colonization and takeover, page-33

There is a linkage between return on investment, Competitive advantage and replacement cost of assets. Unless SHV has some sort of competitive advantage there is no reason to believe they will make an outsized return beyond that which will be made by the industry in general. If the return by the company on its real asset is identical to cost of capital to the industry then the value of the company is the cost to replace its tangible assets.(i.e It makes a return of 15% on its assets which can also be financed at 15% so fair book value multiple is 1) If the company is at a competitive disadvantage then the value of the company will be less than the replacement cost of its tangible assets because it will continue to consume capital at an inferior rate until it is no more.

I like SHV and it's exposure to some big Macro themes that I want t to invest in. It's pretty close to what I think is a fair price but a couple of things have led me to my decision.

Specific to the market - I have seen it get really negative on stocks and price them way lower than what I think is reasonable, so I pay due recognition to the current negative sentiment.

Specific to the company -
I think Olam is going to be a significant competitor to SHV and potentially hold the competitive advantage in the Aus Industry. They are likely to have a lower cost of capital then SHV and the scale advantage.

SHV has invested 32million into a 40,000 tonne processing plant yet the current full maturity yield under their control (ex Olam) is currently less than half that. So I am worried about the efficiency of the plant. Also the costs of transport from WA for processing.

Over 4000 acres of the SHV Orchard is leased. This is a large fixed financial commitment into the future and will magnify the bad seasons as well as the good. Combined with their level of debt, leverage is quite demanding.

The capex, business acquisition or additional lease commitments required to secure full tonnage to their processing plant may necessitate more capital raisings at potentially undervalued share valuations hence diluting current holders.

I am mindful that the majority of people that will read this post probably are SHV holders and I don't want to agitate you all. I have pointed out in my past two posts what I think and have found from my investigations and I have indeed decided not to invest at these prices. But on the flip side, all things considered SHV is still a better proposition and valuation than the majority of companies on our market in my view, especially some of the high flying mining Turkeys. We are only talking differences of degrees on the invest proposition not polar opposite positions. Those few different degrees could quite possibly be because I have not gathered enough information or my judgement is wrong.

Two risks of not being in now would be a falling dollar which will not only improve the operating position but also improve share valuation to international investors. And the potential for Olam to make an offer, they would have to be looking at the SHV valuation prior to making a final commitment on their processing plant Capex.

I'm still digging for information and am grateful of others insights - I have read back some way and there is obviously some people posting who know the company well. Thanks for sharing.

Cheers