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CV Capital

CV Capital June 2021 quarterly update

To my fellow shareholders,

The ASX 200 has closed the chapter on the pandemic. At the end of June, the index closed at 7,313 points which is higher than its pre-pandemic level.  As I write this, Sydney, Brisbane and Perth are all in some form of lockdown due to outbreaks of Covid’s Delta variant. The difference in market reaction at the start of Covid lockdown last year and the current lockdown is stark notwithstanding the delta variant being twice as transmissible as the original Covid virus. Recently, a friend sent me a chart for the of 10 year Greek government bond yield which I found quite amusing. Back in 2012, markets were worried that Greece would default on its government debt which caused investors to dump Greek debt. Greek debt was then toxic, rating agencies downgraded them to junk and yields shot up to 35%. A default was avoided due to the EU and ECB stepping in to bail out Greece. Fast forward to the present and it appears that Greece is more indebted now than it was in 2012 as the government is running large fiscal deficits to support the economy through Covid (see here). Greece is more indebted than ever yet it’s 10 year government bond is trading at half the yield of Singapore, a creditor nation which is AAA rated. WTF?

Fund Activity

We bought more shares in Boustead Projects, a company I previously discussed here. We also increased our stake in Boustead Singapore, the parent company of Boustead Projects. These two positions combined currently make up 23% of the portfolio.

Boustead Singapore

Boustead Singapore’s history goes back 190 years as a British trading house operating in Singapore and Malaysia. In the 1970s, it separated from the Malaysian side of the business which had most of the tangible assets, leaving it with a smatter of different businesses. By 1996, when the current management took over, the company was a shadow of its former self and had a market capitalisation of only S$14 million.

Today, Boustead Singapore has 3 key divisions; (1) Boustead Projects (real estate) (2) engineering business and (3) geospatial division. They have recently acquired a health division and although the size of this division is currently not material, its growth prospects are reasonable. We made an investment in Boustead Singapore due to the following:

  1. Top class management
  2. Geospatial division is a gem of a business 
  3. On a sum-of-the-parts basis, it was very cheap

Top class management

Boustead Singapore is led by its major shareholder and CEO, Mr Wong Fong Fui. You can read about him here. His track record at Boustead Singapore is excellent, Boustead Singapore has paid a dividend every year since 2003 and compound shareholder returns since 1 January 2000 till today (21.5 years) is approximately 18% p.a. $10,000 invested in 2000 would have turned into roughly $368,000 today.

This performance is truly extraordinary and I would bet Mr. Wong would easily be in the top 0.1% of CEOs globally based on his track record for shareholder returns.

Geospatial division

The geospatial division is the licensed distributor of Esri products in the region (Australia, Singapore, Malaysia, Indonesia, and other smaller markets). Esri is the global leader in geospatial software. Think of it as googlemaps on steroids for commercial customers. Australia is by far the largest market in this division, accounting for nearly 75% of the division’s revenue, which provides us with a partial currency hedge. Traditionally, key customers are government organisations but over past 20 years, more and more corporate customers are using geospatial software. This has translated to strong and steady revenue and profit growth over the past 17 years, as shown in the chart below. FY2021 revenue and profit bump was due to governments using Esri solutions in their fight against the Covid-19 (click here to learn more).

Software businesses are fantastic because their revenues are usually very sticky. Once a client has all their data stored on particular software, it is usually troublesome and risky to migrate to another vendor. Although this division is an exclusive distributor of Esri’s products and doesn’t own the IP, I think the risk of termination is actually pretty low due to these two reasons:

  • The relationship between Boustead Singapore and Esri goes back some 3 to 4 decades and the founder of Esri owns close to 12% of the geospatial division.
  • Due to the nature of these solutions and especially with government customers, there is typically a long lead time involved for a sale and both consulting and training are important aspects of a sale. So there is symbiotic relationship between Esri and Boustead as Boustead Singapore has the relationships with government which generate sales and can provide consulting and training to the customer.   

I believe demand for geospatial technology will increase as we move deeper into the digital age with further development of virtual reality, autonomous driving, collection of geospatial data from internet of things for big data analysis, smart cities etc.

Besides the real estate division (Boustead Projects), the other big division in Boustead Singapore is the engineering division. The engineering division mainly designs and supplies waste heat recovery units, process control systems for downstream oil & gas companies. This business is global and cyclical as it depends on the capital expenditure cycle of their downstream oil & gas clients. The chart below highlights the cyclicality of its revenue and profits.

Sum-of-parts valuation

I calculate below the sum-of-parts intrinsic value for Boustead Singapore based on its 31 March 2021 financial results.

Our average purchase price was around A$0.78 cents which is significantly lower than my assessed intrinsic value (the A$ and S$ are nearly equal value). The paper gain on this investment is currently 49%.  

In relation to securities sales, I trimmed our positions in Schaffer Corporation and Baby Bunting. The share price for Schaffer was approaching my assessed intrinsic value so I decided to offload some our holdings. At inception Schaffer was the largest position and is currently close to 7% of the fund. Our returns from Schaffer are circa 94% so it has been quite a good ride so far.

I sold 20% of our position in Baby Bunting when the share price hit $6 (our average cost price was $1.45). I trimmed the position because I felt the market was pricing perfection in Baby Bunting future results and I wanted to raise some cash to be a bit prudent in current market conditions. Overall, Baby Bunting is still our joint largest position (the other being Boustead Singapore) in the fund.  

Fund performance

It’s the end of financial year and the accountants are currently preparing our financial statements and taxes. So the numbers presented below may change slightly, mainly due to tax. CV Capital return for FY2021 (1 July – 30 June) is 45.2% and since inception is 15.6% on an annual compounded basis.

Note 1: Total returns are calculated by including dividends, franking and other tax credits. The benchmark return calculation does not assume reinvestment.

Note 2: There was an adjustment to June 2020’s unit price for franking credits which caused an increase in return compared to prior reports
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The chart below shows our returns on $100,000 from inception to 30 June 2021 compared to our benchmark.

Our cash and cash equivalents position are circa 16.3% of the portfolio and the unit price as at 30 June 2021 is $1.65. I’ll update the table for the subscription and redemption prices once the accountant confirms our tax position. The share price can be broken down into the following:

Dividends

We will be issuing our inaugural dividend this year. The key reason for issuing a dividend is to pay out our franking credits to shareholders. The franking credits have no value in the fund and our shareholders may be able to benefit from it depending on your individual tax position. Given the aim of the fund is to compound capital for the longest period possible, by default I will be reinvesting the cash portion of the dividend into the fund. The unit price for dividend reinvestment will be our unit subscription price at 30 June 2021 as calculated by the accountant. If you do not wish to reinvest the cash portion of the dividend, please advise me accordingly.

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