Q1 2015 Reperio Capital Model Portfolio Results
In Q1 2015, we found an additional investment opportunity in Peak Sport Products 1968:HK. Peak Sport is an athletic footwear company trading just above its liquidation value (NCAV) with low investment requirements and a good product. The company is increasing its dividend payout ratio. To read more about our investment thesis view our recent research report dated March 23, 2015. We are in the middle of building a 10% position in Peak Sports.
At the end of Q1 2015, cash still represents 84.7% of our portfolio. It will take some time to deploy the cash as our research process is very detailed and takes a significant amount of time to complete. We will build our portfolio as ideas come along and will remain disciplined in our research process.
Our portfolio at the beginning and the end of Q1 2015 is illustrated below.
PC Jeweller performed well in Q1 2015 as the company continues to execute its store expansion plans. At the time of initiation, our expectations was for a doubling its showroom count over the next five years. PC Jeweller since announced it plans to triple its showroom count with some expansion coming through franchising.
PC Jeweller continues to be one of the most efficient operators with the Indian Jewelry Retail industry. During the recent downturn due to restrictions in supply most Indian Jewelry Retailers had a very difficult time remaining profitable while PC Jeweller remained very profitable. Government restrictions have eased and PC Jeweller continues to report strong numbers with earnings starting to normalize. FQ3 2015 (Sept-Dec 2014) saw showroom count increase to 48 from 40 in FQ3 2015 and retail square feet grow to 279,000 from 238,388, representing growth of 20% and 17% respectively. PC Jeweller’s top line grew by 40% and operating profit grew by 62% while total capital employed only grew by 7%. This was during a period when gold leases where still not being used as a financing tool as restrictions on gold leases where just lifted. Gold leases drastically decrease the upfront working capital requirements and interest costs (12% to 4%).
The company also announced innovative partnerships with Flipkart, an Indian online retailer, and Blue Nile, a US online jewelry retailer. These partnerships give PC Jeweller additional distribution channels with minimal investment requirements. The true extent of the additional earnings power from this channel is not yet known but it is good to see management always thinking of innovative ways to improve the business.
The strength in PC Jeweller’s operating business lead to a 48.6% increase in the price in CQ1 2015 and 152% return since we first recommended the company. In May 2014, we were able to purchase an extremely profitable business in an industry with huge variability of profitability at 4.27 times EV/EBIT. The company is going to triple over its store count over the next five years, yet still only trades at roughly 9.4 times EV/EBIT. Its largest competitor but closest in terms of profitability is Titan Company, which trades on an EV/EBIT multiple of 30 times. Titan generated much better profitability but PC Jeweller is growing much faster. Titan’s profitability advantage will diminish, as Titan was aggressive in selling installment plans to customers, which decreased its working capital requirements. The installment plans have now been outlawed. Given PC Jeweller’s growth outlook, profitability and Titan’s valuation, PC Jeweller should be trading closer to an EV/EBIT of 20 times.
Our initial investment was $12.3 million. We sold $16.4 million of PC Jeweller’s shares as the share price rose. Despite our sales at the end of Q1 2015, PC Jeweller was 9.2% of our portfolio. Given we have sold more than our initial investment, we do not foresee any sales and will see how PC Jeweller progresses over the next five to ten years.
Zensar Technologies appreciated by 8.1% in Q1 2015 and 62.8% since the initial recommendation. We purchased Zensar when it was trading on an EV/EBIT of 4.65 times despite steady top line growth and very strong management team. The company’s share price was depressed as margins were depressed across all business lines. Despite the depressed margins, the company remained very profitable. The company continues to grow at a mid to high teens with expanding margins and is valued like a no growth company currently trading on an EV/EBIT of roughly 8.5 times.
Reperio’s Model Portfolio increased by 3.5% in Q1 2015 and has increased by 16.6% since inception. The Reperio Model Portfolio outperformed iShares MSCI Emerging Markets (EEM) by 1.4% and underperformed the iShares MSCI Emerging Markets Small-Cap (EEMS) by 1.5%. Emerging Market ETFs are used as they are probably the lowest cost vehicle to accessing Emerging Markets with EEM and EEMS both having an expense ratio of 0.69% for 2014.