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Geoff Gannon November 25, 2019

Sydney Airport: A Safe, Growing and Inflation Protected Asset That’s Leveraged to the Hilt

Today’s initial interest post really stretches the definition of “overlooked stock”. I’m going to be talking about Sydney Airport. This is one of the 20 to 25 biggest public companies in Australia. It has a market cap – in U.S. dollar terms (the stock trades in Australian Dollars) – of about $13 billion. It also has a lot of debt – including publicly traded bonds. So, not what you’d normally consider “overlooked”. On the other hand, Andrew and I have a couple standard criteria we use (low beta and low share turnover) to judge whether a stock might be overlooked. And Sydney Airport happened to score just barely well enough on these two measures of “overlooked-ness” that it wasn’t automatically eliminated by our screens. For this reason, I left the stock on a watchlist that went out on our email list. While a lot of people mentioned the stock definitely wasn’t overlooked – a lot of other people also mentioned they’d like to hear my thoughts on the stock. So, here they are.

Sydney Airport was suggested to me by my former newsletter co-writer Quan Hoang. He’s from Vietnam originally. And he’s now spent time in Australia. He was looking at stocks and sent me over some financial data of Sydney Airport. A few things jump out about this company immediately. One: it pays out basically everything it can afford to in dividends. Two: it uses a high amount of debt (close to 7 times Net Debt/EBITDA – at one time that number was closer to 11 times Net Debt/EBITDA). However, this isn’t a distressed company in any way. The debt is spaced out – about half of it matures within the next 5 years and the other half after the next 5 years. The bonds are rated by Moody’s and S&P. Sydney Airport intends to maintain an investment grade rating. That’s usually not easy when you have well over 6 times Net Debt / EBITDA. But, this is an airport.

The problem with the debt here is not solvency risk. It’s that the stock price with the debt added – so, the enterprise value relative to various earnings power measures – creates a pretty high future growth hurdle that needs to be cleared. On a dividend yield basis, the stock looks cheap. It yields 4.3%. However, you need to be careful with that number. Consider, for example, Vertu Motors in the U.K. It also yields 4.2%. But, instead of having more than 6 times Net Debt / EBITDA – it has basically no net debt. It also pays out only about 1/3rd of its earnings as dividends. I’m not saying Vertu Motors is a better stock than Sydney Airport – though, at this point, I do own Vertu and don’t own Sydney Airport – but, I am saying that it’s a lot easier for Vertu to cover its dividend and grow it over time than it is for Sydney Airport. Basically, if Sydney Airport doesn’t want to increase …

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Andrew Kuhn November 25, 2019

Burford Capital Limited LSE (AIM): BUR

Recommendation: Buy

Burford Capital is complicated to value; and so vulnerable to opportunistic short sellers, but this weakness offers opportunities to long term investors.

Stephen Gamble, writer and analyst, 12th October 2019.

Figure Above: shows how each of 74 concluded matters in period 2009-2016 contributed to profits in this period – 4 matters make up 50% of gross profits, 11 matters make up 75% of gross profits


Figure Above: shows gross cash profit/loss for each of the 127 matters concluded/partially realised in period 2009-2016. 58% of cases give a positive return, the rest break even or lose money.


Burford Capital is in litigation finance, a relatively new industry in a growth phase, with complex assets. The recent attack from short sellers give rise to opportunity for longer term investors.

Lawsuits are risky for companies: they have to commit large amounts of capital up front to pay for expensive lawyers, they can take years to settle, and the return on their investment is unknown until the end, and binary: either a large cash windfall, or else a total loss, and they may even face a liability for costs of the other party. Furthermore, once litigation has started, it has to be seen through to the end in order to prevent a total loss of money invested. This often takes multiple appeals, making the total cost difficult/impossible to ascertain at the start. In summary, lawsuits can be difficult to justify to shareholders since the duration, cost and outcome are inherently uncertain. However, they are often desirable in order to protect key business interests – so the companies are left with a difficult choice when considering whether to litigate or not.

It is at this point that companies considering a lawsuit, are increasingly turning to a third party litigation finance company. They can provide capital, to avoid the problems discussed above, and in return, they take a slice of the outcome. Therefore they do not need to spend money at any point in the litigation process, e.g. on lawyers etc. since the litigation finance company will spend its money instead. This changes litigation from an uncertain and risky enterprise into a simple opportunity cost – that they might have made more money, if they had paid the lawyers themselves. It also incentivises companies to pursue litigation that they might otherwise have deemed too risky. For the company, the cost of making ~30% less money in victory or settlement, is much preferable to the risk of committing an unknown amount of money for an unknown duration, where if the commitment is not followed through to the end, all the money invested is lost. Furthermore, in many cases the company still retains some control over the litigation, and can input into the strategy pursued – without having any financial risk. Litigation finance can be crudely characterised as a ‘corporate no win, no fee,’ claims industry.

This industry is a relatively immature one compared to the personal claims one, which …

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Geoff Gannon November 23, 2019

F.W. Thorpe: A Good Business Making Durable Products that May Have Already Peaked

Today’s initial interest post is a company I like a lot. It’s trading at a price that could be justifiable – possibly – based on that company’s past performance. But, it’s not a stock I’m going to give a very high initial interest level too. The reason for that is uncertainty about the future.

I’ll get to that uncertainty in a second. First, I want to describe what FW Thorpe does. The company makes lights. I won’t go into too much detail here. You can always read a company’s annual report for yourself. So, I hate to go into analysis free re-hashes of a company’s basic business model. I’ll do that a little here, though, because I don’t want you to think FW Thorpe makes light bulbs for your house.

The company’s focus in on professional lighting with the lowest cost of total ownership. It makes lights for everything from clean rooms to warehouses to retail shops. FW Thorpe’s products are used for street lights, in tunnels, up on the ceiling of the office you may be working in now (though, if you’re not in the U.K. or the Netherlands – it’s a lot less likely that’s an FW Thorpe product). The company also makes lighting for emergency signs. It has a business unit that seems to me to be focused on making emergency sign lighting that complies with regulations while looking aesthetically pleasing (the customers all seem like locations that care about the look of the interior of their building). Some lighting is used to illuminate advertisements and things like that. It’s a whole variety of professional lighting where the main focus is not having the cheapest initial purchase price. It’s about what the lighting does and how little it’ll cost you in electricity bills, replacement, etc. over many years into the future.

Basically: FW Thorpe makes lights. Decades ago, lighting was not a very durable product. But, that changed in recent years. Unfortunately, not so recent that we’re still in the middle of this shift from more disposal lighting to more durable lighting. What was once often fluorescent (and incandescent) lighting became LED. As you probably know, a lot of governments put in rules phasing out incandescent lighting. Many of these rules were put in place anywhere from 5-15 years ago. So, again – we’re talking about a tailwind that was stronger in the past than it will be in the future.

I’m sure there are people reading this who know more about the lifespans of incandescent, fluorescent, and LED lights. But, from what checks I could make – it seems that a typical LED light can have a life as much as 10 times that of a typical fluorescent lamp. I was, however, able to find references to some fluorescent lamps designed to have similar lifespans to LED lights. So, companies have probably always been working on extending the lifespan of any of these types of lighting. For us as investors here – the problem is that …

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Geoff Gannon November 22, 2019

Gamehost: Operator of 3 “Local Monopoly” Type Casinos in Alberta, Canada – Spending the Minimum on Cap-Ex and Paying the Maximum in Dividends

Today’s initial interest write-up is a lot like yesterday’s. Yesterday, I wrote about an Alberta based company paying out roughly 100% of its free cash flow as dividends. In fact, that company was paying almost nothing in cap-ex. Today’s company is doing the same. It pays almost everything out in dividends. And it doesn’t spend much on cap-ex. So, cash flow from operations translates pretty cleanly into dividends. And like yesterday’s stock being written up (Vitreous Glass) – today’s stock being written-up (Gamehost) probably attracts a lot of investors with its high dividend yield. As I write this, Gamehost’s dividend yield is a bit over 8%. Like the dividend yield on Vitreous Glass – that sounds high. But, you need to be careful. If a stock is paying almost all of its free cash flow – and, in fact, almost all of its cash flow from operations in this case – out as a dividend, then you might need a much higher dividend yield than you’d think. There are three reasons for this. One, if the company pays everything out in dividends then it’s obviously not paying down debt or buying back stock or piling up cash. So, the free cash flow yield is no higher than the dividend yield. A dividend yield of 8% sounds amazing. But, a stock trading at 12.5 times free cash flow (for an 8% free cash flow yield) isn’t unheard of. It’s still cheap. But, you need to do some research to make sure there aren’t good reasons for it being that cheap. Two, the dividend coverage ratio is obviously 1 to 1 on a stock that has a dividend payout ratio of roughly 100%. A stock paying out just one-third of its earnings as dividends can see its earnings drop by 65% and still cover the dividend from that year’s earnings. Any decrease in the earnings of a stock with a 100% payout ratio would threaten the dividend. Three, it’s usually hard for a company to grow it sales, earnings, free cash flow, etc. over time if it retains literally no earnings in any period. For some companies, it’s not impossible. But, for a stock like Gamehost – which does have a fair amount of tangible assets – it’s impossible to organically grow those things aside from just capacity utilization increases. Luckily, Gamehost’s properties are currently operating far below capacity. When I describe what these properties are and – most importantly – WHERE they are, you’ll see why.

Gamehost’s EBITDA and other measures of earning power peaked about 5 years ago. The company operates both hotels and casinos in Alberta. It also provides food and beverage services in those hotels and casinos. The company claims to have 3 segments – casinos, hotels, and food and beverage. It also owns a strip mall. However, the only real source of profit we’ll be talking about here is the first segment: casinos. The other segments don’t lose money. They make a slight profit. And they do …

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Geoff Gannon November 22, 2019

Vitreous Glass: A Low-Growth, High Dividend Yield Stock with Incredible Returns on Equity and Incredibly Frightening Supplier and Customer Concentration Risks

Vitreous Glass is a stock with some similarities to businesses I’ve liked in the past – NACCO, cement producers, lime producers, Ball (BLL), etc. It has a single plant located close enough to a couple customers (fiberglass producers) and with an exclusive source of supply (glass beverage bottles from the Canadian province of Alberta that need to be recycled) and – most importantly – the commodity (glass) can’t be shipped very far because the value to weight ratio is so low that the price of transportation quickly exceeds the price being charged for the glass itself (absent those shipping costs). The stock is also overlooked. It’s a microcap with fairly low float, beta, etc. It’s also a simple business. And capital allocation is as simple as it gets. The company pays out basically all the free cash flow it generates as dividends. And operating cash flow converts to free cash flow at a very high rate, because the company spends very little on cap-ex.

That’s most of the good news. The one other bit of good news is the stock’s price. As I write this, the stock trades at about 3.60 Canadian Dollars. I did a quick calculation of what seemed to be the normal trend in dividends these past few years. The company pays out a quarterly dividend that pretty much varies with quarterly cash flow from operations. So, it’s not a perfectly even dividend from quarter-to-quarter. But, it seems fairly stable when averaged over 4, 8, 12, etc. quarters and compared to cash flow from operations. If we do that – I’d say the current pace of dividends seems to be right around 0.36 cents per share each year. In other words, the dividend yield is 10%. There are other ways to estimate this. For example, we can use the price-to-sales ratio (EV/Sales would be similar, the company has some cash and no debt) and compare it to the free cash flow margin we’d expect. Then assume that all FCF will be paid out in dividends. Again, we get numbers suggesting future annual dividends are likely to be a lot closer to 10% of today’s stock price than say 5%.

There is some bad news though. One bit of bad news is the difficulty I’ve had in this initial interest post verifying certain important facts about the business. In preparation for this write-up, I read 3-4 different write-ups of this stock at various blogs, Value Investors Club, etc. I read the company’s filings on SEDAR (the Canadian version of America’s EDGAR). While I believe the information in the blog posts to be true -they’re getting those facts from somewhere, I can’t independently verify certain things about the supply agreement, the specific customers buying from Vitreous Glass, etc. Having said that, nothing I found in the accounting and in the filing overall really seemed to contradict what I read in the blog posts. And I did notice some stuff in the accounting that matches up pretty strongly with the …

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Andre Kostolany November 9, 2019

Bank of N.T. Butterfield: A great wealth franchise and interest rate derivative

Bank of N.T. Butterfield (NTB)


N.T. Butterfield (NTB) is a Bermuda-based bank whose shares trade on the New York stock exchange. Bermuda’s corporate taxfree status, together with a conservative culture helps Butterfield generate a superior return on equity with limited risk. That’s right, Butterfield doesn’t pay taxes!


After English explorer George Somers crashed into the island in 1609, N.T. Butterfield first opened its doors as a trading firm in 1758 and later received its banking license in 1858. For a long stretch of time, NTB grew in-line with Bermuda’s insurance industry. When in 1956 American International Group, Inc. (AIG) became the first insurer to move its captive unit to Bermuda, an influx of other captive insurers followed in the 1960s and 1970s, and by the 1980s, some of the mutual insurers such as Excel and Ace also came to the island. Now, Bermuda is a global hub for reinsurance. In 2009, NTB required a recapitalization due to investing in CMO, ABS and CRE lending that went bad. Since then, the bank has become extremely conservative in its asset allocation, holding exclusively GSE insured RMBS and treasuries in its securities portfolio.


NTB is a full-service community bank and wealth manager, operating in Bermuda, the Cayman Islands, Guernsey, Switzerland, and the United Kingdom. NTB’s community banking operations provide retail and corporate banking products to individuals, local businesses, captive insurers, reinsurance companies, trust companies, and hedge funds. NTB has seven Bermuda branches and 49 ATMs and a 39% and 35% deposit market share in Bermuda and the Cayman Island.

In Bermuda, the Cayman Islands, Guernsey, and Switzerland, NTB offers wealth management to high-net-worth and ultra-high-net-worth individuals, family offices, and institutional and corporate clients. In practice, the wealth business can be further segmented into trust, private banking and asset management divisions. The trust business has over $92 billion in assets under administration while the custody business has another $29 billion in assets.

The asset management business had $5.6 billion in assets under management as of September as well. This business targets clients, including institutions such as pension funds and captive insurance companies, with investable assets over $10 million, and private clients such as high-net-worth individuals, families, and trusts with investable assets of more than $1 million.

These businesses generate both a stable fee stream as well as a low-cost deposit base that NTB invests in mortgages and low-risk bonds.

Balance Sheet

NTB is extremely asset sensitive, with every -100bp change in interest rates having a -11% impact on net income according to their disclosures. This is because NTB holds about 40% of its assets in agency MBS and Treasuries and another 26% percent in cash and equivalents. The remainder of NTB’s balance sheet consists of loans. This has specific historic reasons: The cash and equivalents are higher than at most banks because Bermuda does not have a central bank or monetary authority. Instead, Butterfield is the lender and liquidity provider of last resort. As such, Butterfield’s liquidity portfolio is much larger …

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Jayden Preston November 5, 2019

Qurate Retail: The Perfect Candidate for a Leveraged Turnaround?

Qurate Retail





This is the year 2019. And shopping has never been easier. Browse for a product on Amazon, and tens of thousands of options show up; with just one click, your chosen product will be by your doorstep in 1 to 2 days. Shopping online offers the broadest range of products and the convenience to receive your purchased item without even leaving your room. And while Amazon has close to half of the US e-commerce market, most retailers now have an online offering.


Of course, if you insist on your desire to get the product in your hands immediately, the option to purchase the item at physical stores is still very much in place. Or you might look for a social gathering, in which you spend time with family and friends in shopping malls, picking a few things up along the way.  Even though the world is inevitably moving more and more toward e-commerce, the majority of retail spending is still conducted at physical stores.


To most people, the retail landscape seems to be divided between the above two options. That is unless you belong to a small group of mostly female baby boomers. They are typically home-owners, married, college educated, aged 35 to 64, and shopping for themselves. They shop without leaving their home. Yet, they shop “with their friends” as well. They do so by devouring live TV shows that are hosted by “lifestyle influencers” whom they have grown to be “close to”. Almost every day, the hosts, through a dialogue among themselves, will introduce and recommend quality items that are being sold at a discount. As a viewer, if these female baby boomers are interested in the product being discussed, they can place their orders through a call, using the TV remote control, or via the retailer’s website. They may not have an item to purchase in mind at the beginning. But after watching the demonstration and receiving recommendation from the TV hosts, many of them would make the decision to give the item a try.


The above, in essence, describes the business of QVC and HSN, the two TV shopping businesses that serve as the core of Qurate Retail.



Business Overview


Corporate History


Qurate Retail was formerly Liberty Interactive. Being a Malone company, Liberty Interactive has a convoluted corporate history. What matter to our understanding of the current Qurate are the following:


  1. QVC came under the control of the predecessor of Qurate Retail in 2003.


  1. In 2008, HSN was spun off from IAC/InteractiveCorp, and Liberty Interactive established a stake in HSN. Liberty Interactive completely acquired the remaining 62% of HSN that it didn’t already own in July 2017 for USD 2.1 billion. Included in the HSN deal is a group of catalog businesses in the home and apparel space, collectively referred to as Cornerstone group.


  1. In August 2015, Liberty Interactive paid USD 2.4 billion for zuilily, an online flash retailer.


  1. Finally, during the reorganization in March 2018, QVC Group received assets, including stakes
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Warwickb November 4, 2019

Ardent Leisure Group Ltd (ASX:ALG): Follow-up Post

Post by Warwick Bagnall

This is a brief follow-up to my earlier post regarding ALG.  In that post I wrote that I would write the company up in full if I found that it was robust.  I didn’t find that ALG was robust but decided to summarise why anyway.  Again, for the reasons mentioned in that post, I’m going to focus mostly on ALG’s chain of entertainment centres, Main Event (ME).

What I found was that there are few constraints to growth for ME to grow in the next few years.  There are plenty of vacant buildings or spaces in malls which are likely to be suitable for ME stores.  Unfortunately, the same can be said for Main Event’s competitor, Dave & Buster’s (NYSE:PLAY) or for any other chain or individual store which wishes to compete.  

Competition is the big worry here. ME and PLAY have no customer stickiness or supplier advantages that couldn’t be replicated by a competitor.  There’s little likelyhood that customers will prefer to keep visiting the same location if a competitor opens up nearby with and tries to lure them away with cheaper prices or a newer, nicer facility.  I’ve been told that PLAY has better games than ME. That might help create stickiness with a small cohort of customers that are dedicated gamers but not for the majority of customers. 

There is a theoretical argument that scale matters here because this is a high fixed cost business and many locations only have enough population for one site to be viable.  In order to survive, a market entrant would need to take a high percentage of the existing store’s customers in order to cover their fixed costs. Because that is unlikely to happen quickly a potential entrant would decide not to enter the market.

That theory tends to work if the capex and degree of difficulty (e.g. permitting, finding competent staff) required to build a new location is high compared to the size of the company and where management of both the existing company and any potential entrants are somewhat rational.  Usually I’d expect this to happen in very unsexy industries with conservative management teams. Anti-knock additive plants, galvanising works and the oilseed crush/refining industry in some locations are examples that come to mind.

In reality, the financial and emotional cost to develop a new site for ME or PLAY is low compared to the size of these two companies.  Management in the entertainment industry doesn’t tend to be conservative when it comes to growth capex. I’m basing this opinion on the movie theater industry in the US and Australia.  This suffered from oversupply in the 1990s, consolidated slightly in the 2000s but more recently has started to add screens on a per-capita basis. That’s in an industry where some of the players have a scale advantage in that they own both cinemas and movie distribution and can somewhat restrict distribution in order to give their cinemas an advantage over competitors.  This is a good example

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Geoff Gannon November 3, 2019

A-Mark Precious Metals (AMRK): A Dealer and Lender in Physical Gold

A-Mark Precious Metals (AMRK) has been written up twice at Value Investor’s Club. The most recent time was this year. You can read those write-ups over there. It was this most recent write-up at Value Investor’s Club that got me interested in the stock. However, it was for different reasons than that write-up itself lays out as the case for buying the stock. The VIC write-up focuses on how low volatility in the price of gold (and silver and other precious metals) in recent years means that A-Mark has under-earned in each of the last 5 years or so. Having looked at the company now – I’d say that’s possibly true. A-Mark says many times in its SEC filings that it benefits from increased volatility in the physical markets for precious metals. The company also says that the price of gold – rather than how much that price bounces around – doesn’t much matter to the company’s results. I’m less sure of this second point. There is one activity that the company engages in where I feel high (and continually rising) gold prices would be a benefit and low (and continually falling) gold prices would harm the company. Since I mentioned “activities” – let’s talk about what acts A-Mark actually engages in.

The best way I can describe this company is as an investment bank (really, a “trading house”) focused on physical precious metals. That word “physical” is important. We are talking about the buying, selling, storing, shipping, minting, lending, and many other things of actual physical bars and coins of gold, silver, etc. The business is almost completely U.S. It seems 90% of profits probably come from the U.S. I say “seems” and “probably” because of some difficulty in using traditional accounting measures when looking at a company like this. A-Mark is a financial company. It really is a highly leveraged and fully hedged – or as near as fully hedged as it can get – trader in a market. As a result, an accounting line like “revenue” is meaningless. The company reports revenue. But, revenue doesn’t matter. The first line on the income statement that is worth paying attention to is “gross profit”. Gross profit at A-Mark is always less than 1% of revenue. Usually it’s quite a bit less than 1%. This makes typical SEC requirements to disclose revenue stuff useless. For example, does A-Mark have high customer concentration? We don’t know from the 10-K, 10-Q, etc. There’s a line in the 10-Q that says about 50% of revenue comes from two companies: HSBC and Mitsubishi. However, this is just hedging activity. Because of how A-Mark’s accounting works, you could list big “customers” as just entities they are making sales to in the form of hedging activity that will never be settled with physical gold and will never result in any gross cash profits for A-Mark (on their own). So, it may be that around half of the revenue line you are seeing is hedging done with …

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