Evaluating spinoff TNT Express

TNT Express (TNTE.Netherlands)  (TNTEY.PinkSheets)

Price: €6.92 (6/28/2011)

TNT Express is a recent spinoff from the former TNT (now called PostNL) a private mail operator in the Netherlands.  In this post I'll give a small background on the company, show a comparison with competitors, and look at catalysts for improvement.

Business Background

The Netherlands privatized mail delivery and TNT was one of the companies that filled the void.  Private mail can be thought of as two separate functions, the actual door to door mail delivery function, and parcel/freight delivery.  TNT handled both functions up to May 30th of this year, at which point it demerged the post division from the express division.

TNT Express is a worldwide parcel and freight delivery company.  The company considers themselves an integrator which the following picture depicts.  Other integrators are DHL, Fedex and UPS.

TNT Express delivers packages by truck and air.  I'm unclear if they use rail, but they might use it as UPS does which is load the trailers onto rail cars for long haul transit.

The company operates in three main segments, Europe & MEA (Middle East, Africa), Asia-Pacific, and Americas.  The company is well established in Europe & MEA, expanding in Asia, and has a growing presence in South America.  It appears that they will ship a product to North America but they don't have any direct presence.  

The revenue and EBIT breakdown by region are as follows:

As noted in the picture the Americas division is contributing a loss which is due to some execution failures in Brazil.  One catalyst which will be talked about below is a turnaround in this division.

Valuation Comparison

I've had TNT Express in my "to research" hopper for a few months with my main struggle being how to approach the valuation.  Express is a much more complex company than I usually evaluate and the company is in a market I don't know much about.  I got the idea to do a competitive analysis from this blog post.  In that post the author mimics a Benjamin Graham worksheet, I took a few modern liberties in creating my spreadsheet to show fields Ben Graham might not have had access to.

For the purposes of the spreadsheet I compared TNT Express, DHL, Fedex and UPS.  All three competitors were identified by Express as competitors who have substantially similar business models.  In addition while digging through DHL's annual report I was able to pull out a few income figures for their DHL Express division which I think are useful for comparison purposes.  I should also note, Express and DHL figures are in Euro, Fedex and UPS in dollars.  I considered converting all to Euro but deemed it unnecessary, the margin and ratio figures are currency independent and the most important.

Here is the spreadsheet:

The spreadsheet is rich with data which an investor might want to use as a starting point in looking at Express, I'm not going to go over each field but wanted to highlight a few that were important.
  • The first item is that I added in pension liabilities and operating leases to get a complete liability picture.  This is important because all of the companies except for UPS operate with a high level of operating leases.
  • Express is clearly the smallest company of the four.
  • The P/E is quite high on a TTM basis, while the company is trading almost at P/B.
  • Express has the lowest margins of all four.
  • P/FCF is a bit lower than P/E at 38.27
  • DHL's Express division is responsible for most of the profitability of DHL as a whole.  This is the reverse of PostNL and TNT Express.  Pre-demerger PostNL contributed a larger portion of profits but was in decline while TNT Express contributed a smaller amount towards earnings but growing at a faster rate.
  • UPS has an eye popping Earnings/BV ratio because they include their debt on the balance sheet.  Adjusting the other companies' BV to include operating leases would increase their Earnings/BV ratios as well.

Outlook and Catalysts

Looking at the raw stats on TNT Express doesn't exactly throw off a buy vibe to me.  Many times a spinoff creates an opportunity where the business spun off is clearly undervalued at the onset.  Other times the spinoff could hold potential if the new management is able to unlock hidden value, I believe this is the case with TNT Express.

The first catalyst is a turnaround in the Brazil operations.  The CEO has stated this is the highest priority and expects to be breakeven in 2012, and profitable in 2013.  If this happens remains to be seen, but they appear very hopeful and motivated.  I think management has the greatest incentive to turn things around now that they're standalone.  While part of PostNL the losses from Brazil weren't as large compared to the profits from the company in general, whereas now as a standalone company Brazil is having a much bigger negative influence on the accounts.

The second catalyst is that it appears part of the motivation to spin off Express was so they could be sold.  The management of TNT stated this explicitly a few times in the business press.  In addition PostNL holds a 29% stake in Express to which management has stated in they would vote yes for acquisition offers on their stake in Express.  It appears the 29% is a way for PostNL to profit if an acquisition takes place.  My suspicion is that a suitor approached them but only wanted the Express division not the entire company and a legal demerger was one way to satisfy this requirement.

The third catalyst is that the 2010 operating income, and net income were heavily influenced negatively by spinoff items.  There were €45m in demerger costs in 2010, in addition there was a €92m profit pooling loss in 2010.  The profit pooling is interesting, before the spin the Express division's profits were used to offset the German post divisions losses and while this is a legal distinction that existed in 2010 and needed to be reported on the statements it won't be continuing going forward.  This is why reading notes is so important, the pooling items appears as a small footnote, but results in 50% increase in operating income going forward.

If we take the €45m and €92m and add those back into operating income it comes out to €317m, verses the €180m reported, quite a difference.  That changes EBIT/Sales from 2.55% to 4.49% which is a much more respectable number.

Fourth catalyst management has stated they plan on paying out 40% of net income as a dividend.  On the spreadsheet I estimated this based on the 2010 dividend.  Based on the proforma EBIT the dividend would have been 9.4 eurocents a share for a 1.37% yield at today's price.  I would classify this as a very weak catalyst.

From an outlook perspective management has stated that their goal is to increase revenue from €7b to €10b by 2015.  Most of this increase is coming from a turnaround in Brazil, and growth in the Asia operations.


I've been watching Express since the first day of the spinoff when it quickly jumped to €10 and then slowly drifted down to its current price of €6.92.  While I don't think the company is a slam dunk as is, I do think there are a lot of positive catalysts which if realized could create a lot of value for Express shareholders.  I haven't pulled the trigger on a position yet, but I'm strongly considering it.  Even with the future uncertainties around the Brazil turnaround and Asian growth I think buying TNT Express at 1x book value is probably a pretty good deal.  I'd actually like DHL to spin off their express division, from what I saw I'd love to own a piece of that!

Talk to Nate about TNT Express

Disclosure: No positions in any stocks mentioned in this post.

2010 TNT Express annual report (supplemental filing)
TNT Express website

Best of the Best

Best of the Best (BEST.UK)

Price: 16.5 GBX (6/23/2011)

Best of the Best (BofB) is a company specializing in luxury car competitions.  They display cars in airports and online and then raffle the car off.  The company offers games people can play where the user pays a small fee to enter in a chance to win a car.  Eventually someone wins the car after the cost of the car and a built in profit margin are achieved by player entries.  The company guarantees one winner a month, offers free worldwide shipping, as well as free insurance for the first year.  A sample of the cars currently offered as prizes, Aston Martin Virage Volante, Lamborghini LP560-4, Audi R8 + £20,000, Ferrari 458 Italia, Porsche GT3 RS 4.0, Mercedes Benz SLS AMG, and £100,000 cash.

Just for good measure here's a picture of me sitting in a Ferrari a few years back..

In some ways the business reminds me of Quibids which is an internet bidding company in the US.  The theory is that the consumer will be enticed by the thought of taking home a Ferrari for £50 or £100 and is willing to commit that amount of money to try and win.  Spread across thousands of people it can be a very profitable business.

The actual nature of the games is a user is shown a picture, the one I tried was of soccer players.  In the picture the ball was removed and I was instructed to pick where I thought it would be.  If I clicked multiple times it was considered multiple entries.  The coordinates of my clicks were my ticket, and if one of my coordinates was the exact coordinate of where the removed ball actually was I'd be a winner.  Apparently under UK gaming law this is considered a game of skill.  If it truly is a game of skill I'd expect to see a skilled winner appear more than once, in my quick browse of the results that doesn't appear to be the case.  Skill or not the company is in compliance and is legal in the UK.

Business Breakdown

Up until the last interim statement BofB made 2/3 of its revenue displaying cars and offering games in airports around the UK.  BofB earned 1/3 of its revenue from the online division which it has expanded recently.

The business has had strong results and remained profitable and cash flow positive for the past five years.  The question you're probably asking right now is why is the company trading so low?  The cause of the cheapness for Best of the Best's shares is very simple, in October 2010 BAA airports discontinued business with BofB stating they would like to reclaim the space previously used for car displays and games at the airports for additional seating.  BAA runs a number of British airports including London Heathrow, London Stansted, Glasgow, Edinburgh, Aberdeen, and Southampton airport.

This is significant for the company, two thirds of its revenue is derived from airport displays and a large section of the high traffic airport market was just shut down.  Management has stated that they are working to increase online market share as well as expand offerings at current airports.  It's unknown if this will work or not and the company next reports results in August 2011.


The company is trading at a discount to net current assets giving it a bit of a margin of safety as it retools.  Here is the asset breakdown.

The company is sitting on a nice pile of cash, almost no receivables and inventories.  I would presume the inventories consist of the cars about to be given to winners.  The asset makeup is desirable and very liquid.  In the case of BofB I would say that the inventory doesn't need a discount.  Even at a fire sale liquidation they would probably be able to get close to book value for the luxury cars they hold.

The big question is how will the discontinued airports affect the income statement?  I went ahead and created a small pro-forma income statement based on the latest financials with three difference scenarios.  I estimate a 25%, 50% and 100% loss from the airport operations.

In all three cases the company is moved from a profit to a loss of varying degrees.  Interestingly cash conversion was an astonishing 7x net income the previous period which was helped by increased depreciation.  If the company can even convert at 2x they could post positive cash flow for a 25% decline, and a small dip into cash for a 50% decline.  

The company is sitting on £2,647,000 of cash which it plans on using as it tries to increase its online presence and open new airport outlets.

Bottom Line

Best of the Best is trading at a nice discount to NCAV and has a history of sizable profitability in the past.  The company has hit a sizable bump in the road and it's very uncertain if they will be able to increase the online business or gain new outlets.  One thing on the investor's side is that 64% of the company is held by two directors which gives them motivation to turn operations around.  In addition to management's strong motivation an investor has a sizable margin of safety to await the turn around.

I'm not making any investments at this time but I'm going to keep the company on my radar and wait for the next results in August.

Talk to Nate about Best of the Best

Disclosure: No position

Seahawk Drilling, value in bankruptcy?

Seahawk Drilling (HAWKQ.PinkSheets)

Price: $5.72 (6/20/2011)

Seahawk Drilling is the story of a deep value spinoff play gone awry, but the story isn't quite over yet...


Seahawk Drilling started out as a part of Pride International up until 2009 when Pride spun out the mat jackup rig business.  The company for years drilled natural gas in shallow waters (under 300ft) in the Gulf of Mexico.  The spinoff wasn't exactly wonderful, from the start Pride saddled Seahawk with a tax liability related to a dispute with the Mexican tax authorities to the tune of $300m+.  In addition at the time of the spinoff Seahawk had a majority of its rigs engaged with Pemex for which the contract ran out shortly after the spin.

Coming into the Spring of 2010 Seahawk had a fleet of 20 rigs of which 10 were cold stacked (stored long term), two contracted, and eight operating.  The company was cash flow positive and things were looking up going into the Spring drilling season.

All this was disrupted with the BP Macondo disaster when the US government put a halt on all drilling until safety could be ensured.  Eventually the ban was lifted for shallow water in name only, while there was no official ban the government wasn't handing out the drilling permits lessees needed to drill.

This left Seahawk in an interesting position, they had a lot of cash, a fleet of rigs and the hope that drilling would resume soon.  This is where the value investors entered, at the time Seahawk was selling for far less than the value of the cash plus the scrap value of the rigs.  The theory was the company could liquidate and would offer a nice return to investors.  This wasn't just the theory of a few deep value guys on the internet, this was how the CEO was selling his company during investor presentations.  On the old Seahawk website there was a great PowerPoint slide showing how the market was valuing Seahawk's rigs at $6m apiece whereas the scrap value was closer to $12m apiece.  This appeared to be a classic net-net type of situation, or maybe a Third Avenue Value super net-net.

So what went wrong?  Over the next few months Seahawk languished losing money attempting to wait out the government drilling permit ban.  The company was able to limp along from the Summer of 2010 to February 11th 2011 at which point they declared bankruptcy.  During this time the company began to investigate 'strategic alternatives' which mostly included putting the company up for sale.  According to documents filed during their bankruptcy Seahawk received a good bid for the company, but at the last minute the bidder low balled, most likely because they smelled blood in the water.  At this point Pride called on a portion of the spinoff tax agreement which required Seahawk to pay $40m immediately.  Seahawk didn't have the money and was forced into bankruptcy.

The bankruptcy was in a sense prepackaged, they sold off all of the drilling assets to Hercules Drilling in exchange for 22.3m shares of Hercules common in addition to enough cash to retire Seahawk's line of credit.  The deal was valued at $105m at the time of the filing.  As part of the bankruptcy the company declared they would be able to pay all creditors and hoped to have money left over to pay out the remains to equity holders.  Management touted the bankruptcy as the best way to return value to shareholders.

As a very quick aside the original deep value thesis actually held, Hercules bought the drilling rigs for $105m and have stated they intend to scrap 10 of the rigs for approx $10-12m apiece.  The liquidate value is real, the flaw in the thesis was that Seahawk wasn't able to survive long enough to realize the value, in addition management was more interested in holding on and hoping for a positive outcome than returning value to shareholders.  This fact has shaped my net-net investigation going forward, it's the big reason I search out positive cash flow in addition to asset safety.  Seahawk had asset safety but the cash flow situation destroy any chances of full asset value being realized.


Two notes before I dig in:
1) All bankuptcy filings for Seahawk are viewable for free online at: http://www.kccllc.net/seahawk
2) Bankruptcy filings are much more robust than SEC filings, the company usually needs to file a monthly cash flow statement as well as other statements.  The original filing includes an excellent description of how Seahawk found themselves in bankruptcy.

With all this background it's time to take a stab at putting a residual value on the assets of Seahawk.  Valuing Seahawk is actually very simple, all that remains is an estate with 22.5m shares of HERO along with some residual cash.  All an investor needs to do is figure out the amount of claims to be paid out, subtract them from the estate and divide the end result by the number of shares outstanding.  A bankruptcy process is very fluid with things changing often, but enough is static that we can come up with a range of potential values.

The first idea that needs to be understood is the difference between pre-petition claims and post-petition claims.  Pre-petition claims are liabilities the company had coming into the bankruptcy.  These claims could be accounts payable, lines of credit, payroll claims, amongst other items.  Once a company declares bankruptcy all creditors (anyone who is owed anything by the debtor) has to file a petition with the court to recover the amount owed.  The judge assigned to the case has to approve each petition claim for payout.

Here is a picture of the pre-petition short term liabilities by month.  The left most column is the filing date, then 2/28, 3/28, 4/28

Here is a look at the pre-petition long term liabilities:

While the short term liabilities look manageable it's the long term liabilities that are scary to an equity holder.  The good news is that the biggest long term liability is an intercompany receivable for $354m, an account payable for the Mexican tax liability at the Mexican subsidiary of Seahawk.

The good news is that US courts have precedent that foreign tax liabilities are unenforceable in the bankruptcy process rendering this claim worthless.

Here are the post-petition liabilities:

The post petition liabilities are what matters, these are liabilities that have been approved to be paid out of the estate by the judge.  The above view is clean and with some simple math we can get the value of the common.

Of course nothing is perfect, in addition to the $14m in post-petition allowed liabilities Pride is claiming they are owed $53m.  Here is how they describe their claim:

What we have as the complete liability picture is allowed liabilities of $14m and claims of up to $54m for which there is a hearing in the next few days.  With this picture we can work up a range of high and low values for the equity:

If the judge rejects the Pride Category 2 claims equity holders could receive $8.34, but if the claims are allowed the value equity holders recover will be around $3.85.  The judge could also approve some portion of the claims and not all of them giving a value somewhere in the middle.

Downside: 32%
Upside: 45%

The second variable to this picture is the value of HERO stock, not too long ago HERO was trading at almost $7 which would have increased the recovery value.

Note: Seahawk also has $14m in cash as an asset, I'm not including this in the recovery scenarios as I expect most of it to be exhausted by lawyer fees.  Any left over could increase the recovery value as well.

I'm not smart enough to know which way the judge will rule, but an investor who understands law could have an edge in this situation.  If you do understand the details of this case please email me or leave a comment on this post.

Reorg plan is docket 755 and on page 35 contains the details of the contested Pride claims.  Here is a link to the document: http://www.kccllc.net/documents/1120089/1120089110520000000000005.pdf
Here is a link to the Pride filing discussing their claims: http://www.kccllc.net/documents/1120089/1120089110616000000000003.pdf

Talk to Nate about Seahawk Drilling

Disclosure: An unfortunate residual long position

Titon Holdings

Titon Holdings (TON.London)

Price: 54 pence (6/16/2011)

Titon Holdings is a very small cap British stock that makes window fasteners and ventilation systems for sale in the UK and South Korea.  The majority of operations are in the UK but the South Korean division has been growing steadily.

The main issue with Titon is that the operating business has been struggling and continues to struggle.  Valuhunteruk has an excellent writeup on Titon located here.

To take a step back Titon is a net-net (aren't most stocks I profile...) and trades on the LSE.  When I investigate net-nets I am interested in two main things:

1) The strength of the balance sheet, especially the makeup of the working capital.
2) Ensuring the operating business isn't destroying the margin of safety.


-Market cap of £5.5m with £3m in cash
-Pays a dividend yielding 4.25%
-£.025 in OCF ps
-FCF positive
-Profitable (barely as of the latest interim report)
-Cash per share of £.30

Balance Sheet Strength

I put the numbers for Titon into my net-net template, here is the result:

The first thing that stands out is that Titon isn't trading at much of a discount to NCAV right now.  The second is that while the company has more than 50% of its market cap in cash the makeup of the working capital is heavy in receivables and inventory.

It's not unusual to see a high percentage of inventory or receivables for a manufacturing company, if the opposite were true I would be concerned.

In summary the balance sheet is nothing spectacular but the stock is trading slightly below working NCAV giving us a slight margin of safety.


The margin is only safe if the operating business isn't generating losses or engaging in recklessly consuming cash.  In the case of Titon our margin is barely secure.  When I first investigated the business (and subsequently purchased) they had 3.85p in earnings on top of a similar NCAV.  At the time the company stated that they were experiencing challenging business conditions which they expected to last for the near future.  When reading that I presumed they would be able to continue at a relatively similar earning power, the presumption was an error on my part.

As of the latest interim statement Titon had an operating profit of £9,000, compared to £128,000 last period.  Net profit was boosted by the following items, investments in associates (South Korea operation), a tax credit, and finance income.  Net income was £62,000 compared to £80,000 in the last period.

While the current profitability picture is poor the cash flow picture is a bit better.  While operating profit was £9k, cash from operations was £298,000.  Capex came in at £228,000 giving us a basic FCF of £70,000.  It's interesting that FCF is higher than net income.  The tailwind to operating cash flow is a large amount of depreciation.

The last item I want to mention from the cash flow statement is the payment of dividends.  This past period Titon had to dip into cash reserves to the amount of £98k to cover the dividend.  This could be viewed as a negative but I actually view it as a complete non issue.  Let me explain; paying a dividend out of cash reserves lowers the NCAV by distributing cash to shareholders.  For a business like Titon which earns a poor ROE I would prefer for them to distribute some of their cash to me instead of squandering it in the business.  Paying a dividend out of reserves is a small tangible realization of NCAV for the shareholder.  This is especially true where the cash isn't needed for operations which is the case of Titon.

In summary while business conditions are deteriorating the company still has a secure margin of safety. It's worth considering if the margin will remain secure going forward but for now the safety holds.

Why is it cheap?

-It's plain the market has extremely low expectations of profitability, this on top of the poor recent results has left the price depressed.
-The company is extremely small and has limited visibility in the market.


My view on the value of Titon has changed since the last period report.  Previously I had given credit to the operations as kicking in some to the value, but this can't be counted on anymore.

The downside in my opinion is NCAV of £.56.

While business results currently are poor I don't think the operations are worth zero which is the value the market is assigning.  The reason I say this is that given new management and possibly a new sales team margins could possibly be increased and profits could return to the more normalized averages.

Over the past five years the average earnings are £.032, which if we assign a 50% discount for poor business conditions and a 10x multiple gives a business value of 16p.  Together this is a share value of 72p.

If we value based on the FCF average over the past five years of 3.2p at a 10x multiple the operations are worth 32p if conditions improve.  We can give a similar 50% discount and end up with the same value as above.

The flaw with both of these valuations is that we're betting on the future for the value of Titon to be realized.

While I'm not happy with how my investment in Titon has turned out so far I'm not giving up hope.  The  company has a history of higher earnings in the past and I'm hoping management can turn the ship around.

Titon website
Latest interim report

Talk to Nate about Titon Holdings

Disclosure: Long Titon

Asics Trading Co

Asics Trading Company (9814.Japan)

Price: ¥1030 (6/14/2011)

Asics Trading Company is yet another Japanese net-net stock.  The company trades on the Tokyo exchange and is a shoe manufacturer.  The company makes what appear to be dress and casual shoes (as seen by an American with little fashion sense).  I should also note I have no idea what the Japanese wear, these could be the most hideous shoes in the world to someone from Japan and I would never know.  The shoes I looked at online all had what I would consider reasonable prices.  One of Asics Trading's online shoe sites can be viewed here.  Like most stocks I write about on this blog Asics Trading shares are trading below their net current asset value.  In addition the company is profitable and has decent free cash flow.

I've taken a bit different approach with this post, I'm using the Peter Cundill inspired net-net template as the basis for my valuation work.  At the end of the post I am linking to the Google doc version of this template for online viewing or modification/download.

-Market cap of ¥8.99b, EV of ¥2.22b
-EV/EBIT 2.01
-EV/CF 3.18
-EV/FCF 3.64
-NCAV of ¥1320ps
-Discounted NCAV of ¥1085

Balance Sheet Strength

As always the first thing I always want to consider with a net-net is the strength of the balance sheet.  In the case of Asics Trading 75% of its market cap is composed of cash, the rest receivables and inventory. The company is in retail which means that it's important to take a look at the trend of receivables and inventory.  Over the past five years inventory has remained stable and receivables has come down slightly.

The company has no long term or short term debt and no pension costs.

The below picture is a snapshot of the balance sheet portion of the net-net worksheet.

The next graphic is the accruals worksheet for Asics Trading.  At first I wasn't going to work this out but after closer investigation of the liability accounts I decided to.  The reason I changed my mind is that current liabilities contains entries for bonus accruals, income tax accruals as well as retirement accruals.  I wanted to capture the magnitude of the accruals from the balance sheet.  Here is the result:

So the result is balance sheet accruals aren't a big issue but we need to watch out for income statement accrual issues.


My rule is that I avoid net-net investments where the operating business is destroying my margin of safety, to evaluate that I take a look at the income and cash flow statements.

Income aspects:
Cash flow aspects:

What I like is that cash flow and free cash flow have been consistently positive the past five years which includes the recession period.  One of my fears for this stock is that if Japan hits another downturn shoe demand could shrink further hurting the company, but looking at the past that doesn't seem to be the case.

The company also has a history of recent higher profitability which is good.  When investing in a net-net I try to avoid companies where the earnings are at an all time high, I prefer to see fallen heros verses growing champions.  A fallen hero has experienced profits and success and has hit a bad patch, it's often easier to fix what went wrong than create an environment to nurture future growth.

Return on Invested Capital

The ROIC for Asics Trading comes out to 7.39% which is good for a Japanese company.  The caveat I have is that there might not be many growth opportunities available for Asics Trading.  With a ROIC of 7.39% it would be wise to invest in new business opportunities, instead they are piling cash on their balance sheet and capex has remained stable.  The lack of cash deployment says to me that growth might not be available.

Why is it cheap?

-The company is small it has a market cap of $111m.
-While the balance sheet and sales have grown net income dropped off in 2010.
-Shoes are not an exciting industry to be in, they are dull boring and not high tech.
-A depressed outlook for Japan could result in consumers delaying shoe purchases which could hit Asics Trading's sales.
-The company doesn't export as far as I can tell which means they are completely reliant on the Japanese consumer.


To value Asics Trading I wanted to do a sum of the parts analysis.  Here is how the company breaks down:
¥1320  Net current assets
¥416    Property, plant and equipment
¥76.25 FCF

A 10x multiple on the FCF plus cash results in ¥1609 which is 56% higher than the current price.
A sum of the balance sheet results in ¥1736 which is 68% higher than the current price.
Taking the NCAV plus a 5x FCF multiple results in ¥1701 which is 65% higher than the current price.

Buying Asics Trading for ¥1030 gives no credit to the fixed plant or the operating business which throws off ¥76ps in FCF.

-The company's business could deteriorate and begin to impair the margin of safety.
-The company's financial statements are all in Japanese.
-The company could spend the cash pile on an ill conceived acquisition.
-Shoes are a commodity item and Asics Trading is a price taker leaving it vulnerable to larger players in the market.
-The quality of the shoes is unknown (note: If anyone has bought or looked at shoes manufactured by Asics Trading I'd love to hear about it.)

Talk to Nate about Asics Trading Co

Disclosure: As of the time of this writing I hold no position in Asics Trading Co.  I am considering a long position and plan to research further.

Full net-net template: Google Docs Version

Peter Cundill inspired net-net template

I just finished reading the book "There's Always Something to Do" which is an excellent story of Peter Cundill a net-net value investor.  I'm not going to review the book because there are some excellent reviews on the internet already like the one Richard Beddard did here.

What I found fascinating is that Peter created a net-net template in the 1970s and continued to use it until he retired in 2009.  The book doesn't discuss his template much but they do include a sample of one as an appendix.  I took the liberty of creating what I consider a Peter Cundill inspired net-net template in Excel.  I used a lot of things in his template but made a few modifications as well.

I have my own template that I've been using on this blog for a while that I might consider some modifications to after examining the one Peter used.  When I research a stock I have an Excel spreadsheet that has different worksheets for income statement, balance sheet, cash flow, net-net worksheet.  What I like about the Cundill template is that all of that information is on one worksheet which makes it easy to glance back and forth at different aspects of financial statements.

I am posting a link to the template as a free download for anyone interested.  The file was uploaded to Google Docs, you can view it from there, and if you want a copy on your own PC select File->Download as.

Here is the link to the net-net template file

Japanese net-net Takachiho Koheki Co Ltd

Takachiho Koheki Co Ltd (2676.Japan)

Price: ¥831 (6/7/2011)

Takachiho Koheki is a fascinating company they are basically a Japanese middle man.  They import or export technology products.  I know import/export seems like a very generic business but it appears they partner with Western countries to bring a technology over and then act as customer support as well as on site expert in finding partners and a distribution network.

The company began as a mainframe computer importer in the 1950s and has continued to build out their profile from that point.  The company has offices in Silicon Valley and Israel which I am presuming are used to source new technologies.

My main question with this company is how much is their business model in demand still?  They seem to completely specialize in technology and from the website computer technology.  In the age of the internet a consumer in Japan can order from a supplier worldwide as long as the supplier is willing to ship to Japan.  This could be the reason the company is trading at such a low price.


Here is the net-net worksheet I put together.

The company is trading at a nice discount to ncav and discounted ncav, it's also trading at a few yen more than cash per share.  The balance sheet looks great, a high amount of cash, moderate receivables and inventory.

Operating Highlights
-EV/EBIT of 1.52
-CFO of ¥136 per share for a P/CF of 6.11 or a EV/CF of .78
-FCF of ¥122 per share for a P/FCF 6.81 or EV/FCF .87
-CFO has been a bit spotty, it went negative in 2006 and then climbed to ¥196 in 2009 before declining to ¥136 in 2010.
-Capex has been between ¥4 and ¥13 a share the past five years.
-The cash balance has been steadily increasing.
-The company pays a 2.8% dividend.

While this company looks great on a cheap statistics basis I'm taking a pass.  The reason is the business model seems outdated, I just don't see a need for a technology importer anymore in this global internet connected age.  Back in the 60s and 70s I could see how a company in the US or Europe might want Japanese expertise to gain access to the local market.  I'm just not convinced of a need for this anymore.

Talk to Nate about Takachiho Koheki Co or net-net investing.

Disclosure: I have no positions in any issue mentioned in this post.

Solitron, wrapping things up

This is part three of a series, please read part one and two first for the best understanding.

Part 1
Part 2

For my final post on Solitron Devices I want to look into two things, the operating performance, and risks involved in the investment.

I took the first two posts to establish the margin of safety from a balance sheet perspective.  Solitron Devices is trading at a nice discount to net current asset value.  When looking at net-net stocks I prefer to buy companies that are trading at a discount as well as profitable or at least cash flow positive.  The reason for this is I don't want the danger of the operating business destroying my margin of safety.

I put together the following spreadsheet breaking down the operating performance for Solitron Devices.

Usually my standards for profitability are not that high when looking at a net-net, but Solitron exceeds those expectations quite easily.  A few operational highlights

-Operating margin between 5.4% and 14% for the past six years.  Mostly around 9-10%.
-Net margin between 5.6% and 23% with 2011 coming in at 14%.
-Cash flow positive all six years
-Capex is never higher than 30% of CFO

The results mostly speak for themselves.  Solitron has been consistently profitable has is able to convert their accounting earnings to cash.

When examining the cash flow statement an important distinction should be made, CFI is high because investments in treasuries are included along with capex.  If an investor takes a quick glance at the cash flow statements they could be turned off thinking the company is bleeding money, instead the opposite is true, they're building a cash pile.

I also included in the spreadsheet two free cash flow lines, raw cash flow and adjusted.  Raw is CFO minus capex, whereas adjusted I used the average working capital changes across the entire time period. 

One thing to consider is that any discussion of free cash flow might not even make sense for Solitron Devices.  Free cash flow is the amount of cash that a company could in theory give back to investors or use in share buybacks or dividends.  In the case of Solitron if you look at the FCF as computed on my spreadsheet and the amount of Treasury purchases they are very similar amounts.  Solitron has been accumulating it's FCF on the balance sheet as Treasury bonds.

The hope is that once the environmental liabilities are exhausted that Solitron will finally start to pay out its cash hoard as dividends, this could be considered a catalyst for a higher share price.

Valuation Scenarios

I've taken a stab at what I think Solitron could be worth under a few different situations.

NCAV: $3.80
Discounted NCAV (liquidation value): $3.03
EPS at 10x: $5.10
EPS at 10x + cash: $8.04
FCF at 10x: $3.53
FCF at 10x + cash: $6.57

Also for the heck of it I did a dividend discount model scenario.  I take the amount of treasuries purchased each year as a proxy for dividends that could be paid.  I then discount them at the 10yr treasury plus a 4% risk premium giving a value of $4.18 a share.

I personally believe a cash plus operating value is more appropriate method for Solitron Devices putting a possible intrinsic value at between $6.57 and $8.04 both more than double from the current price.


Even with all the great aspects going for it an investment in Solitron Devices isn't without risk.  I've tried to detail what I think the most likely risks are.

-Business could dry up, curiously management has decided to keep a line in their quarterly and annual reports which states that they could possibly operate at break even or at a loss in future quarters.  While this line remains the results speak otherwise.
-Current management could retire and be replaced with managers who are intent on using the cash for empire building squandering the margin of safety.
-The company is very small with a market cap of $7m giving limited liquidity and visibility in the marketplace.
-The company could be subject to a takeover or buyout without giving appropriate value to the shares.
-Defense spending could be hit by major cuts, defense contractors and the government are a large source of business.

Even with the risks detailed I think an investor is on safe footing buying Solitron Devices, a true rare net-net in the US market.

Disclosure: Long and actively working to increase my position.

Solitron the assets and liabilities

The is part two if a three part series digging into the American net-net Solitron Devices.  If you haven't read part 1 you can find it here.

To me when investigating a net-net stock the most important thing to consider is the makeup of the assets and liabilities.  A company that has most of it's market cap in aging inventory or the dubious "other current assets" is avoided for one that's market cap is cash and marketable securities.

Solitron Devices is a great company to investigate for a few reasons, the first is that the balance sheet is very simple and clean.  The second is the consistence of it's financial statements, and the third is the desirable composition of its assets historically.  Before diving into the financial statement weeds I want to give a quick overview of Solitron's history which is very important to understanding it's current position.


Solitron Devices was founded in 1959 and is head quartered in West Palm Beach Florida.  The company grew by acquisition through the 60s, 70s and 80s.  By the late 1980s the company had over 900 employees working at their Palm Beach facility.  In the process of acquiring other companies it racked up a large amount of debt.

Sales peaked for Solitron in 1987 and began declining.  In 1988 the auditor letters began to include statements regarding the concern that Solitron would continue as a going concern.  During this time the city of Riveria Beach sued the company and won an environmental damage lawsuit for $2.16m.  The company had $23m in debt and only one profitable division the microwave division which it sold in 1989 for $8.5m to attempt to ward off a foreclosure.

Solitron was able to avoid the foreclosure by restructuring it's $18.5m loan with Southeast bank into an extended $19m loan.  At this point Solitron only had a few money losing divisions and not much hope.  Amazingly they were able to limp along until 1992 when their facility caught on fire.  Contrary to what might be floating on the internet environmental liabilities didn't do them in a facility fire did.  The fire destroyed their manufacturing capability and insurance was slow to reimburse forcing them into bankruptcy.

As part of the restructuring the company reduced debt from $22m down to $3m, moved from a 270,000 sq ft facility to a 60,000 sq ft facility and eliminated low margin products.

While most of the debt was extinguished in the bankruptcy the environmental liabilities were not, and addition liabilities were incurred from the fire and cleanup involved.  The company still had the money losing divisions and auditors who were warning as late as 1996 that the company probably wouldn't survive as a going concern without a liability restructuring.

The company finally turned a profit starting in 1997 and began paying off its debt and rebuilding its balance sheet.

So why does all this matter?  When Solitron restructured they gained new management that had an aversion to debt and a desire to never fall back into the same mess as the past.  I feel that knowing some of this history explains the balance sheet much better.


The following graph shows the historical composition of Solitron's assets for the past five years.

The biggest change is that in 2008 Solitron took their cash and bought a lot of Treasury Bills which at the time paid a decent interest rate but not so much anymore.  Otherwise cash and bills have been increasing, accounts receivable have remained steady and inventories have strunk slightly.

The next graph shows the overall assets compared to current assets for the past five years.

The trend is a good one, both current assets and assets are increasing.  The increase in current assets is an increase in the Treasury Bills account, while the reason for the total asset increase is additions to the PP&E account.  

The next graph I believe really breaks down the balance sheet the best, it shows both asset and liability levels per year.

What we can see is that liabilities have stayed relatively flat while both asset accounts have increased nicely.  Even while a net-net Solitron has been working to grow its book value.  You can also see from the graph that Solitron has been trading close to or below it's NCAV since 2007.  

I don't have the market cap information on this chart but the price was in the $1-2 range.  I think the great thing about this is that an investor didn't need the stock to ever trade at or above NCAV to have great returns.  An investor buying in June 2007 would be siting on a 112% return in addition to a company that is growing it's cash balance and healthy.  Not bad considering an investor putting money into the S&P at the same time is still sitting on a 13% decline.


The liability story for Solitron is interesting, outside of a nominal amount of trade payables most of their liabilities reside in bankrupt accounts payable which amounts to $1030000.  The company has an agreement to pay $7,000 per quarter until this liability is exhausted.

The only other liability is related to the cleanup of former sites.  The company is currently paying at a rate of $1,000 per month or $12,000 per year towards the cleanup costs.  The company breaks down the cleanup costs as follows.

Taking a look at this schedule the company will have exhausted the environmental liability in 2016 which would enable it to pay a dividend of some of the cash on the balance sheet.

I have seen some comments on the internet that the environment liability might be paid off in 2013 but I can't find anything about this in the 10-k, if anyone has any information please leave it in the comments.

The next post I will discuss the operating performance of Solitron Devices.

Disclosure: Long Solitron and actively working to accumulate more shares.