Monthly Archives: April 2015

Peak Sport Products HKG:1968 10% Position Purchased

Peak Sport Products HKG:1968 10% Position Purchased

 

We built the initial Peak Sport Products position. We accumulated just over 33 million shares over the past 23 days at a cost just under $10.77 million. At the end of April 24, 2015, our Peak Sport position represents 9.8% of our portfolio at a value of $11.6 million. PC Jeweller and Zensar represent 9.7% and 5.3%, respectively. Cash represents the remaining 75.2% of the portfolio. Cash will decrease as we find additional investment opportunities.

 

We have instituted a new policy of not selling our position within the first year. If there is a significant change to the business fundamentals and/or management, we will reassess the investment case and potentially sell, but barring any significant events, we will not sell. This does not mean we will not follow the companies we purchase and recommend.  In contrast, we will continue to diligently report on all our portfolio companies.

 

There are a number of reasons for the new policy. It eliminates short-term capital gains tax. It also makes us think seriously about the business we are buying and eliminates any trading. We were hurt with our impatience in letting the PC Jeweller investment thesis play out. We were show a quick ramp in share price and felt uneasy with our position size (then 22% of the portfolio) and sold more than half of our position in PC Jeweller, despite the strength of the business, growth opportunities, and undervaluation.

The policy should really be no selling for at least three years as by this time fundamentals and market price should converge.  If our research is correct then eventually the investment thesis will play out.

Q1 2015 Reperio Capital Model Portfolio Results

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.

Q1 2015 Position Sizes

 

PC Jeweller

 

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.

 

PC Jeweller FQ3 2015

 

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

 

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.

 

Zensar Technologies Quarterly Performance

 

Overall Performance

 

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.

 

USD Returns Q1 2015

Q1 2015 Relative Performance Chart