A Greek Tragedy and US deception

Greek TragedyI very rarely focus on Global Economics and prefer to turn that “noise” off, but I think the current global situation has implications for value investors in Australia and globally. So much so that I thought I’d share my thoughts with readers.

Did you know that most of Greece’s sovereign debt is held by European banks? There are concerns that the debt is worthless as Greece is unlikely to repay. Greece can’t get out of it by printing money. Either Greece will have to default, or pretend it isn’t, while the rest of the Euro ignore the pretense, pretty much like they are doing now. Banks in Europe are now being downgraded, with Standard & Poors downgrading seven Italian Banks and three US banks (Bank of America, Wells Fargo and Citigroup) overnight. There have also been reports in the media that some International banks are refusing to trade with European banks. I’ve also read that several European Banks are technically insolvent, as much of their assets aren’t worth the paper they may or not have been printed on.

The US is also kidding itself that it’s sorting itself out. The current economic state is very unstable, and any crisis in Europe will likely affect the US as well. I think the US is over-confident that it can control its economy and avoid a recession. However, the US is lucky in that it can print money to devalue its currency (unlike Greece) making the US dollar cheaper, supporting its exporters and encourage investment into the US.

So what can we expect if this scenario comes to life? A recession in the US akin to the 1930’s Depression, large stock market falls globally and riots and protests in Europe is probably the worst case. The most likely scenario in my view, is for Europe and the US to muddle through for a few years with little or no growth. Expect markets to be much more volatile with large swings both upwards and down.

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Washington H Soul Pattinson (ASX:SOL) – overlooked?

You may or may not have heard about Australia’s second oldest listed company, Washington H. Soul Pattinson (ASX:SOL). The company has been listed on the Australian Stock Exchange for more than 107 years. The company has a current market cap of over $2.9Bn, putting it into the Top 50 companies in Australia by market cap. Would you believe its not in any of the standard ASX indices? Not even the ASX300. The reason is that the company has a cross holding agreement with Brickworks (ASX:BKW), where Soul Pattinson owns 44% of Brickworks shares and Brickworks owns 43% of Soul Pattinson shares. This was setup to protect both companies from being individually acquired.

The company has returned 17.5% per annum to shareholders over the last 15 years, and at the current price of $12.18, looks to be trading at a discount to intrinsic value and definitely worthy of further research. The company’s next report to shareholders is due in the next couple of weeks (has to report to ASX by end of September), and I await it with great interest.

Things to like

  • Big enough market cap of 2.875Bn to be in Top 50, but its not even in ASX300.
  • Only covered by one stockbroker (which is great)
  • Very diversified investments not limited to construction materials, property, energy, coal mining, port operations, pharmacies, pharmaceuticals and health care, telecoms, funds management, rural supplies such as fertiliser, seed and grain, irrigation and insurance and financial services. It also has its own investment portfolio worth around $450m with investments in companies such as BHP Billiton, Commonwealth Bank, Westpac, National Australia Bank, Telstra and Perpetual.
  • Shareholder friendly, pays out approximately 50% of earnings as dividends, so retains fund to invest and has paid out eight special dividends in the last 10 years.
  • Soul Pattinson haven’t raised equity from shareholders in 10 years.
  • Debt/Equity ratio is -45%, with net cash of $1,700m
  • Management have large shareholdings in SOL as well as its associated companies and subsidiaries.


Market value
If we add up all the value the market ascribes to Soul Pattinson’s holdings and exclude $350m in costs such as liabilities and operating costs, Total value comes to just over $4Bn. On a per share basis, thats $16.83. Based on today’s share price of $12.18, you are getting $16.83 of value, a discount of 38%.
Book Value
Soul Pattinson’s last stated book value per share (March 2011) was $16.39, so its trading at a discount to book value of 34%.
Net Asset Value
Based on the last stated net assets provided by Soul Pattinson and each of its holdings, and again excluding $350m in costs, I’ve calculated net asset value per share to be $13.65, so company is trading at a 12% discount to net tangible assets.
Discount to intrinsic value
Based on several of my valuation methods, I get an average valuation of $16.72, so Soul Pattinson looks to be trading at a discount to its intrinsic value. With a history of special dividends, 17.5% annual returns, a 107 year history and the many features mentioned above, Soul Pattinson is definitely a company I’ll be keeping my eye on.

Austock portfolio versus my model portfolio update 9 Sep 2011

My model portfolio continues to outperform the Austock portfolio. It’s now over two months since I started tracking these two portfolios, and the model portfolio continues to increase its outperformance over the Austock portfolio, beating it by more than 4%, as well as outperforming the ASX200 Accumulation index by 3%, as you can see below.

Austock share portfolio versus my model share portfolio

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Transfield Services – An analysis

Transfield Services, Transfield
Transfield Services (ASX:TSE) is an Australian listed company providing services such as operations, maintenance, and asset and project management services to the  Resources and Industrial, Infrastructure Services and Property and Facilities Management sectors. It was listed in May 2001.

In this report, I’m going to have an in-depth look at Transfield’s financials and its current valuation. I’ve also attached an Excel model for the company, so you can see the financials for yourself.

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Austock portfolio versus my model portfolio update 2 Sep 2011

My model portfolio continues to outperform the Austock portfolio. It’s now almost eight weeks since I started tracking these two portfolios, and I’m almost proud to say that my model portfolio is still leading the Austock portfolio, as you can see from the table below.

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Cheap stocks

Now that most companies with a June year-end have finalised their 2011 fiscal year results, I’ve updated the valuations for many companies and share my views on a few of them here, including some that I think are cheap.

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