Breweries – Kopparberg & Olvi + Nagacorp conclusions

More brewery – Kopparberg

My final addition of brewery companies, with a 4% weight, is the Swedish cider company, Kopparberg. The company has been selling sweet fruit cider (and beer) for many years in Sweden and later expanded to the UK. Kopparberg was the first entrant offering a sweet fruit cider in UK, which was more or less unknown to the British.  Kopparberg have managed to break into this market and create its own niche and it has been a roaring success in UK.  Kopparberg has some 60% of its world-wide cider sales towards UK today. Naturally as a Swedish producer the GBPSEK rate is important to the margins of the business and Brexit was not helpful in this regard. Given the companies success in this new niche of very sweet cider, there has of course also been competition that has stepped in. For example Carlsberg Somersby which has also seen extremely strong growth.  With results at current level, the stock is fairly valued and downside is a more general multiple contraction in (brewery) stocks. So I keep this at a lower weight for now, waiting for a more clear confirmation of a turn-around and/or further sell-off, where I would be inclined to add to my position. Nevertheless, I’m impressed by the execution of the Kopparberg management and their track-record. I like that the CEO and founder holds a large chunk of shares. My main thesis for investing at this point, is a normalization of the margins for the UK market, which gives the stock some upside and also that I believe the product will be successful in other markets/countries (with USA being the number one target).

Adding to Olvi – another 2%

I currently hold about a 4% position in both Olvi and Diageo. Diageo is one of the worlds largest brewery groups with a tilt more towards spirits, like whiskey, I’m fairly happy with my holding right now and a larger sell-off would be needed for me to consider adding to my position. Olvi is mainly a beer brewery focusing on Finland, the three Baltic countries and Belarus. Whereas both stocks have traded down slightly since I bought I have been looking more closely at Olvi. The company is in a great position macro wise. The Baltic region is growing very nicely in terms of GDP and economic outlook. Olvi has a very large market share in these markets and just growing at the speed of the local economies will give a significant revenue boost. I believe Olvi is one of the cheaper brewery stocks out there at the same time as they are exposed to some of the countries with very good macro backdrop. I choose to add another 2% to my position here and very much look forward to an interesting report announcement tomorrow.

Nagacorp

Finally Nagacorp, which has made a tremendous turnaround since June, when I decided to add to my position (Double up Nagacorp). The sell-off at the time, was more related to the behavior of the majority holder, rather than any company fundamentals. At that time I added 6300 shares at 3.61 HKD, today I slice my holding with 4300 shares at 7.49 HKD, more than a 100% gain in 9 months, very decent indeed. The explanation is two-fold, the majority holder was not allowed by the HK regulator to cheat the minority holders, this gave a quick bounce up when that issue was resolved. The second reason is that the expansion of the Casino has been a real success. And the latest figures that came out, shows an almost unbelievable growth of VIP rollings. So what I have been saying about the revenue growth all along came true and then some. Thanks to (un-audited) voluntary announcement of the 9/3 month results (which only gives some basic information), we can even see how much VIP rolling grew the last 3 months (in million USD).

vip_rolling_naga_qonq

How this translates into revenue is through the win-rate, which is much lower for VIP gaming than Mass market and Electronic Gaming Machines. A picture from the latest results makes it more clear:

rollings_to_revenue_naga

As you can see, the VIP rollings is presented as an 142% increase YoY, but this increase is mostly driven by the Q4 on Q3 increase of 212%, which as previously stated, is almost unbelievable. Looking at seasonal figures, Q4 is not even a strong quarter, Chinese New Year and so on makes Q1 and Q2 more profitable.

VIP increase effect

So what can we expect from Q1 2018? Well it’s already off the charts, but say the yearly VIP rolling 2018 comes in 4x the Q4 2017 rollings, we have full year rollings at 40,500 million USD. If we take the average win-rate of 2017/2016, we get Revenue of 40500*2.8% = 1134 million USD. The Gross profit margin is lower for the VIP segment, again at an average margin rate of 28.5% this gives us Gross Profit of 323m USD. With other segments at constant revenue and cost this boost Profit before tax with 65% from 263 to 433m USD. Converted into EPS it goes from 0.47 HKD to 0.77 HKD per share, meaning that Nagacorp is trading at a Forward P/E of about 10 currently. With 60% dividend payout ratio policy it get’s pretty interesting.

Why I am reducing my holding?

When things looks so damn good, why am I then cutting my holding? Well reality is not this easy to keep everything constant and just adding VIP rolling growth, first of all, I believe costs will go up as well. Getting this kind of growth in VIP rollings must come a price. The price is paying the junkets for bringing in all the high-rollers. On the flip-side, the highly profitable Mass Market segments is also growing nicely. Another concern is tax, which is again bound to go up (its a yearly negotiation between the Cambodian government and Nagacorp).

mass_rolling_naga_qonq

But really what puts me off is the majority holder and his behavior throughout the years. How he tried to cheat everyone through the double dilution of his convertible bonds price adjustment was very distasteful. Another example, every year he awards himself a massive bonus. Why this bonus even exists is very unclear, he then “kindly” defers it, meaning it won’t affect that years results. It’s a pretty chunky sum of money “Dr Chen will be entitled to a performance bonus of US$11,765,321 (the “2017 Bonus Entitlement”) for the financial year ended 31 December 2017. “. So I keep saying in my comments about Nagacorp, this is money printing machine in a region with tremendous tourist growth. With a better majority owner I would be happy to hold 12-14% of my portfolio long-term in this stock, but now it’s a love/hate relationship, where you are just waiting for the next betrayal. So for that reason more than anything else I hereby take some profit, although I easily could see this stock at 10 HKD before year end.

 

 

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Portfolio Changes – larger reshuffle – Part 1

Thoughts on investment philosophy

I have recently had quite a lot of time to contemplate my investment style and philosophy. I think I reached some conclusions. After all that is what this blog is about for me, learning from and seeing my mistakes more clearly and then adjusting accordingly.

Before I started this blog I have during periods followed the market and specific stocks very closely. I have used technicals and fundamentals to swing-trading holdings (3-12 month horizon) with fairly decent results. Meaning that I see the stock as fairly/undervalued with a chart that looks good for a move up. I then later sell when the stock is more close to fully valued. To some degree I have implemented such a strategy also for my blog (for example Avanza, Ericsson, YY, Shanghai Fosun etc). But this is very different from believing in a company truly long-term, even if the stock gets ahead of itself valuation wise. Given that I do have a full time job and this is a hobby, the time I can spend on updating myself on holdings vary widely. From another perspective baby-sitting such swing trade positions takes away valuable time from researching new interesting companies and sectors/niches.

All in all the conclusion for my future investment strategy is stop looking at these companies that trade cheaply currently and then start to swing them in/out of the portfolio as they get cheap/expensive. If all stocks in the world would be drifting sideways forever with some volatility this might be a successful strategy, but that’s not a very likely scenario. Instead I will focus on what makes more sense, finding great companies. Preferably currently cheap, but anyhow companies that in 5 years time in my view has a high probability of trading significantly higher. I should also at all times be comfortable turning to stop following my holdings and be happy to own them for the coming 5 years. Currently I do not hold such a portfolio and I intend to spend the coming months to do just that. This means that I am tilting my portfolio more towards Quality, which in general is expensive now. But I intend to find my own type of Quality, not necessarily Nestle and the likes (nothing wrong with Nestle though)

In terms of Portfolio management I will still allow myself to trim holdings that grow very large or add in holdings that have under-performed but I still believe in. And of course I will still make mistakes and mis-judge companies, meaning they will not sit in the portfolio for 5+ years, but till be sold when my view has changed. But preferably the investments should be such so I won’t be easily swayed in my judgement of the future prospects of the company. For example an oil company with great management and execution might be dead in the water if oil production cost is around US$60/barrel and oil drop to US$40, so before I have a very clear and sure long-term view on the oil price, it would be a silly investment to add to this portfolio. I take this as an example because currently outside the blog holdings I do have a swing-trade position in a what I think is a very decent oil company (Tethys Oil).

Reshuffle of Portfolio – Part 1

Not only have i contemplated my strategy, but another reason why I have written so little lately is that I have been very busy re-searching a larger number of companies. Most of these investment ideas will materialize in new holdings over the coming months. It probably won’t be perfect, since I change so much at the same time. Minor adjustment might come later. But all in all it’s holdings more in line with a more long-term investment strategy. The holdings are in general also more defensive than what I currently hold. This I also very much what I seek in such a late stage bull-market. I’m not sure if I should call it new Themes, but I chose to allocate significant capital to two industries below, 1. Funeral Services and 2. Alcohol and Beverage related companies. In due course I will try to expand on my thoughts behind these investments.

Dignity – Add at 5% weight

Funeral service business in the UK. I had my eyes on for some years now and lately a very good buying opportunity arose. I heard about it for the first time from a long only manager and have since understood what a wonderful business segment funeral service is. Firstly from a margin perspective. but also how fragmented the business is and the possibilities for a cash flow generating company to buy these small companies at attractive multiples.

Fu Shou Yuan – Add at 4% weight

Basically the same story as Dignity above, funeral services, this time in China. This stock I’m perhaps not buying at the right moment short term, as it has traded up and is actually very expensive at the moment, but from a long term perspective I’m very comfortable holding this.

Diageo – Add at 4% weight

Has a portfolio of high quality liquor brands. Also has a minority holding in Moet Hennessy which I find interesting. Overall the thesis here is that they will continue to leverage their strong brands and their tremendous track-record of shareholder returns. For example the portfolio of whiskey brands probably is 50% of all top quality brands available.

Olvi – Add at 4% weight

I have searched for quite some time for a way invest in line with my positive view on the three small Baltic countries, I think this might be one good way. I also have fairly bullish view on Finland, finally coming out of some economically challenging years. This is a family owned (through voting strong shares) beer and beverage company with exposure to the above mentioned countries. They have also shown a tremendous track-record of execution. Overall, smaller listed beer and beverages companies start to be as common as unicorns. I will expand on this later, but not many are listed anymore. As uncommon they are, its seems to be a fantastic business to be in. Since almost all companies shows great returns (until they are bought out) with very strong cash flows. Previously I held Royal Unibrew for mostly the same reasons (I should have kept it), but overall I find Olvi more attractive, with a stronger track-record.

Tokmanni – Sell Full Holding

This was also a play on Finlands recovery and that the company felt cheap with a good dividend. But they continue to under-deliver and the last straw was the mess with the new CEO not being allowed to start due to a non-compete clause. Felt very unprofessional. Also nothing I’m very confident to hold in 5+ years, with what currently goes on in Retail. I’m happy coming out of this one with a small profit.

Microsoft – Sell Full Holding

A great company of course, but current Tech-hype is just too much for me. If/when Tech companies re-price downwards I will definitely be looking at adding 1-2 Tech holdings again. I’m happy for the returns I got and unfortunately I cut my position in half way too early, the part I kept returned almost 80%.

Catena Media – Sell Full Holding

This became the latest of my “swing trades”, with over 40% return in less than 4 months one of the better ones as well. I was a bit torn about this holding, since I do see some good long-term prospects. The online gaming business will grow, and these sites really need channels which supply them with customers. But it’s a way to unstable business case for me to comfortably hold for many years. It is definitely in the “baby-sitting” category, where I felt a need to keep myself updated on a frequent basis. So with a bit of a heavy heart I sell this holding. This could for sure keep performing very well for a long time, but I categorize it in the “too difficult” pile.

 

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