Wow, it has been 3 months since I last posted on here. Time really does fly. I am finding it progressively difficult to find new ideas and I am currently toying with other ways to still bring value to the value community. Anyway see below for my latest ramblings.
Detour to Africa: So I was back in my native country of Ghana for most of the past 6 weeks. Did not do much investing related activity but looked briefly at an insurer, Enterprise Group (GSE: EGL), which was completing a rights issue when I was in Ghana. I also had the opportunity to have a conversation with one of the company’s largest shareholders. A takeaway from the conversation and a brief look at EGL’s financials was that the Buffett-esque structure of “holding company anchored by an insurer”, can be applicable in a higher inflation developing market, such as Ghana. In July 2007 the Ghanaian cedi was re-denominated 10000 to 1 after decades of high inflation. EGL traded at roughly GH₵ 0.20 per share at the time and the USD to Cedi exchange rate was 1 to 1 following the re-donomination. Fast forward roughly 11 years and the most recent close price of EGL was GH₵ 4.79 and the USD to Cedi exchange rate is 1 to 4.43. Some quick math will show that is roughly 17% compounded annually in US dollar terms, not bad at all. As a related side note, I was just reading the 2017 Exor Annual Shareholder Letter , which has a good discussion of holding companies and is replete with references to Seneca & Charlie Munger, John Elkann is truly a man after my heart. Another thing I noticed from being in Ghana was how pervasive the US platform monopolies were in Ghana. Whatsapp, Uber, & AirBnB are quite popular in Ghana. Pundits who speak of declining American dominance are clearly not looking in the right places. These three companies have basically established a tax on a developing nation’s future growth in communication, transportation, and housing with very little physical presence on the ground. Is that neo-colonisation or is it providing individuals in a developing country an infrastructure to monetize their land and labour? Maybe a bit of both. Don’t worry, I am not about to start deviating into conversations about the global world order and what’s fair and what’s not. Picking stocks is hard enough.
Detour into a Constellation: Constellation Software, the TSE listed acquirer of vertical market software companies, that is. So as I mentioned in an earlier post I held a position in Redknee Solutions. I have this bad habit of finding a stock, getting excited about a few factors, taking a position, which then compels me to begin my deep dive research. That must stop. Anyway, as I was conducting my primary research I read all of Mark Leonard’s President’s Letters in chronological order to hopefully gain a better understanding of VMS companies. I noticed just how much of a better business it was which led me to abandon my Redknee (now Optiva) position. It is a turnaround that I now classify in the too hard pile. I am also more comfortable with the decentralized playbook of Constellation, which is a believer in small teams. Redknee’s turnaround, which is being led by ESW Capital has a more centralized approach in that ESW companies like Versata are being used to outsource processes such as application development. It could all work out brilliantly but I do not think I have the ability to handicap the situation. I really like Constellation but even if I adjust for the intangibles (a serial software acquirer whose portfolio companies grow their earnings is not accounted for properly by conventional accounting principles) it seems to trade at close to 40x adjusted earnings which is abit frothy to me for an initial position.
Imvescor/MTY Deal: Of the 66.25% of the shareholders who voted, 92.73% voted for the deal. A complete landslide that took me by surprise. I attended the vote in person and my feeling was the Imvescor management were somewhat somber in their view of a turnaround story coming to an abrupt end but glad they played their fiduciary role to a tee. Afterall, Glass Lewis and ISS both urged shareholders to vote for the amalgamation, a view I clearly disagreed with. I did see what looked like a few representatives of the acquirer, MTY, in the back of the room who showed palpable excitement when the results were announced. This contrast was a physical manifestation of the huge gap that exist between agents/fiduciaries and owner-operators that I’ve never fully appreciated even though I thought I did. Anyway, I sold all my shares before the 80/20 share/cash deal closed because although I have a lot of respect for what Stanley Ma has been able to build I have not liked MTY’s average to poor same store sales performance over the past 5 years in an expanding economy, which means the acquisition machine has got to keep going to justify valuation. Acquisition growth + organic growth (see Constellation software) is much more potent combination than acquisition growth alone.
Current positions: As I sold Redknee and Imvescor and have not been able to redeploy that capital I currently own Urbana (probably not for much longer), Google, Fiat Chrysler and lots of cash. Please, if you see any hard to find unicorns (not the ones found in Silicon Valley) but the ones that are simple great businesses, with great owner/operator management teams, at great prices feel free to let me know. I will be in Toronto from the 24-26th April for Fairfax/Constellation meetings and side events. Give me a shout if you read this blog and are in town too.