Schaffer Corporation

Schaffer FY2017 – Howe firing …

For my original post on Schaffer Corporation, see here.

I wanted to wait until the annual report was out before commenting on the FY2017 results. The segment information contains a bit more granular detail than compared to the summary financial report. Anyway, here is my take on the results for the various divisions:

Howe Leather

The results were very strong, revenue growth and margins were ahead of my expectations.  Revenue grew by 10.2% yoy and EBIT margin improved from 3.1% (FY2016) to 9.4% (FY2017). This EBIT margin is based on an EBIT of $16 million (before deducting employee participation unit costs). As indicated in the results presentations, drivers for the margin improvement include:

  • Lower processing cost in Slovakia compared to Melbourne.
  • Improved yields due to more familiarity with the programs
  • Reduction in hide cost.
  • Reduced freight cost due to shipping direct from South America to Slovakia. Prior to this, the hides were shipping to Melbourne first to be processed and then on shipped to Slovakia to be cut.

Other more subtle improvement in the business is customer diversification. Howe has reduced their dependence on its largest customer:

Looking forward, I think revenue and margin will continue to improve. I’ll set myself up for regret by making a forecast; based on 2HY17 revenue, it suggest that Howe’s revenue (assuming exchange rate stay the same) can exceed $180 million in FY2018.

Yields should also improve as new programs commenced in FY2017 and it takes time and experience to achieve the efficiencies. Therefore, it is likely that the company can further improve on its EBIT margin.

Longer term, I think the investment made in Europe is important as it shows both commitment and brings Howe closer to its key customers.

Well done Howe and in my opinion, management fully deserves their employee participation units.

Building Materials

This division continues to be a laggard and has been for the last few years. This has not been unexpected with the low level of construction activity in WA. The mining sector appears to have bottomed out but I think we’re still some years away from seeing improvements in WA’s construction sector.

Property division

The most interesting assets here are 10 Bennett Avenue and Lot 702 & 703 Jandakot Road. Landcorp has already sold lots in the Shoreline development and from what I can see from googlemaps, not only have the infrastructure been completed for the first phase, the first residential buildings have being constructed. The beauty about being able to wait till all the infrastructure and residential homes are constructed is that this will greatly de-risk the development and increase its value.

The company is seeking to rezone the Jandakot road property from rural to industrial. I think their chances with the council are good given their neighbours, Jandakot City is a large industrial development. The value from the potential rezoning is significant, after putting in the necessary infrastructure (access, power, sewerage, etc) land values could potentially increase from the current value of $17.50 per sqm to $200 per sqm.

Although the share price has increased since my last post, I still think the market is undervaluing the company and there is more upside to come. I continue to hold.


Charles Munger

More on Charlie

I wanted to follow up on the “Art of picking stock picking by Charles Munger” article I wrote with two examples of stock trades that epitomise Charlie’s stock picking methods.

Charlie Munger believes that you’ll only find a few great opportunities in life so when you come across them you have to act aggressively. Therefore, the “secret” about his philosophy is to keep working hard, be very patient and when an opportunity presents itself, forget about diversification, bet big. With this approach. Charlie says you don’t need more than a few great opportunities in your lifetime to build wealth.

I recently read the transcripts of the Daily Journal AGM which he chairs every year and I thought I share some actual real life examples of Charlie’s trades which highlight his amplitude for patience.

Example 1

Charlie Munger is the Chairman of the Daily Journal Corporation, a publishing company which publishes newspapers and websites covering legal affairs in America. From mid 1990s to 2008, it had always invested its surplus cash in US Treasury bills. The US Treasury position grew from $3 million in 1995 to $19 million in 2008; it’s investment policy for 13 years was to purely invest in risk free securities.

Then the global financial crisis hit in 2009 and Charlie ploughed $15.5 million out of the $19 million it had to invest into equities (more than 80% of its portfolio). What did the Daily Journal buy? It bought a grand total of four stocks, with Wells Fargo making up eighty percent of the portfolio. Yes, you heard right eighty percent! So much for diversification. The other stocks which Charlie bought were Bank of America, Posco and US Bancorp.

What’s the value of the portfolio today?

Based on the company’s filings as at June 2017, it reported its common stock value to be $202.1 million. This is a 13x return or 38% compound return on the original investment in 8 years.

Example 2

This was told by Charlie at the 2017 Daily Journal AGM. Charlie had been reading Barron’s (an American weekly newspaper that covers US financial information and has stock recommendations etc) for 50 years and over the course of this time (about 2,600 issues read) he bought one stock idea recommended by Barron’s.

He bought an auto part manufacturer for $1 and sold it for $15 a few years later and made $80 million.  He then gave the $80 million to Li Lu (Himalaya Capital) which then turned it into $400 million. Two decisions turned $5.3 million into $400 million. I don’t know this for sure but I suspect the timespan would be in the vicinity of 20 years.

I think these two trades are amazing examples of the Munger investing philosophy which has worked wonders for him.

“The big money is not in the buying and selling …. but in the waiting” – Charlie Munger



NZME – Disappointing HY17 result

Disappointing results

The results release by NZME for the HY2017 was rather disappointing. A combination of the overall weak advertising market and poor execution were factors that contributed to this result. There were some positive things that came out of the presentation and earnings call. I’ll summarise the key pluses and minuses below:


  • Digital revenue grew by 20% pcp. This is evidence that the new NZ Herald layout from using the Washington Post software has been well received by online readers.
  • New investments in Grabone, Driven, Restauranthub and Ratebroker are forecast to increase ecommerce revenue moving forward. I see these websites as businesses that can easily benefit from NZME’s reach in New Zealand.
  • Radio surveys for the 18-54 age bracket were up in the first two surveys in 2017.
  • Overheads were down 4% pcp.


  • The biggest disappointment was drop in revenue and earnings for the radio division. This was disappointing given radio was down last year. Traditionally, NZME agency sales were made via TRB, a joint venture with Mediaworks. Mediaworks withdrew from this JV in 1HY2016 disrupting agency revenue and NZME subsequently developed an internal agency sales team in FY2016. On the earnings call, management said that radio sales have been extended to 100% of their sales force. This initiative coupled with the improvements in ratings should hopefully stem the fall in revenue.
  • E-commerce (Grabone) revenue continued to fall.

I didn’t see the fall in print revenue as a negative as this was expected by the market and it actually did a lot better than the overall market. NZME reported that their revenue was down 5% but the market was down by 11%. On the earnings call, management said that their circulation revenue was made up of 70% home delivery and 30% retail and they had different price packages for various subscribers.  One positive about having a subscriber base is that you can price discriminate the customers and offer a discount to hang on to customers who call-in to terminate the subscription.

Although results were disappointing, I’m still excited about NZME’s audience reach and the potential to monetize this through a paywall and by supporting adjacent websites like Driven, Ratebroker and Restauranthub.

Regional Express

REX – Sweet sweet dividend

The long wait for this dividend will make it extra sweet for long suffering shareholders. I think the real positive from this dividend is the signal that it sends. Given management’s conservative nature and for them to pay out nearly 87% of FY2017 net profit after tax as dividend (10 cents), they must believe that the fall in passenger numbers has bottomed out.

I also feel like a genius as I have previously forecast FY17 net profit to be between $8-$12 million. Just thought I mention it in case anyone missed it 🙂

Key takeaways

So the key takeaways for me are:

  • The increase in passengers pcp from March 2017 onwards. The WA routes started in Feb 2016 so a comparison from March onwards shows the increase in passengers with the same network. With the exception of April, the network has experience passenger growth. The surplus in March and deficit in April are linked to Easter falling in March last year and falling in April this year. So net, passenger are up 6% which is consistent with May to June figures. 
  • Load factor has increased from 56% (FY2016) to 58.8% (FY2017). This is a good sign as it corroborates with the above recovery.
  • Wage cost increased by 2.5% pcp. I was very pleased to see Rex keep this cost under control. I have been arguing that rising cost is forcing the company to raise ticket price which further drives customers away so this marginal increase in wage cost is very pleasing.
  • The other positives are of course the Pel-Air winning FIFO contracts with Iluka Resource and Cobham.  So I expect the charter revenue of $22.9 million to increase in FY18.

Investors cheered the dividend and pushed the share price up to a 5 year high. The last time the share price was at this level was in October 2012. The company is currently trading at:

On a price earnings basis, it doesn’t look very cheap. However, it still appears cheap based on the following (also see chart below):

  1. Profit before tax (PBT) was significantly higher back in FY2006 to FY2011. FY2012 was an unexceptional year for charter revenue which masked the poor results from RPT operations.
  2. Load factors are still depressed compared to FY2006 to FY2011 (back then above 60%).
  3. Although passenger numbers appear to be recovering, in reality Rex today has a larger route network than it had 10 years ago; meaning the passengers on the “traditional” network (NSW, VIC and SA) have still not recovered to previous levels.

Based on the March to July passenger data shown above, it appears that passenger numbers on the “traditional” network is starting to recover. This recovery should increase the load factor and given the fixed cost nature of the business, any increase in load factor falls directly to the bottom line.

Therefore, I think there is a good possibility of Rex getting back to previous profitability levels.