Capral FY2017 results

See my original post on Capral here.

The floor didn’t cave in and the stock price went higher. When I wrote my original post, my opinion was that the market at that time was pricing in a bad result for FY2017. Turns out, the FY2017 result was actually pretty decent.

FY2017 results were pretty similar to FY2016’s results so there isn’t anything major to highlight. It was pretty much business as usual. Some notable developments include:

  • Normalised net profit (normalised for inventory revaluations) was down 12.7%, this was mainly due to aluminium metal price rising in 2017.  Half of the sales volume is derived from sales contracts with LME aluminium pricing and there is a time lag between the spot price is when the price is charge to the customer.  As LME metal prices rose throughout 2017, Capral’s were unable to fully pass on the metal cost to the customer and therefore margin fell. However, when LME metal price falls, the opposite will happen.

  • Housing starts are slowing with multi residential market falling by 9% and detached units falling by 2%. Capral’s main market is detached housing, so this slight fall has marginally affected sales volumes. The latest HIA reports forecast slowing housing starts for NSW and Victoria in FY2018/19 with the multi residential market falling significantly more than detached housing.
  • Capral sales to the industrial sector have offset the decline in the housing market. Strong demand for truck trailers (e.g. Maxitrans), marine (e.g. Austral) and other infrastructure projects have contributed to a 4.2% increase in revenue (excl scrap revenue) in FY2017.
  • Capral flagged higher capex at the AGM in March 2017 and capex increased by 41% to $5.8 million in FY2017. Capex is expected to further increase to $10 million in FY2018. Capral is introducing more automation in its factories which will further reduce operating costs.
  • New anti-dumping cases have been launched against two of China’s largest aluminium extrusion importers into Australia. I understand that the anti-dumping commission has used a more advantageous cost formula to calculate a “fair price” for the extrusion products which should increase the dumping duties.

At the time of writing, the share price is 17 cents which imply a market capitalisation of $80.7 million.

Based on the current update, I don’t see any reasons why the dividends cannot be sustained as the payout ratio is at 50% and the company has cash of $34 million. I continue to hold this stock.

Schaffer Corporation

Schaffer – cracker 1HY18 result

See my original post on SFC here.

Howe Leather

Howe Leather hit the ball out of the park with it’s 1HY18 result. The biggest surprise to me was the improvement in earnings margin. To illustrate how big an improvement this was, the table below compares my estimate of the 1HY18 EBIT margin to historical EBIT margins.

Management attributed the strong margins to an appreciating EUR:USD exchange rate as 60% of their variable cost are denominated in USD. Based on historical exchanges rates, I compared the change in average EUR:USD and the prevailing EBIT margins for various periods.

If EUR:USD continue at these levels till the end of the FY18, I won’t be surprised if 2HY18 EBIT margins exceed 20%. Current EUR:USD levels are still below average levels if compared to the past 10 years. EUR:USD maybe back on an uptrend since the decline in 2014.

Revenue for 1HY18 was $105 million and management announced that “steady state” volumes have been achieved. The company looks set to easily beat my previous revenue forecast of $180 million for the full year. Although management has indicated the expected revenue for Howe Leather in 2HY18 to be similar to 1HY18, I noticed that since 2015, there has been a seasonality factor which wasn’t previous present; see table below:

If this seasonality pattern continues in 2HY18, a combination of this seasonality factor with the current EUR:USD exchange rate would an even better result in 2HY18.

Building materials

In my opinion, management achieved a good price for the Limestone quarry assets and Urbanstone business; which were not making money. The selling price was approximately 1.5x of the net asset value.

Property division

Not much material change on this front except that the company has gotten state approval for rezoning of the Jandakot property. The next step is getting a local development plan. The Jandakot property development will be a few more years in the making.

SFC Capital

The company announced the formation of a new division to invest the cash generated from Howe Leather. I’ll wait till we get better clarity on how the capital is being invested before giving my opinion on this.

This has been a stellar report by SFC and the share price has acted accordingly by rising to a 12 year high. In many ways, you could have predicted the strong results due to:

  • Management guidance during the mid November AGM for further increase in volumes and profitability in 1HY18
  • The Chairman then proceeding to buying $1.37 million worth of shares two weeks after the AGM. An important lesson here!

Bottom line

I still think the company is undervalued. At Howe’s current volumes and profitability, the market capitalisation of $172 million still only mostly represents the value of Howe Leather. There is value upside from 1) revaluation of the Jandakot property to recognise conversion to industrial use, 2) future cyclical upturn in construction 3) development of the North Coogee and Jandakot sites.


CV Capital

CV Capital – 16 Feb 18 update

To my fellow shareholders,

Our one month milestone has passed. Although the market (ASX 200 index) fell by 3.5% from 6,121 (close at Friday, 2 Feb 2018) to 5,904 (close at Tuesday, 6 Feb 2018), individual stocks which I have been monitoring did not fall to levels which I felt gave us a big enough margin of safety. Nonetheless, I continue to look for investments “off the beaten track”. We have the advantage of having small sums of capital to invest and I want to fully exploit this advantage by investing in places where the market is less efficient. Every good angler knows that to catch fish, you have to fish where the fish are. The same applies in investing.

In general, I expect our portfolio to fare worse than the market during a bull market but fare much better than the market during a downturn. In other words, our portfolio should rise less than the market during a bull market and fall less than the market in a bearish market.

Our benchmark (STW) closed on 2 Feb 2018 at 57.1 and on 16 Feb 2018 at 55.25; representing a 3.2% fall for this period. Over the same period our portfolio (excluding cash) increased by 2.5% and including cash increased by 1.6%. I don’t expect our portfolio to have a negative correlation with the market, I do however expect it to fall less than the market during a downturn. At the moment, our portfolio has a thinly traded security which has contributed to this unexpected result. A few small parcels of this stock were traded on Friday which has pushed up its value.

The result of our portfolio since inception to 16 February is (0.03%). This compares with the benchmark’s return of (2.56%).


Another cuppa, moms and dads?

I was inspired to write this post after reading a recent article in the SMH by Noel Whittaker.

Cappuccino or latte (cafe latte) is about $3.50 in Sydney. Can you build a nest egg just by forgoing one cuppa a day? You bet.

As a parent with a young toddler, I believe starting an early savings plan for my child is an exceptional idea. With a long runway, not only can kids fully harness the power of compounding but the savings plan can teach them the benefits of delayed gratification/ savings.

The idea is to start a retirement plan the day your bundle of joy is born.

The investment horizon is 65 years (that’s sort of the average retirement age) and the fund would be invested in shares. Shares do not only produce very good long term returns (history has shown that these returns are anywhere between 6%-9%), they can also be bought with relatively small sums of money (as opposed to real estate or commodities), brokerage is cheap and they have zero maintenance cost.

A low cost ASX 200 ETF will be a reasonable way to accessing these returns.

If you start an investment plan which invests $3.50 a day (I would recommend investing into the market on an annual basis to avoid paying too much brokerage fees) for your child and assuming an annual compound return of 8%; the nominal value of the plan at the end of Year 65 would be $2.55 million (before brokerage fees and fund management costs). Assuming a 2% long run inflation rate, this would be equivalent to $704,909 in today’s dollars, not too shabby for just one latte a day huh.

I would argue that after seeing such wonderful results, your child would probably be eager to contribute much more than $3.50 a day when he/ she enters the workforce.

I’ve included the math in the table below. Like me, if you start the plan when your child is older than zero, then just subtract his/ her age from year 65 and take the value from that corresponding year.

The table below shows a combination of daily savings rate (from $1 to $10) and long run annual return (6% – 10%) and the resulting balance (nominal dollars) at the end of Year 65.


Read here for the Noel’s article. If you read his article, I suspect the difference between his figures and mine are due to different compounding frequencies.

This post gives me some motivation to update the ASX All Ordinaries long run return, originally posted here.