CV Capital – 30 November 2018

To my fellow shareholders,

Maintaining the trend from October, the ASX 200 index was down approximately 3% in November, without taking into consideration dividends. US China trade war and rising interest rates in the US have all weighted on the market. Unless there is a major rally in December, it is increasing looking like calender 2018 will be a negative year for stocks.

As discussed last month, I accepted Besix’s offer for our Watpac shares. I still think Besix’s offer undervalued Watpac but between the choice of selling now and locking in a gain of 29% or  holding onto the shares and becoming a minority shareholder in a situation where Besix will have voting power greater than 75%; I thought it was a no brainer.

We recently acquired a small interest in a mining company. This is unusual territory for me as I tend to stay away from the resource sector given the risks. Earnings for mining companies tend to be volatile, a key reason being the inability to determine prices for their products (i.e. price takers). The reason why I invested in this junior miner was that I thought it was very cheap and had huge potential upside. This company had purchased a brownfield mine from the liquidators of the previous mine owner for $40 million. The previous mine owners spent $500 million on plant & equipment and mine development. For a junior miner which has $200-$300 million worth of plant & equipment (bulk of capital expenditure already spent for production ramp up), very experienced management, currently breaking-even with production ramping up and quarterly sales of $30 million, I thought it was cheap when it was trading at a market capitalisation of $70 million. This investment is not without risk but I believe the upside potential is huge.

The portfolio had it worst month to date, falling by 3.9%. One of the stocks which dragged down our performance is Donaco. This is a gaming company with casinos in Vietnam and Cambodia. Donaco is in dispute with the former owners of their Star Vegas casino in Cambodia and this dispute is getting uglier and looking like it will get dragged out with a small risk of Donaco losing the casino. A poor trading update for the first quarter of FY2019 saw a huge sell-off, it is down 52% in November. Arbitration between the parties will take place in July and will confirm whether this investment has been a mistake but it is looking like it at this stage. The only silver lining was that it was a smallish investment.

Although I have been reporting CV Capital’s performance on a month end basis, I’ve done it mainly for the purposes of transparency. CV Capital’s objective is to beat the benchmark over the long term (3-5 years) and therefore I do not place too much emphasis on the current performance given the short history.

The table below shows our performance (before taxes) from inception to 30 November 2018. Our cash position is circa 17% of the portfolio.

 15 Jan 1830 Nov 18Gross dividends (cumulative)Return (incl. franking)
CV Capital1.001.134nil13.4%
Benchmark STW56.753.232.67(1.4%)

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