ISSUE SIXTY TWO APRIL 2016
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DECLARE YOUR ECONOMIC INDEPENDENCE
The art of getting
something for
nothing in the
investment markets
When I set out to buy a home for my family last year, I applied one
of the key criteria that I also use in my stock market investing. I like
to buy assets so cheaply that it’s hard to lose money, even if
the worst happens. I look for deals where I can get something for
nothing.
Having spent a lot of time in Bali, and rented temporary
accommodation there for about 18 months, by mid-2015 I had been
following the real estate market closely for over a year.
Much as with the current nosebleed level of the stock market,
frankly, I was scratching my head at the prices. Most asking prices
were way too high.
Then, a whole confluence of temporary negative factors hit the Bali
real estate market all at once.
1. There was a speech by an Indonesian government minister in
which he threatened to “take” the properties of any foreign person
who had circumvented Indonesia’s constitution and set up a dummy,
“nominee” structure to hold property in a local person’s name.
The law is quite clear on this. Any attempt by a non-citizen to
control the freehold title to a property in Indonesia will see the
TIM’S
RECOMMENDATIONS
IN TWO MINUTES:
KAROON GAS (KAR on ASX)
BUY AT CURRENT LEVELS OF AROUND
A$1.22. USE UP TO 1/12TH OF YOUR
4TH PILLAR CAPITAL.
RURAL FUNDS GROUP (RFF on ASX)
HOLD.
YORKEY OPTICAL (STOCK 2788 ON THE HONG
KONG STOCK EXCHANGE)
HOLD/BUY UP TO HK$1.01. USE UP TO
1/8TH OF YOUR 4TH PILLAR CAPITAL.
COKAL LIMITED (CKA on ASX)
HOLD.
COFFEY INTERNATIONAL (COF on ASX)
AWAIT UPCOMING PROFITS.
NAM TAI PROPERTIES (NTP on THE NEW
YORK STOCK EXCHANGE)
HOLD.
CARNARVON PETROLEUM (CVN on ASX)
HOLD/BUY UP TO A$0.081. USE UP TO
1/8TH OF YOUR 4TH PILLAR CAPITAL.
LE SAUNDA HOLDINGS (STOCK 738 on THE HONG
KONG STOCK EXCHANGE)
HOLD/BUY UP TO HK$1.66. USE UP TO
1/8TH OF YOUR 4TH PILLAR CAPITAL.
ASIA PACIFIC DATA CENTRES (AJD on ASX)
HOLD.
INSIDE
RCI up 9.2% already in a month; HOLD
for
more gains
1. A
business with no debt, and A$2.01 in net cash for
every A$1.22 you pay for it now
2. S
&P ASX 300 Index inclusion sees RFF shares run
up all the way to A$1.60 before a slight pull back;
you’re now up 78%
3. Y
orkey Optical rep orts profit of $4mn for 2015 and
declares 10c special dividend; shares soar 18% in a
day
4. C
okal still working on a new takeover deal or IPO;
meanwhile it raises $500,000 via an asset sale and
consultancy fee
5. Y
ou’re up 36% on NTP, but it’s still selling at a
discount to liquidation value, with ZERO value
attributed to its real estate
6. C
VN up 12.5% in a month for you
7. L
e Saunda sees decline in sales and profits; but the
news is well and truly factored into the share price
8. Y
our gains on AJD shares now 33%
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property revert to the state. So, there was an immediate panic among the tens, or hundreds of thousands
of foreigners who took dubious advice and entered into nominee arrangements, despite what the law says.
2. Simultaneously, the emerging market currency meltdown saw the Indonesian rupiah sink rapidly below
14,000 and almost hit 15,000 to the US dollar. This knocked a lot of people’s confidence in the market even
further.
3. There was also some political uncertainty, as the new President’s administration started off very
tentatively, with a number of high-profile disagreements in the ruling coalition.
4. Plus, as China slowed rapidly, the resources boom in Australia came to a screeching halt, and the
Australian dollar plummeted – one of the most important sources of foreign investment in the Bali market
all but dried up.
Being psychologically wired differently to most people, I saw my opportunity to pounce. I put in a low-ball
bid on a property that had already been heavily marked down by the European owner, who was anxious to
sell.
The price I offered was probably 25% below the most conservative estimate of what it might cost to build
a house of the same size and quality today – with the land essentially thrown in for free. Nonetheless, my
offer was immediately accepted.
My friend John, a big wave surfer formerly based in Hawaii, who now calls Bali home, is in the real estate
business here. His take was, “Dude! You nailed the bottom of the market.” He said that in the week my
wife and I inked the deal to buy our place, his phone didn’t ring once.
In the following months, business slowly came back. And now, activity has picked up noticeably again. The
rupiah is back to around 13,000 against the dollar, and the property market appears to have bottomed.
The silly asking prices of 18 months ago are no more. If a seller wants to sell, they have to be realistic. So,
there are some fantastic deals around. It’s still possible to buy quality properties in Bali for well under the
cost of construction, just like my wife and I did.
The way I see it, there are at least THREE ways you can make money on a deal like this:
1. On the currency appreciation. I swapped highly valued USD for Indonesian rupiah when the rupiah
was particularly weak. But it moves in cycles, and I fully expect that at some point in the next ten
years, I’ll have a chance to exit with a nice currency gain, should I choose.
2. I will be living in the home. So, I save having to pay rent. You could also rent the house out and get
income that way. (Though, I don’t really recommend absentee ownership of foreign property.)
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3. The property could appreciate. Even if we only sold it at the replacement value for the buildings
sometime down the track, we’d be looking at a 30%+ gain.
The reason I tell this story is not to get you interested in Bali real estate. It’s to point out that there are
analogous situations sitting under our noses in the stock market right now, where you can get
something for nothing.
Buying a publicly listed company at a significant discount to its net cash in the bank, or liquidation value, is
essentially no different to buying a house at a big discount to its cost of construction. And if the shares are
denominated in a beaten down currency, and the company pays a dividend, then you have the full trifecta of
profit generating factors at play.
The whole idea with this form of “deep value” investing is to build in a big enough margin of safety, and buy
SO CHEAPLY, that even if things don’t go to plan, it’s hard to lose much – if any – money. And if just one or
two things go right, you can make a bundle.
In the 4th Pillar Model Portfolio, we’ve already applied this principle to invest in stocks such as Yorkey
Optical, Nam Tai Properties, and Carnarvon Petroleum, on which I will have updates later in this issue.
Over the past several years, I’ve also used this principle in Sovereign Man: Confidential to recommend seven
separate portfolios of Australian junior mining stocks, all trading at large discounts to their net cash backing.
The average gain on these seven portfolios, the one loser included, has been 54.7%. Two of the portfolios
are up more than 100%, and the latest one is showing 65.7% average gains. The strategy clearly works.
And we’re applying the deep value principle again this month. I have a brand new recommendation for you,
which, like the Bali real estate example above, comes at a great discount to its intrinsic value, because of a
confluence of temporary bearish factors striking the company’s share price all at once.
Until next time…
Good investing,
Tim Staermose
Editor, The 4th Pillar
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A BUSINESS WITH NO DEBT, AND A$2.01 IN NET CASH
FOR EVERY A$1.22 YOU PAY FOR IT NOW
Imagine this. Someone offers you the opportunity to buy their company. It has $523,000 in cash in the bank,
no debt, and the possibility of a further $200,000 coming into its coffers down the road, if oil prices recover
significantly. But they are asking just $302,000 for the business. Would you be interested?
I know I would!
Essentially, this is the situation we have right now with the Australian oil exploration company Karoon
Gas (KAR on the Australian Securities Exchange).
Tack three zeroes on the numbers above, and that’s what you’ve got: KAR has A$523.5 million in cash (most
held in US dollars). But at the current share price, the total market capitalization of the company is just
A$301.99 million.
The company has no debt. And it did a deal some years ago to sell its Australian gas assets for US$600
million, where the buyer still has to make payments of up to US$200 million, if it decides to go ahead and
produce gas from the properties (which would first require a significant recovery in prices).
Even assigning zero value to this US$200 million contingent asset, and subtracting the estimated A$28.8
million net cash burn for the quarter ending March 31st, I calculate there is net cash backing of A$2.01 per
share. But, right now you can buy those shares for just A$1.22 – a more than 39% discount to net cash.
Obviously, no sane businessman would ever offer to sell you his private business on these terms. But this
is yet another example of the wonderful opportunities the stock market sometimes throws up, if you look
hard enough. And if you want to buy a part of KAR’s business on these insanely cheap terms, right now you
can.
Moreover, KAR is no cash box. It’s a real company with a successful track record of discovering oil and gas,
advancing properties toward production, and then selling them for large profits to deeper-pocketed rivals.
It’s drilled 16 exploration wells over the course of the past 11 years or so, with a 68% success rate. That’s
phenomenally good in an industry where the odds of finding oil in a typical well are sub-30%.
KAR has two oil discoveries that it is currently progressing through the appraisal stage. Combined, they
currently have a base-case estimate of 84 million barrels of oil in place, which will likely be economic to
produce if oil recovers to $40 per barrel.
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In the event oil recovers to $85 a barrel, payback of the capital expenses to get the wells into production
would take between 1 and 3 years, depending on the production model chosen.
It also has two promising earlier-stage exploration permits where low oil prices mean it is allowed to hang
onto them for the moment, without spending any money on them.
Typically governments require oil companies to constantly spend money exploring in order to retain the
rights to permits, which obviously makes no sense in a bad down-cycle such as the present. So, many
companies will be forced to relinquish their hard-won early stage exploration assets; but not KAR.
It is currently looking for partners to farm out part of these permits to, thus bringing more money in the
door, and de-risking future exploration.
Why so cheap?
As with my property purchase in Bali, there are at least six different factors I can identify depressing the KAR
share price all at once.
1. The oil price has cratered by 2/3rds from its highs. That’s obviously bad for sentiment.
2. The company’s main focus is now on oil exploration in Brazil, where political instability is high. There’s
been a massive corruption scandal at Petrobras, the national oil company, and vociferous calls for
President Dilma Rousseff, who used to be in charge of Petrobras when the bulk of the corruption
occurred, to be impeached.
3. The Brazilian economy is in its worst recession since the 1930s, and the currency, the real, has lost
57% of its value against the dollar. So, sentiment on any company operating in Brazil is terrible.
4. Because the company’s market capitalization has been sliding, it’s no longer big enough to be
included in the benchmark S&P ASX 200 Index. It was removed as of March 18th.
In the parallel universe that many fund managers seem to operate in, that means that – even though
the stock is cheap, and getting cheaper – they have to sell out. There has been selling both by index
funds, which are only permitted to own index constituents, and by “closet” index funds, which hug
the benchmark indices closely.
5. One such large shareholder in KAR, Janus Capital, is selling out right now, seemingly without regard
to price. They still own just under 5% of the company. So, there’s a great chance for us to scoop up
their remaining shares cheaply.
6. KAR’s 35% partner in its Brazilian offshore exploration blocks, Pacific Exploration of Canada, has run
into financial difficulties. The company has too much debt, not enough cash flow, and has recently
called for a moratorium on its interest and debt repayments.
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The market seems to view this as a big negative. While it certainly does create some uncertainty
around the funding of future drilling and capital expenditure programs in Brazil, it could just as well
be positive.
KAR may get the chance to buy back the 35% interest in these blocks that it farmed out to Pacific
for a bargain price. It certainly has the cash to be in a position to consider it. Alternatively, another
quality partner may farm into the blocks.
My take is that there is a lot of negativity already built into the KAR share price. And in an oil industry
environment where “cash is king,” KAR finds itself sitting on plenty of it.
Of course, there are no certainties. And KAR’s management could still stuff things up and burn through
all the company’s cash over the coming 5 to 10 years (that’s how long it would take them at current burn
rates), without finding more oil, or earning anything from the production of the oil the company has already
discovered.
Oil prices could also stay at current, low levels for a protracted period. But that’s unlikely. Oil prices are
cyclical. They always come back at some point. And right now you’re paying a very low entry price to
speculate that maybe, possibly, something good might happen for KAR in the not-too-distant future.
If you ask me, on a one- to two-year horizon, it will prove very difficult to lose money in this stock, such is
the margin of safety.
We’re not looking to make hundreds of percent. If the stock merely trades back to its cash backing
sometime in the next 12 to 24 months, we’ll do just fine – with a 50% gain.
Management has decent long-term track record, though some shareholders are currently impatient
KAR first listed on the ASX in 2004 at A$0.20 per share. See Appendix A for its full track record of oil and
gas discoveries since then. By my reckoning, they’ve drilled 16 wells, and found gas or oil 11 times. That’s a
68% success rate.
At one point, when the company was flying high, with a series of high-profile natural gas discoveries in the
Browse Basin in north west Australia, and oil prices were over $100 a barrel, the KAR share price reached
highs over A$12.
Since then, much has changed. The global financial crisis hit. Oil and gas prices fell. Development costs for
Australian gas fields rocketed. And, as a result of these factors, KAR’s management made the decision to
cash in their gas interests.
They completed a deal to sell their 40% interest in their Browse Basin permits to Origin Energy for up to
US$800 million.
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KAR currently has interests in the following petroleum exploration assets:
· Australia – two offshore permit areas: WA-314-P and WA-482-P in the Browse Basin and Carnarvon Basin;
· Brazil – six offshore Blocks in the Santos Basin: Block S-M-1037, Block S-M-1101, Block S-M-1102, Block
S-M-1165, and Block S-M-1166; and
· Peru –two Blocks: Block 144 (onshore) and Block Z-38 (offshore).
Many shareholders are currently impatient and upset that the next “action” we’re likely to see in the stock
won’t come until the drilling of two appraisal wells on its Brazilian exploration blocks in the second half of
2016. A drilling rig has already been contracted for this.
But management is also on the lookout to acquire producing oil assets at current depressed prices, if they
can find a deal that makes sense.
From where I sit, we should give management the benefit of the doubt. They clearly have a knack for getting
involved in the right oil and gas basins, gaining exposure to prospective exploration blocks, and hiring the
right people to run their exploration business and make discoveries.
They also showed good commercial acumen to sell their Australian discoveries when oil and gas prices were high.
Now they are sensibly focussing on lower-risk, appraisal wells to further their understanding of their Brazilian
discoveries.
They have a plan for a low capital expenditure production method to start generating early cash flow from these
assets, if an oil price recovery materializes. The method is based on a proven technique that Petrobras designed
and used on neighbouring properties in the same basin to profitably extract oil for less than $40 a barrel.
Another thing I like about KAR’s management is that they’ve shown a willingness to buy back the company’s
shares when they are cheap, which leads me to…
How we’ll make money
I see a number of potential catalysts to reverse the slide in KAR’s share price and set it back on an upward path.
1) The current share buy-back of up to 10% of the outstanding shares should place some sort of floor under
the price.
2) Oil prices could recover faster than the market expects.
3) KAR could make a value-accretive acquisition.
4) Its appraisal wells in the second half of the year could surprise on the upside.
5) It could become a takeover target.
6) Things could go from bad to less bad in Brazil, improving sentiment.
7) The market might just become a little bit more rational and at least price the stock at close to its cash backing.
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Bottom line: we’re buying the shares so cheaply – at a one-third discount to net cash – it won’t take much
positive change for us to see profits on this one.
Still, it’s a pre-cash flow company in a speculative and high-risk sector. So, I don’t want to allocate too much
of our Model Portfolio’s capital to this one.
RECOMMENDATION: BUY shares in KAR around current levels of A$1.22. Use 1/12th of the capital you have
allocated to trading my 4th Pillar recommendations.
DISCLOSURE: Tim Staermose owns or controls 20,000 shares in KAR purchased at an average of A$1.345.
S&P ASX 300 INDEX INCLUSION SEES RFF SHARES RUN
UP ALL THE WAY TO A$1.60 BEFORE A SLIGHT PULL
BACK; YOU’RE NOW UP 78%
Last month, I pointed out the irony that now Rural Funds Group (RFF on the Australian
Securities Exchange) has done very well, risen in price, and become large enough to be included
in the benchmark S&P ASX 300 index, it is suddenly on many investors’ radar screens.
When it was cheap and offering much better value and upside potential, few people knew about it.
Thankfully, I discovered it early, and we were able to get in for just A$0.925 per share back in mid-2014.
With A$0.131 in dividends and distributions paid out since then, and the shares settling at $1.52 last week,
after a brief spike all the way to A$1.60, you are sitting on up to 78.4% profits.
Keep holding. I think more profits are in store. As I said last month, the company has recently invested
heavily in future growth, and I believe it has a bright long-term future. However at 1.33x book value, and on
a yield of 5.6%, it is no longer a bargain.
RFF will pay its next quarterly dividend of A$0.022325 per share on April 29th. The shares will trade ex
dividend from March 30th.
RECOMMENDATION: HOLD.
DISCLOSURE: Tim Staermose owns or controls 112,508 shares in RFF purchased at an average of A$1.062.
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YORKEY OPTICAL REPORTS PROFIT OF $4MN
FOR 2015 AND DECLARES 10C SPECIAL DIVIDEND;
SHARES SOAR 18% IN A DAY
After buying back some shares in recent years with its huge surplus cash pile, Yorkey Optical
(2788.HK on the Hong Kong Stock Exchange), finds itself with 821,102,000 shares on
issue, a current share price of HK$1.00, and a market capitalization on current HKD/USD exchange rates of
approximately, US$106 million.
It made a net profit of US$4.03 million last year, even after writing down the value of its Brazilian subsidiary
from US$5.05mn to US$848k. And it has US$123.8 million in the bank and ZERO debt.
As Simon recently said:
“Putting that in a context that most folks can easily understand: you have a profitable business that made
$4k last year, has $124k net cash in the bank and zero debt, yet is being offered for sale at $106k. How fast
would you write that check?
“You’d immediately have your entire purchase price back, pocket an instant $18k gain, and own a business
putting $4k in your pocket each year going forward.”
He’s right. It’s a no brainer. A total lay-up.
Yorkey recently announced results for 2015. Encouragingly, in addition to the HK$0.035 regular Final
Dividend, which it will pay in August, Yorkey declared a Special Dividend of HK$0.10 per share, which it will
pay in September.
It appears management is finally getting the message that many shareholders would prefer the company’s
cash in THEIR OWN pockets, and not sitting in a big lazy pile on Yorkey’s balance sheet.
After all, Yorkey is profitable, cash flow positive, and even after last year’s dividend payments, saw its cash
pile GROW.
On the first trading day following the results and special dividend announcement, Yorkey’s shares popped
as much as 18.3%, from HK$0.93 to a high of $1.10. They’ve since retraced part of that gain, and are
offering you another good buying opportunity.
For anyone who doesn’t already own shares in Yorkey, it’s a BUY up to HK$1.01. If you already own
shares on my initial recommendation at HK$0.78, you’re already up 36%, including dividends. Well done.
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RECOMMENDATION: HOLD/BUY up to a limit of HK$1.01. Use as much as 1/8th of the capital you have
allocated for trading my 4th Pillar recommendations.
DISCLOSURE: Tim Staermose owns or controls 534,000 shares in 2788.HK purchased at an average of
HK$0.843.
COKAL STILL WORKING ON A NEW TAKEOVER DEAL OR
IPO; MEANWHILE IT RAISES $500,000 VIA AN ASSET
SALE AND CONSULTANCY FEE
Cokal (CKA on the Australian Securities Exchange) was the high-risk takeover
arbitrage that failed to get the expected outcome for us, but remains in the Model Portfolio as the
company has been working on several other deals.
None of these deals have yet come to fruition. But I remain hopeful of something providing a catalyst for
the share price, which is now a depressed 3.1c.
One of the strategies the board has considered is to list a share of the company’s Indonesian coking coal
properties on the stock market China. This remains a long-shot given the downturn on China’s equity
markets.
But, on a positive note, there has been a noticeable up-tick in Chinese investment interest in Indonesia in
recent months. Indonesia’s humble, workmanlike President, Joko Widodo, has been hard at work on the
international political circuit, drumming up interest in infrastructure investment in the country. And China is
taking note.
With Chinese companies running out of obvious infrastructure work that needs doing at home, they realize
they may need to look abroad to stay busy. Indonesia is a sprawling country of almost 15,000 islands, and is
in dire need of extensive infrastructure investment. It could potentially be a match made in heaven.
One Chinese conglomerate already has plans to build a steel works in Indonesia. I expect many more such
initiatives to follow.
Cokal, you may recall, is sitting on several promising coal properties in the Indonesian province of
Kalimantan on the island of Borneo. The company has made good progress with its permissions and
permitting, and is located next to BHP and Adaro’s operating Haju mine.
The type of coal Cokal has is the type used to fire blast furnaces for steel-making, and not the much
maligned form of coal that is used to fuel power stations. So the global warming hysteria is less of a
negative for CKA.
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While they work toward making something happen on the corporate front, Cokal’s management remains
mindful of the fact they need to keep paying the bills. So, it was encouraging to see them raise US$500,000
this month, without going back to the market with cap in hand.
They sold one of their less promising and more remote exploratory-stage coal concessions in Indonesia for
$100,000. And, they signed on as a consultant to another foreign company currently trying to negotiate the
Indonesian permitting and approvals process. They will earn a $400,000 fee for this.
Market reaction has been non-existent, and CKA shares remain bombed out at A$0.031. I think that’s too
cheap, and if you own them, my advice is to hold. I am doing so with my own shares.
If you are not in the stock, however, I’d steer clear. Use your money to buy some of my other
recommendations instead. They are lower risk.
RECOMMENDATION: HOLD.
DISCLOSURE: Tim Staermose owns or controls 1,140,000 shares in CKA purchased at an average of A$0.093.
YOU’RE UP 36% ON NTP, BUT IT’S STILL SELLING AT A
DISCOUNT TO LIQUIDATION VALUE, WITH ZERO VALUE
ATTRIBUTED TO ITS REAL ESTATE
Nam Tai Properties (NTP on the New York Stock Exchange) is a former contract
manufacturer of liquid crystal display modules and other parts for electronics and automotive dash panels.
In 2014, it decided to get out of that low-margin, cut-throat business. It turned its attention instead toward
developing its two valuable former factory sites in Shenzhen, China, into higher value-added commercial,
retail, and residential property.
I was attracted to the stock for two main reasons.
First, one of these factory sites is recorded on the books at historical cost dating back to 1993, when Shenzhen
was only a small developing town, and not the fourth biggest and second wealthiest city in China. The other is
also held on the books well below its present value, with the acquisition cost of $9.1mn dating to 2006.
Clearly the value of these properties today is many multiples of what they are on the books at. Even more
so, if NTP can successfully add value by developing them, and selling apartments, offices, and shops.
Second, the company had more cash in the bank than its market valuation. It was just nuts.
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So, I went to Shenzhen, turned up unannounced at the gate to its old factory site in Guangming, and
had a look around. The property is well located, close to public transport, and suitable for the mixed-use
development project the company is working on and calls “Namtai Inno Park.”
NTP is now well on the way to making it a reality. During the past year they received the Permit for Construction
Site Planning from the municipal government and are well advanced with plans to start work at the site.
NTP has appointed an internationally renowned and award winning architectural design firm, Ronald Lu
and Partners (Hong Kong) Ltd., as well as WSP Parsons Brinckerhoff, an international Project Management
Company (PMC), and Currie & Brown, another reputable international firm, to provide quantity surveying /
cost management services for the development of Namtai Inno Park.
NTP expects to finalise the master layout plan for Phase 1 of the development of Namtai Inno Park in the
second quarter of 2016.
With things progressing well for the company, the discount to cash backing has since closed – also helped
in part by NTP’s management twice offering to buy back shares via tender offers at a big premium to the
listed share price.
Due to these share buy-backs, the share count is now just 36.7 million, down from 45.3 million.
But, even today, with a total market capitalization of $221.7 million, NTP trades below its net working
capital (short-term assets including cash, minus all short-term liabilities), which came to $226.6 million as of
December 31st, 2015.
The company doesn’t carry any debt. And its “land use rights” (essentially long-term leases, as only the
government and peasant collectives can own land in China) are booked at just $38.4 million on the balance
sheet. You get those, and all the upside potential of its property development activities thrown in for free at
the current share price.
If you bought shares in NTP on my original recommendation, you’re doing well. Including dividends, they
are up 36.1% since December 2014. NTP trades ex another quarterly dividend of $0.02 per share on March
30th. You will be paid on or before April 30th.
There are still many execution risks involved with NTP’s proposal to develop its properties. But so far things are
progressing to plan, and I have no reason to doubt that management can make us all more money in future.
It also gives me a lot of comfort that the directors and senior management at NTP collectively own 36.9% of
the company. So their interests are directly aligned with ours.
RECOMMENDATION: HOLD.
DISCLOSURE: Tim Staermose owns or controls 12,500 shares in NTP purchased at an average of US$4.41.
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CVN UP 12.5% IN A MONTH FOR YOU
My recommendation of Carnarvon Petroleum (CVN on the Australian Securities
Exchange) last month coincided almost with the stock’s 52-week low of A$0.07. You should have been
able to purchase shares for A$0.072 or less.
Why the stock is so cheap remains a mystery to me. CVN’s current market capitalization is only A$82 million.
CVN made A$16 million net profit in 2014. It made A$25 million net profit in 2015.
It has A$100 million in net cash, and no debt.
It has a long-term receivable of US$31.5 million from the sale of its Thai oil properties. The first scheduled
payment of A$1.1 million was received on time and in full.
Its partner, Quadrant Energy, will pay the first A$8 million of CVN’s share of the drilling costs on the
upcoming Roc-2 well to be drilled early in the second half of 2016.
The recent Roc-1 well has been confirmed as a possible commercial discovery.
The successful Phoenix South-1 well, which discovered light oil in 2014, and previously saw CVN’s share price
spike to over A$0.40 per share, is only 12.5 miles away from Roc-1. It wasn’t drilled to the same depth as
Roc-1. And CVN thinks there is potential for more oil and gas to be found at greater depths.
The two fields could be developed together in future. Early estimates are they could generate gross cash
flows of over A$2.8 billion, with an estimated total development cost of A$1.6 billion.
CVN and its partners are also drilling a second well at its Outtrim 1 discovery in June, which could provide
yet another catalyst for the stock price.
This is a serious, well managed company, selling at a substantial discount to its cash and liquid asset
backing. And you have a great opportunity here to build a substantial position at a very attractive price.
It will most likely not be a get-rich-quick proposition. But if CVN’s discoveries to date in the North West Shelf
of Western Australia turn out to be anything like they are projecting, when production commences in as little
as four years’ time, this could be a blue-chip stock in the making.
RECOMMENDATION: HOLD/BUY up to A$0.081. Use as much as 1/8th of the capital you have allocated for
trading my 4th Pillar recommendations.
DISCLOSURE: Tim Staermose owns or controls 600,000 shares in CVN purchased at an average of A$0.109.
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LE SAUNDA SEES DECLINE IN SALES AND PROFITS;
BUT THE NEWS IS WELL AND TRULY FACTORED INTO
THE SHARE PRICE
Le Saunda (738.HK on the Hong Kong Stock Exchange) was another new addition to
the portfolio last month. You should have been able to buy shares for HK$1.66.
Le Saunda is in the shoe business. Its business is vertically integrated all the way from design, through
manufacturing, to retailing. The company has 790 self-owned stores in Mainland China, Hong Kong and
Macau and 106 franchised outlets in Mainland China.
Retailing is in the midst of a soft patch in greater China right now, and for the three months that ended February 29th Le
Saunda experienced a drop in sales of 12.9% across its three markets. Even e-commerce sales declined 1.7%.
As a result of this revenue weakness, operating losses in Hong Kong and Macau, and cost-increases in
Mainland China, the company is expecting to report a 35% drop in earnings for the 2015/2016 financial year.
However, its share price is now down more than 52% from the 52-week high. That seems excessively harsh. Le
Saunda has a quality business that exhibits superior returns on invested capital, and has a long track record of
generating excess cash flow and paying a healthy stream of dividends to shareholders.
It was recommended as a solid long-term buy and hold stock because the valuation currently appears too cheap.
RECOMMENDATION: HOLD/BUY up to HK$1.66, if you don’t already own shares. Use as much as 1/8th of the
capital you have allocated for trading my 4th Pillar recommendations.
DISCLOSURE: Tim Staermose owns or controls 176,000 shares in 738.HK purchased at an average of HK$1.983.
YOUR GAINS ON AJD SHARES NOW 33%
Shares in Asia Pacific Data Centres (AJD on the Australian Securities Exchange) had
an uneventful month. You will receive your next quarterly dividend payment of A$0.024 per share on April 29th.
Dividends and capital gains to date have you sitting on as much as 33% gains in this stock since my
recommendation back in September 2014. The yield is still 7%, and remains attractive relative to most
alternative investments with a similar risk profile.
RECOMMENDATION: HOLD.
DISCLOSURE: Tim Staermose owns or controls 67,673 shares in AJD purchased at an average of A$1.122.
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4TH PILLAR MODEL PORTFOLIO AS OF 27 MARCH 2016
COMPANY
TICKER DATE
ENTRY CURRENT DIVIDENDS
%
WEIGHTING
NOTIONAL IN USD
PURCHASED PRICE
PRICE
GAIN/LOSS A$100,000
PORTFOLIO
Deep value
Yorkey Optical (HK$)
2788.HK
02/06/2013 $0.780 $1.000 $0.190 52.6%
10.7%
$16,259.40 Nam Tai Properties (US$)
NTP
02/12/2014 $4.510 $6.040 $0.100 36.1%
9.9%
$15,070.61 Carnarvon Petroleum
CVN
02/04/2016 $0.072 $0.081 $- 12.5%
9.3%
$14,062.50 Dividend income
Rural Funds Group
RFF
01/07/2014 $0.925 $1.520 $0.131 78.4%
14.7%
$22,304.73 Asia Pacific Data Centre
AJD
26/09/2014 $1.090 $1.335 $0.115 33.0%
11.0%
$16,628.44 Le Saunda
738.HK
02/04/2016 $1.660 $1.650 $- -0.6%
7.8%
$11,882.06 Trading / Arbitrage
Cokal
CKA
02/07/2015 $0.100 $0.031 $- -69.0%
1.3%
$1,937.50 Cash*
35.3%
$53,473.31 Total*
51.6%
100.0%
*Including profits/losses to date
$151,618.55 $12,713.68
$11,345.16
$10,586.25
$16,791.00
$12,517.89
$12,424.70
$1,458.55
$40,254.71
$118,091.93
AUD/USD Exchange rate $0.753 RECENTLY CLOSED OUT POSITIONS
COMPANY
TICKER
DATE
SOLD
LIMIT
PRICE
SELLING
DIVIDENDS
PRICE
%
GAIN/LOSS WEIGHTING
PROFIT/ LOSS
IN USD
UXC Limited
Australian Dollar short
sale (US$)***
DMX Corporation**
Coffey International
New Zealand Oil & Gas****
Strike Resources
Coalspur Indophil Resources
UXC
12/02/2016
$1.215 $1.220 $0.020 2.1%
9.5%
$195.82 $139.03
FXA
DMX
COF
NZO
SRK
CPL
IRN
02/02/2016
02/02/2016
29/01/2016
02/10/2015
15/09/2015
26/06/2015
1/28/15
$89.30 $2.456 $0.410 $0.869 $0.050 $0.021 $0.280 $70.57 $0.700 $0.425 $0.370 $0.055 $0.023 $0.300 $2.778 $1.800 $- $0.217 $- $- $- 17.9%
1.8%
3.7%
-32.5%
10.0%
9.5%
7.1%
25.0%
1.3%
12.5%
8.5%
6.8%
12.5%
12.5%
$22,626.95 $1,900.50 $457.32 -$2,704.26 $752.98 $1,190.48 $892.86 $15,952.00
$1,349.36
$324.70
-$1,968.70
$548.17
$909.52
$682.15
****Adjusted for cancellation of 1 in 5 shares in return for NZ$0.75 capital return
***Assuming 30% margin requirement on short sale of 1,000 shares
**Entry price adjusted for A$35 capital return paid 29 Feb 2012, and A$18 capital return paid on 9 April 2012 and 100-1 share consolidation
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APPENDIX A
KAR’s successful 11-year+ exploration track record
AUSTRALIA
Browse Basin – Exploration Permits WA-314-P, WA-315-P, WA-398-P
•
2004 - Acquired WA-314-P and WA-315-P (Karoon 100%)
•
2006 - Acquired 1,131 km2 3D seismic survey and 845 km 2D seismic survey •
2006 - Farm-out WA-314-P and WA-315-P and operatorship to ConocoPhillips (Karoon 40%)
•
2007 - Awarded exploration permit WA-398-P in the Browse Basin (Karoon 40%)
•
2008 - Acquired 1,900 km2 3D seismic survey over WA-398-P
•
2009 - Poseidon-1 wet gas discovery
•
2009 - Kontiki-1 dry hole
•
2010 - Kronos-1 wet gas discovery and production test
•
2010 - Acquired 2,828 km2 3D seismic survey over greater Poseidon structure and surrounds
•
2011 - Equity interest in WA-314-P increased from 40% to 90%
•
2012 - Boreas-1 wet gas discovery and production test •
2013 - Zephyros-1 wet gas discovery
•
2013 - Proteus-1 wet gas discovery
•
2014 - Grace-1 dry hole
•
2014 - Poseidon North-1 wet gas discovery
•
2014 - Pharos-1 wet gas discovery
•
2014 - Equity interest in WA-314-P increased to 100% and operatorship assumed
•
2014 - Divested WA-315-P and WA-398-P to Origin Energy for up to US$800 million
Carnarvon Basin – Exploration Permit WA-482-P
•
2012 - Agreement to Farm-in to WA-482-P (Karoon 100%)
•
2013 - Acquired 2,375 km2 3D seismic survey
•
2014 – Farm out 50% and operatorship to Apache (now Quadrant Energy) for US$9 million + 90%
carry in 1 well (Karoon 50%) •
2015 – Levitt-1 dry hole
Other
I S S U E
•
2007 - Gippsland Exploration permit PEP-162 lapsed
•
2008 - Gippsland exploration permit EL-4537 relinquished
•
2011 - Relinquished AC/P8 Bonaparte Basin
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BRAZIL
Santos Basin – Blocks S-M-1037, S-M-1101, S-M-1102, S-M-1165, S-M-1166 •
2007 - Awarded 5 exploration Blocks, Santos Basin in Bid Round 9 (Karoon 100%)
•
2010 - Acquired 750 km2 wide azimuth 3D seismic survey
•
2012 - Farm-out 35% to Pacific Rubiales Energy Corp for $40 million + $70 million per well
•
2013 - Kangaroo-1 oil discovery
•
2013 - Emu-1 dry hole
•
2013 - Bilby-1 oil discovery
•
2013 - Kangaroo initial Contingent Resource
•
2013 - Discovery Appraisal Plan approved
•
2014 - Kangaroo-2 appraisal well production tested
•
2015 - Kangaroo West 1 - Dry Hole
•
2015 - Echidna-1 oil discovery and production test
Santos Basin – Block S-M-1352
•
2010 - Farm-in to Petrobras’ exploration Block S-M-1352 (Karoon 20%)
•
2010 - Maruja-1 oil discovery (renamed Bauna Sul)
(Block since relinquished, 1Q2016)
PERU
Tumbes Basin – Block Z-38*
•
2008 - Farm-in agreement for 20% interest + an option for an additional 40% (Karoon 20%) **
•
2009 - Acquired 2,300 km 2D seismic within Block Z-38
•
2009 - Exercised option for an additional 40% (Karoon 60%)
•
2010 - Acquired 1,500 km2 3D seismic within Block Z-38
•
2011 - Exercised option for an additional 15% (Karoon 75%)**
* Block Z38 is currently in force majeure (low oil price means a moratorium on minimum spending obligations)
** Subject to completion of farm-in obligations
Maranon Basin – Block 144*
•
2009 - Awarded 100% equity interest in exploration Block 144 (Karoon 100%) * Block 144 is currently in force majeure (low oil price means a moratorium on minimum spending obligations)
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