A few new positions

And some commentary on previously mentioned stocks

My investment approach is probably best summed up as multiple arbitrage with some special situations thrown in. And some nice dividends sprinkled on top, especially in less stable parts of the world. 

Where I tend to get interested if something significantly trades below its (or its peers) historical average. I don’t blindly buy low PE stuff. For example I got pretty excited about Extreme Networks last year at 10x FCF with its large order book. I thought they could easily double earnings + trade at a higher multiple.

But downside risk is even more important since earnings can easily disappear. Take for example Halyk Savings Bank (HSBK). The stock trades at under 3x earnings. This is a very dominant bank in Kazakhstan, Kyrgyzstan, Tajikistan and Georgia. Russia exposure has been reduced to zero. They paid sizable dividends in the past years, 50%+ of earnings from 2018 to 2020. But it got cut recently due to the war in Ukraine, but still a >10% dividend yield.

There is a short but decent write-up about the company on VIC. Due to the geography it is not without risks, but then the valuation more than reflects that. If I have to believe TIKR forecasts, I will get most of my money back in the next 4 years in dividends alone (although that might be a bit too optimistic). Upside to 5x earnings with some earnings growth + dividends would be more than 100%. And inflow of Russians fleeing from mobilizations will provide a nice boost in earnings as well.

Peers, BGEO and TBCG are now trading at >4x 2023 earnings and a <10% dividend yield. Discount in book value multiple is especially wide now:

Yet I am less excited here at 3x earnings than I was with Extreme Networks at 10x earnings. Earnings multiples aren’t everything!

Still got myself a modest position at $11. 

Then Spanish Broadcasting (SBSAA) managed to sell their TV segment for $64 million. Net proceeds after taxes and transaction costs are probably ~$50-55m?. A little bit more than I hoped for. I still own a small equity position, and actually purchased the 9.75% bonds on Interactive Brokers. I wanted to do a post on it, but I was too cheap and wanted to buy more in the $50’s, but wasn’t able to before they came with the news of their sale. Shoulda just hit that $61 bid! Now they trade at $73. I managed to get a modest sized position at an average price of about $64. 

At $73 they are now less attractive, but still a decent bet I think. Unless results completely implode it seems very likely I will get another $15-25 in tax free interest payments. Say they use another $30m to buy back debt at $75, which would reduce debt to $270m, you are paying only $200m for the radio business which did nearly $60m in operating income in 2019 and 2021. Or only around $150m factoring in the likely interest payments. 

Bad TV results and excessive corporate overhead has been hiding true profitability here. Which is especially relevant for the bonds. Since that overhead can be cut in a sale and there is a cutoff date in 2026 for getting our money back. 

So either Alarcon finds a way to refinance them in 2025, or the business is sold/restructured in a chapter 11. In case of refinancing, CAGR would be ~24%. With pretty modest downside risk. 

If results do deteriorate, and the business is sold in a liquidation, then say 7-8x $40m in operating income would still result in an okish return here (with a significantly longer timeline probably?).

Just hard to see how this business is worth less than $150-200m in a sale.

VNET group (VNET) founder Josh Sheng Cheng who was leading the buyout actually defaulted on his margin loan and lenders repoed 12.7m shares. I think this kind of kills the buyout thesis? I had closed it previously, but for the people who did not notice, $5 is still a good price to get out here. 

Wanting to have a bit more euro exposure I decided to buy a small position in an old favourite of mine Grupo Catalana Occidente (GCO). I had this stock on my watch list for years. But it was never cheap enough to buy. 

It is a very well run and underlevered Spanish Insurance company, with 60% of revenue in Spain. A very good in depth write-up on VIC is available. Stock trades at about 7x earnings, which are expected to be flat in 2023. But in the past decade they have compounded earnings by about 9% per year. And they pay a 3.5-4% dividend. Historically this stock traded at an average of about 11x earnings. And a more levered tangible book value multiple of 2.4x vs 1.2x now. 

Rising interest rates are positive for their results if they are modest. I am in at an average price of €28.5/share. 

Currency Exchange (CXI) has kept posting excellent results. It is becoming a bit of a hedge fund hotel, but I think the shares are still really cheap here. It is trading at <10x earnings, and they have yet to post a full year of proper post-Covid results. The balance sheet is rock solid and stock has historically traded at 20x+ earnings with inferior margins and ROIC. A competitor is putting itself up for sale for 12-13x EBITDA. So I think this can still easily double from here. Continuing growth + uplisting on US exchange could send this a lot higher.

As always do your own due diligence, and I may buy or sell any of the above mentioned stocks at any time.