hope I can increase and a better entry level.


That is all for now. I’m trying to find time to publish a real deep analysis of some new ideas I have had for some time now. But you will have to wait a little bit longer for that. Comments as always are appreciated!

12 thoughts on “Sell Edgewell, adding to Nagacorp and other thoughts

  1. Just realized how good an investment NAGACORP probably is. Myself was considering similar alternatives, seemingly heavier weights (Sands China or Galaxy Entertainment)… Asia/China tourism and entertainment seems a field with secular growth, hence worth investing.

    Additionally, I am currently trying to adress the TAA of my investment strategy: get away from Brexit exposure, just to get back into it when it materializes (only IF opportunities arise in great companies).

    Still, China does not seem to be in the best days. Even if Asian Tourism has definitely little/no-correlation with Brexit, I wonder if other topics would be best suited for my TAA. Ryman Healthcare in NewZealand? Schindler (or Kone) ? Ambu? Anything else?

    1. Yes its a money machine. please use the drop down menu and read all my post on Nagacorp, its a company i covered for quite some time

  2. Naga management are using the good old delay in dispatch again. Reminds me a lot of the convertible bonds thing that happened a few years ago. If you recall, after multiple delays management were able to deliver a scheme that was acceptable to minority shareholders and so marked the start of the rally over the past couple of years.

    I did have a feeling that this time around, they are trying to combine it with strong 1H results and maybe some additional positive news. On Weds they announced an expansion of the partnership with Suncity (who are relocating to more tables to the floor below the penthouse suite. We also had a press release from Sun City confirming 1H19 results have been better than 1H18. Let’s see.

    1. Yes a bit frustrating, Im also very excited to see the results now when the junket operators are moving in in full scale, the revenue levels we see now should be closer to the full potential of the expansion + bond issuances. Thanks for the color you are adding, on vacation now and not fully on top of things

        1. Very decent 1H results + circular for Naga 3 now out.

          Rev+22%, GGR + 38%, EBITDA + 41%, NP+36%

          Overall, I am beginning to think more and more that an ambitous Naga is needed to maximize the monolpoly years and stave off competition especially since clusters of casinos are emerging in cambodia and internationally.

          Verdict: hold

          Positives:
          Overall gross margin improvement – driven mainly due to higher volume and win rate on mass and EGM.
          Payout ratio of 60% maintained
          Looks like the ambitious plans for Naga3 will be passed (i had a look at the circular and there are not many surprises- one clarification that the size of overall development can be reduced.

          Neutral:
          Tax – additional payment of U$10m to authorities. Obviously the amount is negative overall, but when you are making as much profit as naga and contribute so much of GDP, i think it is fair. +4ppt difference YoY.

          Negatives
          VIP win rate declined, hypothesis competition among junkets is driving incentives…
          Staff costs grew 28% YoY, although in line with Rev and NP increases, the number of employees remained relatively flat

          1. Hmm also says Vladivostok is broadly in-line for completion in 2019. All other reports says 2020. So i suspect a typo

          2. Yeah must be a typo. I keep an eye on Summit Ascent, they seem to be able to grow the business at least, not very profitable so far, but also no disaster. Maybe the project could be positive for Nagacorp. I have been afraid the whole time that it will be a drag on share price

  3. I also have a lot of exposure to China. Curious where the trade war will go. I also think a deal is not imminent. The Chinese are smart, they will at least wait till after the presidential elections next year to see if they still have to deal with Trump. To hold out so long they will need to stimulate the economy more I guess. Long term I think China is still the market to make above average returns.

    Thanks for the update!

  4. Aaaah… Waiting so long for your update was well worth it. Unfortunately, many of us got a bit impacted (3-6% maybe?). That’s the price of playing the game (we were too used to smooth conditions!!!!).

    Some of your defensive stocks aka. ‘evil stocks’ are chez Fundsmith too. I also would claim other “comfort stocks” like fast food (McDon. & Co), snacks/chocolates (Pepsico, Nestle, Mondelez) etc are ‘half evil’ stocks. x-D

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