Galileo Japan Trust

The fat lady has sung

Final distribution for GJT

GJT is a gift that keeps on giving. Earlier in the year, I got a nice surprise from GJT when they announced one last distribution which was to be paid in October. So yesterday I received the final 2 cent distribution from GJT. All in all, shareholders have received the following capital distributions:

The share price was $1.77 when I first blogged about it in July 2015 so the cash profit is $1.13 (64% return). Not bad for a two year-ish investment.


Credit and the economy

A few months ago I wrote this piece about the banking environment and ANZ where I touched on the high level of household debt in Australia. I believe that the high level of debt is a major risk to the economy so I wanted to get an idea of the total amount of Australia debt (owed by households, businesses and government). I stumbled onto a website called which had an interesting chart that I have replicated below.

According to this website, the total Australian debt currently is $6.47 trillion, this is equivalent to $258,000 owed by every man, child and dog in the country. I didn’t verify all the figures from their website but the Federal Government debt and the banking sector debt figures looks accurate. Another way to look at this debt is that it is 3.8x the GDP ($1.7 trillion) of the economy. GDP is akin to revenue so this means we have debt levels which are 3.8x revenue.

The debt chat provides a good segue into an excellent video on credit and debt by Ray Dalio (Bridgewater Capital) which I wanted to share. I think this video presentation gives a good mental model to think about the economy, credit and debt which provides some insight into how our huge debt will be ultimately resolved.

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.



Banking environment and ANZ

Since the banks have been in the news lately, I thought I do a brief write-up on the banking environment with a focus on ANZ. Reason being I recently sold my interest in ANZ after holding for more than 8 years and would like to document my decision making so that I can look back to see whether I made the right decision.

Australians have a love hate relationship with our banks. On one hand, we hate them because of their unscrupulous practices driven by a culture of greed. On the other hand, investors love the banks for the high dividends. In my view, the Big 4’s dividends have become sacrosanct in the eyes of the investing community and this has motivated management to do funny things to maintain the dividend. For example, in 2015 the Big 4 collectively raised $18 billion to meet regulatory requirements and they did it by issuing various new securities. In that same year, they collectively paid out $22 billion of dividends. I know they issued various securities (hybrids etc) to raise the capital but I don’t think their existing shareholders were better off from having to pay the capital raising fees and risk future dilution from the potential equity conversion feature of these new securities.

Household credit cycle and bank valuations
Since deregulation in 1990s, household debt in Australia has skyrocketed. As at Mar 2017, household debt in Australia is nearly $2.1 trillion (source: ABS) or $87,000 per person (based on population of 24.1 million). From Mar 1992 to Mar 2017 (25 years) household debt has grown by 10.1% p.a.

In my opinion, this growth household debt can be said to be a key driver in the growth of bank valuations over the last 25 years.

From 1992 to before the GFC, growth in bank valuations tracked household debt levels closely. This was link was broken during the GFC and post GFC, only CBA’s valuation has continued tracking household debt levels.

Record high household debt levels
Our household debt to income ratios are at historical highs. The key culprit for the explosive growth of household debt is of course house prices (mortgages make up more than 70% of household debt). This chart from the RBA shows both the explosive growth in house price to income and household debt to income ratios.

These ratios are high as household debt have been growing much faster than wages mainly due to mortgage debt. From 1997 to 2016, household debt has grown by 555% whereas wage levels have only grown by 101.3%.

So we know that the level of household indebtedness is at all time highs but how does Australia compare to other developed countries. OECD data for 2015 show that for the household debt to disposable income ratio, Australia is fourth on the list with only Denmark and Netherlands being materially higher.

Although Australia is fourth on the household debt to disposal income ratio list (we probably moved up a notch since 2015 as household debt has grown strongly in the last 2 years), on a household debt to GDP level, we come in second ahead of Denmark and Netherlands.

The trillion dollar question is whether the current debt level is sustainable. I don’t know, all I know if there are external shocks to the system, the outcome could get pretty ugly. Some analyst have linked the high levels of household debt to the current weak consumer spending as a sign of debt stress.

House price and mortage, positive feedback
A few years ago, UBS ranked Australians as the richest citizens in the world on a per capita basis. Other than a strong dollar at the time, the key reason can be seen in the chart below on housing values; this chart is interesting as it shows the growth of house prices in constant dollars.

The sharp rise in housing prices coincided with the growth in household debt. I would argue that there is positive feedback loop between mortgage levels and asset values. Although some argue that the high debt levels can be sustained because of higher assets prices, I think that is a flawed argument as asset prices rise and fall but debt value remains constant.

Will house prices fall? This question is above my pay grade. The standard answer is that prices are driven by demand and supply and we know that Australia is experiencing strong population growth. However, in NSW and to a lesser extent Victoria, there has been strong new housing supply responding to the price signal. In NSW, one of the reasons for the increasing house price is insufficient housing supply. From the chart below, you can see that new housing supply hit a low in the last quarter of 2009; since then however there has been a significant increase in new housing starts. In theory the new supply should have a dampening effect on house prices.

ANZ exposure to housing and credit impairment provisions
As at Sept 2016, ANZ’s housing related loans (mortgages) were $323.1 billion or 55% of the entire loan book.  Based on APRA’s banking statistics, ANZ has about 19% share of the total housing loans of the Big 4.

ANZ’s credit impairment charge for FY2016 was $1.9 billion or 0.33% of loans totalling $580 billion (its total provision for loan loss is $4.2 billion). This is more or less in line with its median historical loss rates (below). However, its historical loss rate experience was based in an environment where household debt levels were much lower.

To put it in perspective, a 2% credit impairment charge ($11.6 billion loss) would wipe out all of the provision and more than 70% of FY16 profit before tax of $10.1 billion. I selected 2% as it went up to that level in 1992.

Maybe I’m old school but I would preferred that the ratio of credit impairment charge to loan book creep upwards as the loan book expanded. In my view, it’s way better than provisioning a low amount and then taking it all in one hit when a downturn comes along. And if the provision was overly conservative, one can always reverse it later down the track.

ANZ’s market valuation
ANZ’s market capitalisation at the time of writing is circa $95 billion. Its valuation ratios are as follows:

On face value, these valuation ratios don’t look stretched by any measure and are in-line with historical averages. However, I would argue that the market is not pricing in the heightened level of debt risk in the economy. The other head winds are lower growth environment given the weaker ability of households to take on more debt plus regulators leaning on the banks with additional capital requirements.

Why is the market ignoring these risks? I don’t have a firm answer but I suspect its got something to do with the low interest rate environment and investors reaching for the dividend yield.

For this reason, I’ve sold all my ANZ shares.

I’m not predicting a crash or anything like that, all I’m saying is that I think there are better risk adjusted returns to be made elsewhere.

Shelby Davis

Epitome of a value investor

I recently came across a relatively unknown value investor by the name of Shelby Davis. Shelby Davis started investing at 37 in 1947 with $50,000 and by the time of his death in 1994 at age 85 had amassed a wealth of $900 million. He had a narrow focus and specialised primarily in insurance companies and used leverage to buy into positions. His compound annual return over 48 years of investing was 23%!

The main reason I posted this is to highlight a story told by his grandson which I think is the epitome of a value investor (I also found it hilarious). While taking a walk in Manhattan with his grandfather, Chris asked his grandfather to buy him a $1 hotdog and Shelby’s response was:

“Do you realise if you invest that dollar wisely it will double every five years? By the time you reach my age, in 50 years, your dollar will be worth $1,024. Are you so hungry you need to eat a $1,000 hot dog?”

Delayed gratification and frugality is a virtue shared by all the great value investors that I have come across.

If you are interested in his story, there is a book called “The Davis Dynasty” by John Rothchild.


Central banks

Central Banks

I wanted to share a recent film documentary (link below) which I found intriguing. This film documentary is an adaptation of Richard Werner’s book “Princes of Yen”, a bestseller in Japan in 2001. In his book, Richard Werner makes the assertion that the Bank of Japan (BOJ) purposely created both the Japanese asset bubble in the 80s and prolonged the subseqent recession in the 90s in order to achieve their agenda for a economic restructuring of the Japanese economy; which the BOJ believed would put Japan on a more sustainable growth footing.

For me, not only was this story captivating but it highlighted the immense power of the central bank. By virtue of being able to control the supply of money, central banks have the power to move markets which can lead to societal change. Other point of interest for me was that the economic structure that drove the high growth rates experience in Japan after the war was actually a government guided market system which did not place shareholder’s interest first. In such a system, it would be foolish to assume that the same principles for successful investing in a free market would also work here.

Although I don’t invest on the back of interest rate predictions, I still believe that a broad understanding of monetary policy (and credit cycles) is helpful in understanding the overall market valuation levels; it is a big piece in the puzzle.


So you want to beat the index

This is a follow up to the Mr. Market and Charles Munger posts.

Long term outperformance against the index is rare. Based on this smh report, it says that 2/3 of all active Australian fund managers fail to outperform their benchmarks over a 3 year and 5 year time horizon. Another thing that is also rarely mentioned in the industry is risk adjusted returns. Returns alone do not tell the full picture. It is also important to understand how much risk was taken to make those returns. Even when risk adjusted returns are mentioned, it is usually based on statistical measures of risk such as volatility (i.e. sharp ratios). Volatility as a measure of risk is a flawed concept but that story is for another time.

I believe risk can only be qualitatively assessed by understanding 1) whether there was an adequate margin of safety in the price paid for the shares, 2) whether the company’s future can be forecast with a reasonable degree of confidence.

With the above in mind, I made an investment eight years ago which has beaten the index (ASX 200 accumulation index) by more than 4% p.a. I didn’t realise it had beaten the index by more than 56% until I actually sat down and did the calculations, so I thought I better write about it to remind myself that it is possible to:

  1. Beat the index with very low risk. Risk was very low given the entry price and the quality of the business.
  2. Beat the index with only one trade. I didn’t trade in and out of positions over the holding period, it has been a simple buy and hold strategy.
  3. Beat the index without diversifying the portfolio; you can do it easily with one single stock. For this trade, I feel that diversification would not have lowered the risks but quite likely lowered the returns.

I bought the ASX after it fell from $60 to $30 in October 2008 during the GFC. This chart shows the total returns for the ASX (11.4% compounded p.a.) as compared to the ASX 200 accumulation index (7.3% compounded p.a.) over this period.

I think this was a safe and easy trade. If you took a long term view, you could quite quickly reach the conclusion that a bet on the ASX would be a rather safe bet even in the height of the GFC. Firstly, the ASX has a near monopoly on stock market trading which is protected by regulation and secondly, capital raising and trading activities will continue to grow as a result of the growing superannuation asset class in Australia which will continue to drive earnings higher.

So although far from the highest return trade you could have done during the GFC, from a risk adjusted return perspective, I think this trade ranks pretty high (better than betting on the banks at that time in my opinion). But more importantly, you could have the confidence to bet the farm on something like this and if you did, you’d increased your wealth by 150% with taking very little actual risk.

Any feedback or comment much appreciated.