Monthly Archives: August 2015

Miko International H1 2015 Results Review 8/26/2015

Miko International H1 2015 Results Review

Miko International reported first half of 2015 results on August 25, 2015.  Revenues were down 8.0% from the first half of 2014. After eliminating one-off listing expenses in 2014, the company’s operating income decreased by 14% and ROIC decreased from 43% to 35.8%.

H1 2015 Results Review Key Value Drivers 8 26 2015


The decline in revenue growth came as a significant surprise given the company grew at 17.7% in H2 2014 and 20.3% in 2014.  The company stated weakness in the retail climate and uncertainty of consumer sentiment during the first half of 2015 leading to a slowdown in orders from distributors. Adding to the weak environment, Miko revamped a number of “redkids” branded stores.

Gross margin fell by 269 bps in the first half of 2015 illustrating competitive pressures and lack of pricing power.  Operating margin only fell by 110 bps as the company decreased selling and distribution expense, while asset turnover fell from 1.77 times to 1.54 times illustrating weaker capital efficiency due to a combination of weaker revenue and increased capital requirements related to a deposit made for an acquisition that is scheduled to be completed in the second half of 2015. Eliminating the deposit for the acquisition, Miko’s capital turnover increased to 1.91 as the company was able to decrease receivables, which is encouraging as a common problem in retail during downturns is an increase in receivables and inventory.


Despite the weakness in revenue growth, the company was able to maintain a strong profitability with ROIC at 44% after adjusting for deposits for an acquisition. This is one data point but if the company is able to maintain strong profitability when the business is slowing is a very encouraging sign, particularly in the retail sector.  As Warren Buffett says “only when the tide goes out do you discover who’s been swimming naked.”  Resilience in profitability during an industry downturn is a very good sign of the strength of the management and/or business model.


Regardless of the weak quarter, the main driver of the investment thesis has been a very profitable business in a growing market trading at extremely cheap valuations.  The growth may have temporarily declined but Miko remains very profitable and is trading at 33% discount to its net cash position and a 76% discount to its liquidation value (NCAV).  The company is also valued at 3.65 times earnings.  The company is less of a long run investment in a compounder and more of an investment is an extremely cheap company.

Asset Valuations 8 26 2015

Earnings Valuation 8 26 2015








Update on Macro concerns August 23 2015

Update on Macro concerns August 23 2015


Regarding recent macro concerns, we do not look at macro. While it is very important, it is extremely difficult to forecast due to the complexity of the economic systems. If the Fed and IMF with their armies of PH.D. economists have trouble forecasting the path of economies, we have very little chance particularly when my background is accounting and finance and not economics. Reperio would rather decrease the complexity of investing by focusing on buying high quality companies with good management, strong growth available at cheap valuations. With all that said, we are happy with all the companies mentioned and in our model portfolio as there is little evidence of macroeconomic concerns affecting our companies. The current macro concerns are increasing the number of companies meeting our strict criteria for investment.


PC Jeweller recently report Q1 FY2016 earnings. Sales grew by 14.2% with same store sales growth of 5% and profit before tax grew by 17.0%. The company opened four stores in the quarter remaining on target for 20 stores per year.  This illustrates operations are continuing unabated by any macro concerns. The company is also restarting its Jewelry for Less program in August which should increase affordability for customers.  The company agreed a partnership with Blue Nile, a US online jewelry retailer and is currently working on introducing smaller shops with a new brand for value segment of the market, where the company does not participate. In addition financing costs are starting to decline with the re-introduction of gold leases.  PC Jeweller proved its strength as an organization when the company withstood the recent downturn with very strong profitability while all other participants with the exception of Titan saw a significant contraction in profitability.  The market is valuing PC Jeweller on an EV to Profit after tax of 18.7 times. EV to PAT is appropriate given interest costs are such an vital part of the company’s business model. The company is spending significantly on growth depressing current earnings. The company has a huge opportunity to grow for the next five to ten years and maybe more.  The company is very well run and management continues to innovate, find was to maximize the future cash flows of the business and is trustworthy. We have sold more than my initial cost so we are happy to see how the company continues and do not expect selling any of the position any time soon. If we are lucky enough to see a significant fall in the share price, the position size will increase. A position size decrease would require a drastic run up in share price and even that may not do the trick.


Zensar Technologies reported Q1 FY2016 results as well. Revenues grew by 16.5% and operating profit by 34%.  Zensar has consistently grown its top line over the years (5 year rev. CAGR = 22%) and with larger and larger deals the companies is growing operating profit faster than revenues. The company is growing digital revenues rapidly and management is doing a good job with all divisions. Application management revenues grew by 19% and IMS continues to be volatile and despite a slight decrease in revenues operating profit grew by 96%.  Product and licenses is a small portion but it turn negative profit in Q1 FY15 to positive profit in Q1 FY2016 with a 3.0% operating margin in Q1 FY2016 from -0.4% in Q1 FY2015.  Overall, Zensar continues to grow at a mid-double digit pace yet the market gives it very little credit for any growth with the market valuing the company on an EV/EBIT of 11 times.


Peak Sport also recently reported H1 2015 earnings.  The company grew revenues by 7% and operating profit by 54%.  The company continues to provide highly functional performance products in basketball and is pursuing the same strategy in tennis with some good initial signs.  The company is trading at 1.1 times price to NCAV and 4.5 times EV/EBIT despite a record of continuous and strong profitability. The market is essentially giving the company no credit for its operations.  The position size is roughly 14% and is as large as we would like for a company which is more a deep value investment than a quality value investment.


Miko is valued below its liquidation and at the net cash level on its balance sheet, despite the strong growth in the company’s revenues, its industry and its profitability.  (Miko’s share price = HKD0.71, NCAV = HKD1.04, Net Cash = HKD0.68).  It is also trading on a PE of 3.  EV/EBIT is not used given the numerator is near 0. Miko does not seem to have any competitive advantage but is operating in a relatively immature industry allowing for strong growth and low competitive pressures supporting high profitability.  We will continue to increase our position size despite the lack of liquidity as it is a much better alternative to holding cash on a three to five year time period.


Honworld Group is a high quality business as it has potential competitive advantage from economies of scale and habit forming behavior.  It also sells a low price product which allows for pricing power.  The company should continue to grow at a rapid pace as the company shifts from a dominant regional business to a dominant national business.  Management is extremely passionate but the insistence on building inventory is a bit perplexing and a major drag on profitability.  Despite growing its revenues above 20%, the company is valued at a 13.7% EBIT/EV yield.  Add a very conservative 5% organic growth rate, the annualized return is around 19%. We will continue to build our position to a as long as prices remain around this level or lower as the company is a better alternative to cash despite management’s insistence on building inventory.