Monthly Archives: September 2014

PC Jeweller Position Size Update 9/24/2014

PC Jeweller Position Size Update 9/24/2014

PC Jeweller’s share price fell 20% over the past two days.  This fall combined with selling of 40% of my position over the same period decreased the overall position size to 11.63% of the portfolio.  More importantly, the fall brought the company’s share price below the company’s estimated zero-growth mid-cycle margin target price.

For one of the most profitable companies in the Jewelry sector with a potential to double its store count over the next five years, potential for margin improvement from productivity gains and increased share of diamond jewellery sales, run by a good management team who are owner operators, and an attractive valuation (EBIT yield = 15% + potential growth = 15%) leads to stopping any more sales and a keeping the position at 11.64%.

 

Over the past two days, 2,383,874 shares were sold at a weighted average price of ₹247.86 compared to a VWAP over the two days of ₹249.83.  The 2,383,874 shares represented 40% of the initial position in the company and generated a returned 109% to the weighted average sales price.

The current portfolio is illustrated below.  There are three positions: PC Jeweller is 11.64% of the portfolio, Zensar Technologies is 5.03% and the remaining 83.33% is cash.

 

Reperio Model Portfolio 9242014

Zensar Technologies Update 9/22/2014

Zensar Technologies Update 9/22/2014

After the previous post where PC Jeweller’s Target Price Sensitivity Table was illustrated, we figured to do the same for Zensar Technologies.

As a reminder, Zensar’s position was only 4% as liquidity is an issue. It took 34 trading days to build a 4% position compared to 28 trading days to build a 12% position in PC Jeweller. Zensar profitability is not industry leading but middle of the pack, albeit in a very profitable industry.  Zensar was not as undervalued relative to its zero-growth mid-cycle target price.

Like PC Jeweller, Zensar share price has appreciated significantly, 75% since recommendation and 51% since the weighted average purchase price.

Zensar’s Target Price Sensitivity Table is illustrated below. Zensar’s Target Price Sensitivity Table has an added margin level at each level of growth called Management Target Margins as Zensar’s management has stated its target operating margin is 15% for the group.

 Zensar Target Price Sensitivity Table 9222014

As illustrated above, Zensar’s current price surpassed the current FY2015 zero-growth mid-cycle margin target price of ₹579 meaning the strength of the business will be the key driver of the share price rather than multiple expansion from an extreme undervalued situation.

The max FY2015 target price is ₹1,133 is reached using 5% perpetual growth and management target operating margin of 15%.  Overall, there is still 29% upside to the average FY2015 Target Price and almost 90% upside to the average FY2019 Target Price.  It will remain at its current position size.

This also raises the question should PC Jeweller have a larger position with less downside. PC Jeweller has a better position in its industry with an industry leading ROIC and growth outlook but also requires a great deal more capital to grow.  Given PC Jeweller’s outperformance is should probably be more in-line with Zensar’s current position of roughly 5%.  We will wait to see how quickly PC Jeweller’s position size can be trimmed to 10% and the price at that before determining the next step.

PC Jeweller Intrinsic Value Range 9/22/2014

PC Jeweller Intrinsic Value Range 9/22/2014

Following on from the previous post on the decision to decrease PC Jeweller’s position size, illustrated below is a scenario analysis of PC Jeweller’s intrinsic value using various assumptions. The first column sets out the assumptions, the second three columns show the target price for FY2015, FY2017 and FY2019 and the final column show upsides to FY2015, FY2017 and FY2019 target prices.

 PC Jeweller Target Price Assumptions

The table above illustrates a low FY2015 target price of ₹221 per share, which assumes zero-growth mid-cycle margin assumption. Given PC Jeweller’s share price closed on 9/22/2014 above the FY2015 zero-growth mid-cycle margin target price, the easy money is off the table. From here, the strength of the business will have to drive the share price.

The most optimistic target price is 5% perpetual growth rate with current margins leading to a FY2015 target price of ₹375 per share or 47%.  This assumptions is very aggressive and usually indicates a point of overvaluation.

Overall, the average FY2015 target price is ₹296 and the average FY2019 target price is ₹452 representing 16% and 77% upside respectively.

It will take a number of days to weeks to sell down the position to 10% at which point the position will be reevaluated. 

PC Jeweller Position Size Reduction 22.66% to 10% 9/22/2014

PC Jeweller Position Size Reduction 22.66% to 10% 9/22/2014

PC Jeweller’s share price has appreciated by 110% since our initial recommendation at the end of May and 118% since the weighted average purchase price.  Its position size has increased from 12.31% to 22.66%. The stock is still attractive but the level of undervaluation has drastically decreased and there is no upside to a zero-growth target price; therefore, we are decreasing the portfolio weight by 12.66% to 10% as the stock still offers significant upside over the next five years from intrinsic value growth via showroom count growth and productivity increases, but appreciation from multiple expansion is as clear.