Geoff Gannon July 1, 2019

United Plantations: A Low-Cost Palm Oil Producer with 11 to 17% Returns on Equity and Excellent Capital Allocation

by WARWICK BAGNALL

United Plantations Berhad (KLSE:UTDPLT, UP for the sake of brevity) is an integrated palm oil plantation, milling and refining company (plus a small coconut plantation). It’s currently too expensive for me to buy but it is a company that I would like to own if the price ever drops to an acceptable level.

Superficially, there are a lot of reasons why palm oil companies look like a bad investment. Like all agricultural commodities, the price of palm oil fluctuates a lot. There’s the risk of pests, disease or unfavourable weather events. A significant amount of palm oil is used for biofuel so there is some regulatory risk associated with reduction of biofuel subsidies or an outright ban of biofuel. Many people have concerns about the health impact of consuming palm oil. And the industry has had a lot of bad press regarding forest clearing, peat fires and loss of wildlife habitat.

I have some pretty strong views on these areas. For full disclosure I previously worked in the vegetable oil industry (including palm oil milling) and still do a small amount of work for a palm fruit milling machinery company. So you could say that I’m biased but I have at least seen what goes on at well managed mills in Malaysia, Indonesia and PNG. My opinion is that most of the bad publicity is undeserved and that unless people everywhere decide to accept a major downgrade in their diet and standard of living, palm oil is going to be part of our diet for the foreseeable future.

Previously, most of the hard fats in our diet came from animal fats such as tallow, lard and milk fat. Vegetarianism (and also halal and kosher requirements) made the first of those two unacceptable for many consumer products and veganism reduced the addressable market for the third. For a period, hydrogenated seed oil (mostly soy) provided an acceptable alternative. Unfortunately, health concerns regarding trans fat meant that hydrogenated oils became unpopular. That left palm. For a large food manufacturer or restaurant chain seeking an oil which makes baked goods fatty (but not oily) or fried food crispy, the oil which will offend the least number of customers from a dietary and religious point of view is palm.

Palm oil (and palm kernel oil) are also very versatile (compared to the main industrial oils) in terms of producing specialty products. The oil can be fractionated simply by chilling it until part of the fat solidifies and filtering the solids out from the liquid. The wide range of fatty acids in the oil make it useful for oleochemicals such as soaps and emulsifiers. It’s currently a very cheap oil – that might not continue in the future. But it will probably always be the easiest oil to manufacture many specialty products from.

In terms of the environmental impact, palm has much less impact than other oils when managed correctly. Palm oil uses a fraction of the area …

Geoff Gannon June 23, 2019

Tailored Brands (TLRD): Operating at the Focal-Point of the Retail Apocalypse and the Hedge Fund Armageddon, TLRD is a Stable Company With a P/E of 3

by JONATHAN DANIELSON

Tailored Brands is the company behind the brand names Men’s Wearhouse (MW) and Jos. A Bank (JOSB). As you can probably guess, Tailored Brands operates in the specialty retail industry. More specifically, they provide the younger-to-older middle-class male demographic with suitwear. Broadly speaking, their portfolio of clothing includes suits, sport coats, slacks, business casual, outerwear, dress shirts, shoes and accessories.

I don’t want readers to be misled by the title of this article since I labeled the company as “stable”: Tailored Brands is a high-risk stock. I classify Tailored Brands as a stable company because if you take a look at the company’s stock chart, you’ll see that over the course of the past year TLRD is about 85% off its highs. The stock was trading at $30/share as recently as June of last year. It’s at $5/share now. With a drop that dramatic you would usually expect to find one or more of a few things going on with the company. You would probably expect sales or earnings to be down quite materially. Or you’d expect to find impending liquidity issues. But that’s not necessarily what we find here. Top-line consolidated sales since 2015 are basically flat. Operating income is up 20% since then. Whether or not these are good numbers doesn’t matter right now. At least initially, the business doesn’t seem to have fallen off a cliff; yet the stock certainly has. So why is the stock high-risk? Well, a lot of reasons. One factor that adds to the riskiness of the situation also makes the stock look cheaper. All of you reading this can probably guess what I’m referring to: leverage. Despite aggressively paying down debt over the previous few years the company is still saddled with debt that equates to 3x EBITDA. Anytime you have a business where the popular sentiment is that the business is possibly facing a secular decline (i.e. the market is not too hot about the company’s growth prospects) and you add a highly-levered balance sheet to the mix you tend to get a stock that looks ridiculously “cheap” on standard valuation metrics. These dynamics make the stock high-risk.

Geoff recently wrote-up Farmer Mac (Ticker: AGM) on this site. If you haven’t read that post yet, you should go do it before reading on. In his write up of the Company he said, “An investor interested in Farmer Mac should spend 95%+ of his time worrying about the risks.” And why is that? Why spend so much time pondering the risks of the stock? Because, in his case, the stock he was evaluating was far, far too cheap for the quality of the business. So the only question relevant to investors is: what are the potential catastrophic risks? Will the company survive? If the Company survives then the stock should be a homerun.

I think Tailored Brands is very much the same. It’s not that I’m not making the argument that a specialty retailer is …

Geoff Gannon June 16, 2019

NACCO (NC): A Contract Coal Miner with Stable Inflation Linked Profit Per Ton, a P/E of 10, a Strong Moat, and No Leverage

by STEPHEN GAMBLE

Overview

NACCO is primarily a services company, in the guise of a coal mining company, deriving all of its revenues from its US operations. It provides the service of managing mines and delivering raw materials – coal and limestone – to several large customers on a cost-plus basis on long term contracts. It has mines in several southern US states, HQ in Texas, and its two largest coal mines by coal volume, are in North Dakota. In the Q1 19 earnings call, it changed its reporting structure, to now report its business in three segments:

Coal Mining (coal extraction)
North American Mining (limestone extraction, and one sand/gravel mine just opened)
Minerals Management (oil and gas royalties)

Coal and limestone/limestone are mined in two distinct ways: Consolidated mining means that NACCO owns the mine, pays all the costs, assumes the liability for reclamation, and sells the coal on the open market and so is subject to the coal spot price. There is now only one consolidated coal mine: the Mississippi Lignite Mining Company (MLMC), after the shutdown of various mines under the Centennial Natural Resources subsidiary at the end of 2015. Unconsolidated mining means that NACCO operates the mine, and is paid a fee per tonne of coal/cubic yard of limestone mined, under cost-plus, inflation-linked long term contracts. The customers assume most of the risks and the long-term obligations of operating the mines, paying for equipment, mine reclamation responsibilities, and all other costs. Therefore, NACCO is not exposed to the coal spot price or the price of limestone under these contracts. The gross profit/tonne for these mines is very stable – less than a standard deviation of 6% over the last seven years. Most of NACCO’s profits come from unconsolidated mining, and most of these from coal mining rather than limestone mining. Other coal companies may hedge their exposure to the coal spot price: instead NACCO avoids this risk by selling to the customer for an agreed profit margin. This also reduces the price variations for NACCO’s customers. The image above shows the gross profit/ton of unconsolidated coal over the last seven years, and also the tons of unconsolidated coal mined/share, which has been increasing due to an expansion in unconsolidated coal mining.

In the last seven years, an average 76% of profits came from long term contracts for mining principally coal and limestone (unconsolidated mines), 15% of its profits from royalties for oil/gas extraction on land it leases/owns, and 9% of profits from consolidated coal mines. There are various types of coal: NACCO almost exclusively mines lignite, which is the lowest quality coal, with a low energy density per ton. Therefore, it does not pay to transport it any significant distance, so coal fired power stations tend to be co-located with the lignite mines. This is the case for most of the mines that NACCO operates. Coal is mined exclusively from surface strip mines – this creates large open scars in the landscape that have to …

miguelneto June 11, 2019

Highly Cash Generative Aquarium Operator

By: Miguel Neto

Ticker: S85
Straco Corporation Limited, quoted on the Singapore Exchange (SGX)

Background

Straco Corporation develops and acquires assets in touristic locations, and the founder and his wife collectively own 55% of the shares, with the other big shareholder being a state-owned enterprise. As of today, they own and run two aquariums in China (Shanghai Ocean Aquarium and Underwater World Xiamen), a cable car in Lintong Mountain and a giant flywheel in Singapore. In 2018, they received 4.98mn visitors with the majority being foreigners.

Together these assets cost S$226mn, some were acquired, and some were developed. Last year they generated S$64.9mn in pre-tax profit. In the past Straco’s management – which is nimble because of the large stake the founder has – has acted opportunistically by buying or developing assets in Asia, with a focus on China. The two aquariums, SOA and UWX, help bring the point forward. If these two assets were valued as separate entities, they’d both be worth ~8 times what they cost Straco. If I take what they paid for UWX in 2007, S$12.7mn, and what it’s worth today considering it generates S$9.8mn in pre-tax profit, I get a CAGR of 20.9% on the investment.

Most of Straco’s costs are fixed by nature, about S$53mn. That means that if we take revenue per visitor of S$25, we can see that they could have much less visitors and still not lose money.

The group’s increase in revenue and profit over the last 10 years, was driven in part by the 10.7% growth p.a. in visitors, an increase in ticket prices and a higher margin on incremental revenues. Straco’s EBITDA margin per visitor has averaged 61% over the last five years, substantially higher than the 53% margin over the previous four-year period for which I have data. Further evidence of the value of the incremental revenues is shown by the fact that revenue per visitor has compounded at 2.7% p.a. since 2008, whilst profit per visitor compounded at 6.8% p.a. from S$5 to S$9 over the same period.

Aquariums

Straco’s main assets are the aquariums that account for 66% of revenue and 88% of profits, so that’s what we’ll focus on first.

SOA opened to the public in 2002 and it’s located near Shanghai’s financial center, where it was developed for S$55mn. The company secured this prime piece of real estate land with a 40-year lease, with an option to renew. The government collects rent in the order of 6.5% of revenue, even though this means rent is scales proportionately with revenue growth, it also means that if the government is making good money there isn’t much incentive to not renew the lease.

SOA has capacity for about 5.7mn people a year, yet it “only” boasts ~2.2mn visitors a year, mostly free individual travelers. Generally, the bigger the aquarium the more visitors it attracts, but only up to a certain point. SOA has a turnover of S$65mn, which is 80% of aquarium revenues, and a pre-tax

Geoff Gannon June 10, 2019

ServiceMaster (SERV): Terminix is a Wide Moat Serial Acquirer of Pest Control Companies That’s Well Worth Adding to Your Watchlist

by JONATHAN DANIELSON

ServiceMaster spun-off their home warranty segment, principally the American Home Shield brand, under the new corporate guise “frontdoor, inc.” back in October of 2018. This spin did not garner a lot of attention from the value investing community as both the RemainCo (SERV) and the NewCo (FTDR) were easily discernible high-quality businesses and both parts were going to be about the same size business at about $1.5 – $2 billion in revenue. In other words, not particularly fertile grounds for a mispricing and not what most event-driven value investors look for. Now that we’re about 7 months post-spin, with both entities trading at high-teens EBITDA multiples, they both appear fully valued by my eye. There was quite a bit of volatility in between, as Q4 proved to be a particularly hostile environment for spin-offs of all shapes and sizes so it was possible to pick both up at bargain prices (for the quality of the businesses) if you were paying close enough attention – not so much at today’s prices.

So Why Am I Looking?

Despite ServiceMaster and frontdoor not appearing quantitatively cheap on valuation metrics, the reason I think it’s worth studying up on both companies is fairly simple. Both, at first glance, appear to be extremely attractive companies as they each dominate their respective markets and possess especially compelling corporate-level economics. I’ll go over the multitude of reasons it appears to me ServiceMaster is an above-average business in this write-up. Furthermore, it certainly does not take neck-breaking, earth-shattering primary analysis to ascertain that we’re in the late stages of the current cycle. As such, now seems as good a time as any to be adding quality-type businesses trading at quality-type business prices in order to capture the opportunity if a broader market sell-off emerges. As such, let’s start with ServiceMaster.

Overview – The Company Has Been Around A Long, Long Time

ServiceMaster has been around since the late 1930s. Granted, this is somewhat in name only as the company has acquired and divested many businesses over the ensuing decades; although, the business has always operated in the cleaning residential services industry. The company was originally founded as a mothproofing business by Marion Wade – a minor league baseball player at the time. The company quickly switched gears and got into the carpet cleaning business in the 1930s. ServiceMaster experienced a good deal of success throughout that decade and began franchising its brand in the 1940s for residential and on-site carpet cleaning. Throughout the 1960s and 1970s – the era which the ServiceMaster brand really become a household name – ServiceMaster expanded into hospital maintenance. By the mid-1970s ServiceMaster had sold in excess of 1,000 franchise licenses in its consumer cleaning division, and the Company’s health care division had won cleaning contracts with more than 460 hospitals and was growing rapidly. By the mid-1980s with hospitals reducing their budgets to implement cost controls as well as government regulations making it a continually less appealing …

Geoff Gannon June 4, 2019

Games Workshop (GAW): The Wide Moat, Formerly Mismanaged Company Behind “Warhammer 40,000” Has Always Had Great IP And Now Finally Has the Right Strategy

WRITE-UP BY PHILIP HUTCHINSON

Overview

Games Workshop Group plc (“GAW” or “GW”) – which trades in London under the ticker “GAW” – is by far and away the dominant publisher of tabletop wargames and designer, producer and retailer of miniatures used in those wargames. The company itself would describe its business as the design, production and sale of model soldiers that serve the “hobby” of collecting, modelling, painting and gaming with model soldiers. This is strictly true, but does not do justice to the company’s products. This is because the “model soldiers” are based on the belligerents in the company’s two major fantasy settings, Warhammer Age of Sigmar (fantasy) and Warhammer 40,000 (science fiction).

It’s easiest to demonstrate this visually, with a photo of one of the miniatures from Games Workshop’s range:

This miniature is a Primaris Space Marine. Space Marines are GW’s single most iconic creations – armies of elite, genetically engineered superhumans wearing power armour and dedicated to defending humanity in a hostile galaxy filled with forces bent on humanity’s destruction. The full GW model range is simply vast though, which you can get an idea of by visiting the company’s web pages at www.games-workshop.com, www.warhammer-community.com and www.forgeworld.com. The key point here is that GW’s “model soldiers” have much more in common with the kind of thing you’d find in a sci-fi franchise like Star Trek, Star Wars, or Alien, than they do with real life.

You should understand that if you went and bought the model above (or any of GW’s range), they would come unassembled and unpainted. (The model above was assembled and painted by a member of GW’s design studio.) Assembling and painting the models are key parts of the hobby. The other key part is using those models in tabletop wargames for which GW publishes and maintains rulesets.

GW earns revenue from selling models (such as those above – though its full range is absolutely vast), modelling tools, paints, boxed games, rules books and rules supplements, gaming accessories such as dice and templates, and scenery, all for games set in its two main fantasy settings. Sales are made through GW’s network of company stores, independent stockists, and online. GW also licences its IP to third parties to earn royalty income. The main source of royalty income is for video games set in GW’s fantasy settings. In addition, GW has a publishing arm that earns revenue from publishing novels and other fiction set in the Warhammer and Warhammer 40k universes.

The key thing to understand is that GW services the all-encompassing hobby of collecting, assembling, painting and then wargaming with miniature soldiers. There are no direct quoted peers. This is because GW is by far the biggest company in its industry. It dominates the industry the same way Tandy Leather Factory dominates leathercrafting (arguably more so, as GW is a global business). There are some peer companies out there – companies like Privateer, Battlefront, and Mantic. …

Geoff Gannon May 27, 2019

“Farmer Mac” A.K.A. Federal Agricultural Mortgage Corporation (AGM): The Freddie Mac of Farms and Ranches Has a P/E Below 9 and an ROE Above Most Banks

This is one of my “initial interest posts”. But, in this case it’s going to be more of an initial-initial interest post. I am in the early stages of learning about this company. And it’s likely to take me some time to get to the point where I can give as definitive a verdict on whether or not I’d follow up on the stock as I normally give in these posts.

First, let’s start with the obvious. As you probably guessed from the name, “Farmer Mac” is a government sponsored enterprise like Freddie Mac and Fannie Mae – except it operates in the agricultural instead of the residential market. The company has two main lines of business – again, this is just like the Freddie Mac business model except transplanted into the agricultural mortgage market – of 1) Buying agricultural (that is, farm and ranch) mortgages and 2) Guaranteeing agricultural (that is, farm and ranch) mortgages.

As a government sponsored enterprise operating in the secondary market for mortgages – the company has the two competitive advantages you’d expect. One, it has a lower cost of funds (on non-deposit money) because it issues debt that bond buyers treat as being ultimately akin to government debt. The same bond buyer might be willing to accept a 2.45% yield on a 10-Year U.S. Treasury bond and just a 3% yield on a Farmer Mac bond. This cost above the rate the U.S. government borrows at is much narrower for Farmer Mac than it is for most banks that make agricultural loans.

The other cost advantage is scale. Yes, there are banks – like Frost (CFR) – that have very low financial funding costs. But, these banks usually have to invest in hiring a lot of employees to build a lot of relationships, to provide customer service to retain customers, etc. that leads to a “total cost of funding” that is higher than what Farmer Mac has to pay. To put this in perspective, Frost’s deposits are basically the same as its earning assets (loans it makes plus bonds it buys). Frost has about $200 million in deposits per branch. This isn’t a bad number – it’s 1.5 times the deposits per branch of Wells Fargo and 2 times the deposits per branch of U.S. Bancorp (and more like 3-4 times the entire U.S. banking industry’s deposits per branch). Frost’s deposits per branch are pretty close to industry leading for a big bank. So, we can use that $200 million in deposits they have and assume a bank will almost never have more than $200 million in assets – because it doesn’t have more than $200 million in deposits – per branch. Farmer Mac has $200 million in assets per employee.

As a rule, one employee is going to cost you a lot less than one branch.

To put this in perspective, most banks spend more on rent relative to their assets than Farmer Mac spends on everything relative to its assets.…

Geoff Gannon May 27, 2019

Parkit Enterprise: Activist Controlled Parking Lot Owner Looking to Monetize Holdings, Trading at a Discount to Net Asset Value

WRITE-UP BY THOMAS NIEL

(Image Created by the Author; Data via Parkit Investor Relations Page and Author’s Calculations)

Parkit Enterprise is a Canadian-domiciled owner of parking lots in the United States.

Investors have forgotten about Parkit, pushing the stock to trade well below its underlying value.

But one investor saw opportunity and has taken the reins to realize the company’s underlying value. Leonite Capital, a family office led by Avi Geller, has acquired a large position, and last year took control of the board.

Following this proxy-fight win, Leonite is looking to extract full value out of the company. But can they achieve what its prior management presumably failed to accomplish? Will realization of full value occur within an attractive timeframe (2-3 years?).

Let’s take at Parkit and see if the current discount to NAV is justified or presents a strong investment opportunity.

Background

Parkit Enterprise, Inc. (TSX.V: PKT; OTCQX: PKTEF) is a Canadian-domiciled owner of parking lots in Colorado, Connecticut, and Tennessee. The stock trades on the Toronto Venture Exchange, as well on the US OTC markets.

Parkit started out as Greenscape Capital Group, a holding company engaged in various “green”-related businesses. After developing the Canopy Airport parking facility, the company decided to sell off its non-core holdings and focus entirely on parking.

The company renamed itself Parkit Enterprise in 2013. Starting in the mid 2010s, Parkit formed a partnership with parking lot management company Propark America to acquire additional properties.

This resulted in Parkit becoming a major investor in two partnerships:

OP Holdings JV, LLC. This partnership was formed in 2015 with Och-Ziff Real Estate as the primary investor. In 2015, OP acquired Parkit’s Colorado property, as well as properties in California, Connecticut, and Florida.
PAVe Nashville, LLC. a 50/50 partnership with Propark. This vehicle acquired an airport parking facility in Nashville, TN in 2015.

This opaque ownership structure is part of the reason why investors have overlooked Parkit. Like with other similar vehicles (such as Regency Affiliates), there is the added risk of being a “passive investor in a passive investment”.

OP Holdings JV

The bulk of Parkit’s investments are held through OP Holdings JV, a partnership with Och-Ziff Real Estate and Propark formed in 2015.

Parkit owns an 82.83% interest in Parking Acquisition Ventures, LLC (PAVe). Due to the success of two divestitures, Parkit has fulfilled the 15% IRR hurdle due to Och-Ziff. As per the terms of the operating agreement, proceeds from asset sales will now begin to flow to PAVe.

As per the operating agreement, PAVe is now entitled to distributions until it realizes a 15% IRR on its initial capital contributions.

Through OP, Parkit holds interests in 4 properties:

Canopy Airport Parking Facility (nearby Denver International Airport)
Riccio Lot Hospital Parking (New Haven, CT)
Chapel Square Lot (New Haven, CT)
Z-Parking (East Granby, CT)

Canopy Airport Parking Facility

(Source: Parkit Investor Presentation, April …

Geoff Gannon May 19, 2019

Nuvera Communications (NUVR): A Microcap Telecom Company in Rural Minnesota With Stable Earnings and Effective Management That Is Trading At A Cheap Price to Free Cash Flow

Write-up by Carleton Hanson

Investment Thesis Summary

Nuvera Communications (NUVR) is a micro-cap regional telecommunications company that operates primarily in south-central Minnesota. The company has a long history of operating profitably and growing revenues with timely acquisitions, yet due to its small market cap, OTCPK listing, and limited share liquidity NUVR is trading at very reasonable levels. NUVR’s market cap currently sits at about $100 million, with $8 million in net income in 2018 and $10 million in free cash flow. During 2018, NUVR was able to simultaneously grow revenue 20% YoY and begin integrating a major new acquisition, Scott-Rice Telephone Company. The company also benefits from federal programs that pay telecom providers to install fiber data connections in rural and under-served areas. These incentives are guaranteed for 10-year periods and the terms have become even more favorable recently, with payments to NUVR from these programs rising 10% YoY in 2019. The full effects of the Scott-Rice acquisition and increased federal subsidies are becoming clearer as the company moves into 2019, with NUVR generating just over $4 million in FCF in Q1, putting it on track for a 14-16% FCF yield for the year. For reasons I will discuss, I don’t believe the market is keeping pace with the increased value of NUVR’s business and I think an opportunity exists to establish a long-term position in the company at these levels.

For me to get excited about establishing a long-term position in a company, there are a number of things that I look for. First, I want to make sure that the company has stable earnings and cash flow, which indicates that the core business model is healthy. I also want to make sure that the management is trustworthy and effective and that I feel comfortable investing with them for an extended period of time. Ideally, I would also like to see that the company has avenues to grow the underlying business, and if I can get this growth paired with stability at a reasonably cheap price I am comfortable establishing a position. I believe that NUVR meets all of these criteria and is worthy of investment consideration.

NUVR is Stable

One of the major appeals of NUVR is the stability of its core business. At the most basic level, NUVR provides phone, video, and internet service to its customers for recurring monthly fees. NUVR is responsible for keeping up the maintenance of their infrastructure and providing customer support, but if they can do that the company gets the benefit of steady cash flow coming in every month as customers pay their bills. As a value-add for customers, the fact that NUVR has voice, video, and data/internet options allows customers to bundle their telecom products together into one monthly bill, giving them one point of contact when they need support and a discount from NUVR for using multiple services. While there is competition from other companies offering individual services, few offer bundled services to their customers, making NUVR …

Geoff Gannon May 19, 2019

DPI Holdings Berhad (KLSE:DPI): A Tiny Developing Market Aerosol Paint Manufacturer/Distributor with 16%+ Operating Margins, Wholesale Pricing Power and 12 to 15 Years of Growth Capex in the Bank

Write-up by Warwick Bagnall

DPI is a Malaysian manufacturer/distributor of aerosol paint and paint solvents. It’s listed on the ACE market, a secondary board of Bursa Malaysia. It listed in early 2019 and was heavily oversubscribed so it’s not exactly overlooked. Market cap is around MYR 85 MM (one USD is a little over four MYR at the time of writing) so it is a microcap. Normally I wouldn’t bother to look at a recent IPO but two things made me take a closer look – I think consumer paint businesses have significant pricing power and DPI reports margins that are higher than most paint businesses. It doesn’t hurt that the share price is well below the IPO price of MYR 0.25.

The company segments total revenue into three product categories – aerosol paint (73%), industrial aerosols (8%) and solvents (19%). It sells these products through three channels – 70 distributors within Malaysia, via DPI-owned distributor DPIC which has 630 sub-distributor and reseller customers within Malaysia and to eight private label customers, six of which are located outside Malaysia. Most of DPI’s business is in Malaysia but it has recently indicated that it intends to enter the Myanmar and Vietnamese markets.

Aerosol paint manufacture is not high-tech and for a manufacturing business it doesn’t require much capital. I estimate you could set up a factory like DPI’s replacement cost of MYR 20 MM in the same location with similar input costs and start trying to sell to Malaysian distributors within 12 months. You could also import similar products from suppliers in China, duty free and with a freight cost that would detract from your margin but not prevent you from making a decent profit at the same price DPI sells for. At the very least, one of the other multinationals with factories in Malaysia such as Nippon Paints should have competed DPI’s margins away long ago. But that hasn’t happened – DPI made an operating margin of 16 to 25% between 2016 and 2018.

Paint businesses such as Sherwin-Williams (NYSE:SHW) and RPM (NYSE:RPM) are generally known for having pricing power and steady operating margins in the low teens. But DPI’s is exceptional. I can find only one other paint businesses with similar profitability to DPI – Samurai 2K (SGX:13C) which is a direct competitor to DPI. I don’t think this is a coincidence.

To value DPI at anything higher than liquidation value requires three things:

Confidence that they can maintain market share and pricing power in Malaysia.
Confidence that management and competitors won’t attempt to grow market share by cutting prices.
Willingness to substitute transparent unit economics for a long term history of profitability under public ownership. The company has been listed less than one year.

I’m going to focus on the aerosol segment of DPI’s business. DPI sells solvent at a gross margin around 3%. There don’t appear to be any synergies between the solvent and aerosol businesses – DPI’s competitor achieves similar or better …