revisiting investment thesis, page-74

Hi Deja,

Long time, no speak.

For a story that went largely to script, notably in the form of a completely de-leveraged balance sheet, the stock price initially responded largely the way I had hoped/expected, as the financial risk was all-but-eliminated.

If my memory serves, I remember the debate on Hotcopper when the share price was around 77c or 78c, in which I had envisaged 4 separate scenarios, with expected target prices of, respectively, around 90c, 97c, 120c and 155c.

I recall at the time probability weighting those scenarios by likelihoods of 20%, 30%, 40% and 10%, respectively, leading to a resultant weighted average target price of 110c

The stock price dutifully got there as the re-rating started to take shape following the full repair of the balance sheet in early 2014. At 110c share price the EV/EBITDA multiple was around 7x, which I thought at the time was an appropriate rating for the stock, and a level at which I would ordinarily have been happy to continue owning the business on assumption that the surplus cash flow would be returned to shareholders (in all likelihood, a share buyback would have been the preferred capital return mechanism, given the limited level of franking credits).

Trouble is, on the full-year result teleconference, it became clear to me that shareholders would not be getting their greedy paws on the surplus capital; rather, the CEO had been mandated to grow the business by acquisition.

On this conclusion, I sold the bulk of my TPI stock on the same day.

You see, I thought the New Zealand business that was sold had its own challenges (it was facing all sorts of anti-competition questions by regulators and besides, and it looked to have been operating at the top of its earnings cycle), so I had no issue with them selling it, especially at the attractive price they were bid for it.

But what I did not expect/want as a shareholder was for that capital to be re-cycled into acquisitions in Australia. I think it is difficult to acquire astutely in this industry because of the always-lofty vendor expectations, as well as the competitive business environment, generally.

It was an acquisition spree in the mid-2000s that got this company into a pickle in the first place through the destruction of shareholder value by paying excessive prices for businesses.

Of course, the new piece of information that emerged from the result was the need for an extra ~$30m pa for 5 years for landfill rectification and remediation spending, which I suspect might have surprised some holders of the stock.

Since the result we’ve also had the small matter of the brief grounding of the fleet, which I think is what has further soured sentiment towards the stock.

I have to concede that, given these updated developments, the likelihood of Scenario 4 coming to pass is negligible, absent a takeover offer for the company.

So I now think a weighted average target price of 100c is more realistic (derived, somewhat scientifically by 30%, 50% and 20% weightings of Scenarios 1 to 3, respectively).


In effect the de-leveraging has occurred, as expected, but the desired subsequent re-rating hasn’t, leaving the stock still-languishing at a lowly 5.0x EV/EBITDA multiple.

And it is difficult to see what catalyst gets the stock back to what I would consider an appropriate rating of 7.0x EV/EBITDA.
(But then again, having a business owner mindset, as opposed to that of a short-term stock “renter”, one thing I’ve been inordinately poor at, is the identification of “catalysts” for share prices)


In closing, while I didn’t do quite as well out of TPI as I thought I might at the outset (I returned about 40% over a period panning some 36 months – crudely around 12% pa - which is satisfactory, but not mouth-watering), I am happy that my approach to buying the stock proved the limited downside risk, because as the years go by, I am increasingly of the view that the most important aspect to investing is far less about jagging the multi-bagger, but it is about avoiding permanent capital losses.

I console myself with the thoughts that in any portfolio of stocks, there will be one or two that fail to deliver the quantum of financial returns envisaged.

And hey, if all my mistakes result in a 12%pa positive return, then I will always be delirious about that sort of outcome!

Best

Adam

PS. If you held a gun to my head and asked me what I thought the share price is going to do from here, then I would hazard that it will gradually migrate upwards as a new set of “growth” investors, who are partial to acquisitions, migrate to the stock. But I will be a seller of my remaining small holding if the share price gets close to 100c again.