CV Capital – 30 September 18

To my fellow shareholders,

September has been a relatively quiet month as I have been travelling. However, we did make our biggest exit to date.

We sold our entire position in SVWPA (my original thesis here). SVWPA was a perpetual preference share issued by Seven Group Holdings (SGH) that was trading at $82 (below par value of $100) with a dividend yield of 8.3% (fully franked) when we acquired it (it was transferred from my personal holdings). My thesis for this investment is that I believed SGH could access cheaper debt compared to SVWPA and therefore it would be redeemed eventually. I wasn’t sure when this would happen but we were getting paid 8% while waiting, which in an interest rate environment of 2% was pretty attractive.

In September, SGH proposed to convert SVWPA into ordinary shares. This was subsequently approved by the SVWPA holders. We sold our stake on market prior to the conversion for $101.40 per share (above par value). I elected not to convert the SVWPA shares into equity because:

• SGH is a large conglomerate with many moving parts and I don’t fully understand all the businesses. In my opinion the understanding and knowledge needed for a debt investment is very different from what is required for an equity investment.
• The stock price has nearly doubled from a year ago and is trading at a price earnings ratio of nearly 19x. Not exactly cheap and I see better risk reward opportunities elsewhere.

Including dividends and the capital gain, our return on this investment was 25% (not compounded) over a 9 month holding period. I enjoyed this trade as we made money taking very little risk.

The portfolio fell 0.4% in September. The concentration of our portfolio mean that normal price fluctuations in our big positions can affect the overall portfolio. Cash received from the above sale and dividends received in September have pushed up our cash position to be circa 22% of the portfolio.

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 September 2018. Please note that STW went ex-dividend in late Sept with its price subsequently falling. I understand that the dividend will be paid in October. As I only account for dividends on a cash basis, September’s out-performance is slightly exaggerated.