Portfolio Update Mar 2011


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2011 1st Quarter Stock Portfolio Performance

Positive for the year, but lagging behind. Not concerned as my portfolio contains some clearly undervalued but illiquid stocks, making short term performance difficult to judge.

What’s with Mr Market?

First quarter is out of the way, and with the events that have rolled out in just the first three months alone, I am left scratching my head at how the market is doing so well. While Mr Market obviously feels optimistic, I remain on the cautious side and hesitant in adding new or big positions.

Had you told me at the beginning of the year that three major international events (Egypt, Japan, Libya) would be taking place, I would have concluded that buckets of opportunities would exist. Looking at where we are now, Mr Market has recovered and moved on from all three major events.

As the market continues on up, it is times like these where sitting and waiting patiently is one of the hardest things to do.

Retail Holdings (RHDGF)

Throughout the first quarter, I have mostly been monitoring positions and adding on drops.

One such addition in March was Retail Holdings (RHDGF). RHDGF announced that it had decided not to pursue the sale of its Bangladesh subsidiary citing “turbulent equity market conditions”.

This news brought the stock down 16% and goes to show how inefficient the market is when it comes to international micro cap stocks. Despite the cancellation of the sale, the value of the company remains the same yet it went on sale for a few days before returning to a somewhat more reasonable level.

Even at the current price at $15.70, RHDGF is undervalued by as much as 40%. With the CEO owning 20% of the company, special dividends distributed between 2007 to 2009 and management stating that they are looking to monetize assets and return it to shareholders, you have a very shareholder friendly management who understand the value of their business seeking to unlock the value.

Meruelo Maddux Properties (MMPIQ)

This bankruptcy special situation investment sure is taking many turns.

Greedy management is now sneakily requesting an amendment to the Plan or Reorganization in which they will be able to appoint all seven board members, effectively hoping to eliminate any non insider influence. Debtors are voting to accept the request as it will only benefit them if equity holders disappear.

I bought more MMPIQ when it dropped to 40c and will be sending a letter to the Judge ASAP objecting to such amendment requests.

If you are a shareholder of MMPIQ, send your letter to the judge ASAP and speak up. Here is a sample letter.

Books-A-Million (BAMM)

BAMM is having an awful year so far with the falling out of the traditional book retailer sector. Borders group has filed bankruptcy and the perception for brick and mortar bookstores is not getting any better. But it leaves me to think that it has been overdone.

BAMM still remains profitable on a full year basis and consistent . Despite a slowdown in the fourth quarter, BAMM should be able to able to produce FCF above $15m when the annual report comes out. On this basis, BAMM would be trading at a P/FCF of 4. Flipping it over, the FCF yield is 25%.

At $4, the valuation is becoming ridiculously low. Even with zero growth, given the level of consistency and the health of the company, BAMM should be at a minimum of $6. That’s a potential 50% gain from current levels.

But with such negativity surrounding the entire sector, it will take a couple of years before the value becomes recognized or even accepted by the market.

Gravity Co (GRVY)

The year end result shows that revenue and subscription revenue decreased primarily from Rganarok Online. But the decline has been expected for many years, which is why GRVY has been acquiring games in order to further diversify their income.

The effect of this can be seen if you compare the non consolidated financial statement with the consolidated. The addition of the new games is offsetting Ragnarok’s decreasing revenue and better still, GRVY remains in excellent financial health. However, with the acquisitions, the once clean financial statement has now become messier as extra entities make their way into the consolidated financial statement.

Cash has obviously gone down with the new game purchases but overall the balance sheet remains healthy with no long term debt.

Intangibles has increased 28% which is a large jump. Should any of the newly acquired games fail, expect intangibles to written down.

A cause for concern is that accounts receivables increased 32% and accounts payable jumping 70%. While it is too soon to be alarmed at such increases, it does require monitoring.

The other big news to anticipate in the second quarter is the long awaited launch of the sequel to Ragnarok Online. This is the big catalyst that I have been waiting for. Thankfully, the current price offers a solid downside protection with an even bigger upside.

Brief Notes

BOLT: Additional information on their new acquisition is out. Seabotix looks like an interesting company but at the moment, it won’t add too much to BOLT’s operation. Now that i have the new details, I’ll be looking to unload BOLT at the right price.

YNGFF: Dropped significantly lately and the company successfully converted existing warrants. The deal wasn’t the best for the company but it certainly is MUCH better then further diluting shareholders to raise capital. It looks like the company was in desperate need for cash but once they complete winterizing the mining facilities, production can go on all year round without any downtime during the winter season.

Gold is not likely to drop any time soon and at $1400/ounce,  YNGFF will be a very profitable investment in the future. Will take at least 1 year before production can be achieved and to see the levels that I am expecting.

RDI: Land on the balance sheet remains hugely undervalued. A simple waiting game. Selling at book value but the land value understates current worth.

Disclosure: Long RHDGF, MMPIQ, BAMM, GRVY, BOLT, YNGFF, RDI

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5 responses to “Portfolio Update Mar 2011”

  1. jsarasin says:

    @Jae

    Cash should actually increase significantly once consolidated financials come out. What I expect is the increase in the investment accounts will actually be moved to actual asset and liability accounts. This is cause they have to reflect the 50% investment in Barunson. So unless Barunson used all the cash GRVY paid to acquire the 50% I expect cash to go up around 5,000 million KRW (little less than 50% of the 11688 mill used in the purchase). If you want to be optimistic it could go up more cause Barunson probably had some cash on there books in the first place. This is all in theory but we will see when the 20-f comes out.

    Thanks
    jsarasin

  2. valueinvestortoday says:

    Jae, in regards to your RDI holding. How comfortable do you feel that 2 people on the executive team as well as 2 people on the board of directors are related?

  3. bob says:

    hi jae –

    nice portfolio. has a lot of downside protection. few questions: how confident are you that yngff can hit the 150k production level within a year given their q4 difficulties in the earnings release a few days ago? with respect to rdi, no mention of burwood square seems kind of dodgy. although cotter seems to be a good manager, family controlled stocks sometimes can take years to unlock hidden real estate value (i.e. syms). if they don’t sell burwood or cinema123, you think rdi is a buy here? thanks in advance.

  4. Jae Jun says:

    @ jsarasin,
    Yes very true. The cash they paid out will be gained through consolidated statements. That goes the same with receivables and liabilities as well.
    But I wont know for sure until the report comes out. 5% drop today following non consolidated statement filings.

    @valueinvestortoday,
    as long as I dont see any related party transactions where they clearly benefit, I am ok. Not the best situation but there are still lots of shareholder friendly family controlled companies.

    @bob,
    Not knowing how and when real estate value will be unlocked is one of the biggest risks as well as one of the most difficult catalysts.
    That’s why I made it a small position so that I can ride it out for several years without hampering other opportunities.

  5. jsarasin says:

    @Jae

    Just wanted to comment that I was a little too optimistic regarding the expected increase in cash. If you look at the unconsolidated report I believe our answer is on page 20. It show the subsidiaries information. Barunson’s numbers are not too impressive. But obviously the game with Barunson wasn’t implemented until the 4th quarter of 2010. NeoCyon’s revenue number looks impresive though.

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