I normally don’t post when I buy a stock because there is always the possibility that I will buy more. However,I am limit long with 10% of my equity portfolio invested in this company and think it’s time I contribute to the forum. At the current price (around $1.80)I consider PTM to be extremely cheap!
When you buy a share of PTM at$1.80 you immediately receive around 58c in cash and ‘quasi cash’. The ‘quasi cash’ is ‘seed’ investments in some of the PTM funds. Some of the cash will be used to seed new funds (such as PTM’s prospective ‘Carbon Transition Fund’). When you normally buy a company which is cheap, and it has cash or ‘quasi cash’ on the balance sheet there is often a significant risk that this cash or ‘quasi’ cash will be swallowed up in trying to revive the company. I think there is a very low risk that a strong cash flow positive company like PTM will have to dip into its cash or ‘quasi cash’ reserves. So, in effect you are paying less than $1.25 for the underlying earnings stream of PTM (a small part of the underlying earnings comes from the seed investments). If PTM was to earn 18c fully franked this year which is 25.7c unfranked, you are receiving a gross dividend of over 20%on the $1.25. That is extraordinary for a company with no debt and considerable growth potential.
Ok, great so what is a reasonable downside risk! The major risk quite simply is that funds under management continue to fall dramatically. This could be because of a large fall in international share prices and/or continued large withdrawals by investors. Let’s assume this happens! Let’s assume PTM’s earnings (dividend) falls from 22c last year to 14c in the next year, 11c in the following year and 8c the year after. So keeping this analysis simple (ignoring inflation) we now have received 33c back of our initial investment of $1.25. So, in three years’ time the underlying business has now cost us 92c. Let’s be pessimistic and assume that PTM’s earnings (dividend) then falls to 6c and stays there. At this stage we would still be getting a gross dividend yield of 6.5%! (6/92c). That’s right! If ‘bad’ things happen to PTM it is a reasonable assumption that you will still receive 6.5% on the underlying business. This scenario does require there to still be considerable funds under management. However, I think this is a reasonable assumption given PTM’s history during previous periods of underperformance and because I think a significant proportion of its investors will be ‘sticky’ and remain invested either because they believe in the fund’s methodology and/or simply because of inertia.
Ok that all sounds interesting but how can they ‘turn this around’? ‘Value’ stocks as many of you know have underperformed ‘growth’ stocks massively for the last 8 years plus. This has largely been because of the massive price rises in US Technology stocks during this period. PTM is, and always has been, a hard-core value investing manager. Because they are value investors they have ‘underperformed’ for a long period of time. This growth versus value disparity is, in my opinion, unsustainable. If this turns around and value outperforms growth then PTM will outperform and eventually funds will flow back in. In that scenario PTM’s earnings (including performance bonuses) and the gross yield on the underlying business you are purchasing for$1.25 a share could be enormous!
(I am the author of the fallible investor blog. https://rthompson5.wordpress.com/about/ )
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