Posts By: Warwickb

Suria Capital Holdings Bhd (KLSE:Suria): A Cheap, Conservatively FInanced Port Concession Operator

Writeup by Warwick Bagnall

www.oceaniavalue.com

Suria has some sell-side analyst coverage so I wouldn’t say it is a totally overlooked stock.  But it has several features which make it a quick pass for many investors: top line revenue is up and down by >50% in many years (the company reluctantly books some capex as revenue), it is small (~116 MM USD market cap) and it is illiquid (~4% annual share turnover).  You can’t buy more than a few thousand USD per day of stock without moving the price. Half of the float is owned by a controlling shareholder.  Its shares are listed in a small country which isn’t covered by the more popular discount brokerages. Suria is not worth the hassle for most investors, even those that haven’t been turned off Malaysian businesses by Billion Dollar Whale.

For those who are not put off by Suria’s obscurity, this is a very robust business with reasonable growth prospects at a cheap price.  Suria’s main business is operating the port concession for the eight ports in Sabah (the northern part of Borneo, part of Malaysia). And the controlling shareholder I mentioned above is the Sabah state government, who also happens to set the concession tariffs.

Main Business – Port Operations

Port operations provide the majority of Suria’s revenue and are the most predictable part of the business.  The port operations concession was granted in 2003 for a period of 30 years with an option of a second 30 years. The concession allows Suria to charge tariffs on all ships loading or unloading cargo or passengers in Sabah waters based on various factors such as the tonnage handled, length of the ship, number of passengers etc.  

In return, Suria pays the government a percentage of some of the tariffs charged and lease fees for land use.  Suria originally paid MYR 210 MM to buy the concession and has also paid for long term leases of parcels of port land (more on that later).  

Suria is obliged to spend MYR 1.363 billion in capital on upgrading port facilities over the duration of the concession.  All bar about MYR 300 MM of this has been spent at the time of writing (December 2019). Government loans with interest rates around 4% and generous terms such as 10-year repayment holidays have formed much of the funding for the capital projects.  The balance has been funded through Islamic debt with profit margins of 5.15 to 5.85%.

The tariffs and lease costs are set by the Sabah Ports Authority, a division of the government and are supposed to be reviewed every five years.  They are under review at the time of writing. Strangely, it looks like the existing tariffs were set in the 1970s and this is the first time they have been escalated since then.  This means employees (Suria’s main cash expense) consume about 5 percentage points more of revenue than they did 10 years ago. Despite that, Suria’s cash operating margins from port operations are …

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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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Ardent Leisure Group Ltd (ASX:ALG): Initial Interest Post and Request for Scuttlebutt

Posted by: Warwick Bagnall

ALG consists of two main parts; the Dreamworld/White Water World theme park in Queensland, Australia and the Main Event chain of family entertainment centres in the US.  I’m interested in ALG mainly to try and understand why it is the largest position (>20% and growing) of a value/activist LIC (Ariadne Australia Ltd, ASX:ARA) which I hold.  ALG is cheap compared to its past share price and on a (depressed) P/S basis but it has been loss making since 201. Hence this write-up is part of a reverse-engineering exercise.

 

ALG’s financials take a lot of work to understand.  By that I mean that the reporting is complete and efforts have been made to attribute costs and revenue clearly.  However the company has recently sold business segments, changed from a stapled structure to a simple company, is dealing with a major safety incident (below) and has opening new stores.  There’s a lot going on in the accounts.

 

When ARA went activist they published a plan for realising the value in ALG.  The plan addressed ALG’s management and operational shortcomings and suggested a final valuation of at least AUD 3.58 versus the current share price of AUD 1.05.  That’s fine as a start but it doesn’t address the main things I want to understand – who visits ALG’s businesses, why do they visit, how robust is the business model and will there be any worthwhile growth?

 

The theme park segment of the business is loss-making due to a fall in visitor numbers and per-capita spend following an incident involving one of the rides in 2016 in which several people died.  The inquest into the incident concluded last year (2018) but the final report hasn’t been released yet. ARA gained control of the board in 2017 and significant improvements in safety, operations and per-capita spend have since been made.  

 

The park has a similar catchment size and scale to a typical Six Flags park but has more competition in the form of a nearby Warner Bros. Movie World and Sea World plus some smaller attractions. Fortunately, the area where the park is located attracts a lot of tourists year-round and there are few, if any, comparable parks left in Australia.  People travel to the area from other states to holiday so the number of potential customers is likely higher than what the surrounding population catchment would indicate. Now that per-capita spend has increased, if park attendance returns to 2016 levels then the parks segment should be profitable. Even if this doesn’t happen the stock is valued such that the market seems to be pricing the parks segment at less than the value of the underlying land.

 

The Main Event chain is much more interesting.  Main Event is headquartered in Plano TX, has 42 sites and plans to open around five more each year.  An average store does USD 7.4 MM in revenue at an EBITDA margin of 33% and ALG claim the first-year ROI on new stores is around 41% …

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