Diary of a Focused Value Investor

[raisinglines]

More Saga Furs, funded by Viafin’s profits

Yesterday I did some rebalancing in my portfolio. I sold a piece of my largest holding, Viafin Service, to finance more Saga Furs purchases. It feels bad to sell a good and growing company to buy, if not a bad one, then at least a cyclical and long-term dying business. But greedy is greedy, and I can’t look away from Saga Furs’ euro-denominated net current asset mountain.

Viafin Service has been in the portfolio for a relatively short time, but has risen over 60% from the initial purchases and slightly (15%) from additions. I intentionally overweighted it because I couldn’t find anything else sensible to buy at the time, and my own confidence in Viafin’s long-term success is high. So the overweighting was okay for me - I didn’t perceive it as risky. Now, however, most of the undervaluation has unwound, so lightening the position to finance an investment with a better price/value ratio was appropriate.

I previously wrote a bit about my thoughts on the company’s investment case in the Saga Furs thread. This is a very recent investment otherwise:

@raisinglines

Many times I have left this stone unturned, certainly for the same reasons why not many are interested in it - the fur business is a dying industry. At a quick glance, obvious value. But…

Based on Iikka’s visit to Inderes, I nevertheless took it upon myself to check the claims. Indeed, they held up quite well.

An interesting case indeed. Net current assets of €20/share, net real assets of €30/share. And if the talk about possible undervaluation of real estate holds true - even more. And the share can be bought for €9. Indeed, as a Graham disciple, one becomes interested.

Even the business itself still seems quite relevant. Of course, it will decline gradually, and at some point, even a monopoly position may not be enough. However, using the averages of the last five, ten, and twenty years with 0% nominal growth expectations, the business value is even higher than the assets on average across all time periods. Of course, I would never dare to buy this with the expectation that the business value would materialize, but that’s a nice option too.

It’s hard not to get excited about this case. For ethical reasons, I wouldn’t necessarily want to own it, but on the other hand, the expected value of the investment is highest the faster the entire industry can be brought down by political means (the company will not liquidate without compulsion, due to its ownership structure). And even if that option stretches out, the business is still in a monopoly position and vital, and likes to pay generous dividends.

In addition, there are catalysts for the coming years. The company’s overwhelmingly most important market, China, initiated significant stimulus measures, especially to boost domestic consumer demand. A fresh monopoly position, how will it show in the numbers in the coming years?

I’ve been buying shares for the past couple of days. A small 12% position in the portfolio (I never own more than five stocks). Let’s see how this case develops over the next two to three years, or sell earlier if the share price corrects closer to reality.

Thanks @Iikka !

Saga Furs’ current financial year has proceeded with pretty much the same figures as the previous financial year. The first half fell significantly short, but in the second half, based on the company’s announcements, they have reached roughly the same figures.

The value of brokerage sales for the current financial year after the September auction is 343 million euros (2022/2023: 349 million euros).

Revenue has been fairly consistently 13% of the value of brokerage sales, so it should settle at around €44.6 million. With an EBIT% similar to last year (6.9), an EBIT result of approximately €3.1 million would be achieved in the concluded financial year. The company’s historical average (since 2005) has been an EBIT of 8.5%. In addition, historically, the company has generated net profit on average 36% higher than EBIT, because the company provides financing to both producers and buyers. Thus, with an average assumption, the net profit for the concluded financial year would be €4.216 million, or approximately a 14.5% yield at the current share price (€29 million).

But let’s take these figures with a grain of salt. The company’s business is highly cyclical. It is truly difficult to estimate the normalized EBIT level of the business, given the intervening factors such as corona, bans in producer countries, etc., etc. But on the other hand, also the exit of competitors from the playing field. When the last competitor announced it was closing its doors, Saga Furs raised its EBIT target to 15%. I don’t know if that’s realistic, but even the direction gives a positive sign.

But as I already wrote in my quoted post. I did not invest in the company because of its business operations. There are too many question marks for me to build an investment case around it. But it’s a nice little extra while waiting for cash to be released from the balance sheet. We’re going with a market price correction, larger dividends, or a ban on the entire industry (and thus liquidation of the company’s assets). The company has paid dividends averaging approximately €3 million/year, which is over a 10% yield at current valuation. Will we get there? Healthy skepticism must be kept in mind, but from the numbers and the balance sheet, I find no reason why we wouldn’t.

There are some thoughts. We’ll see what happens. Confidence is not high, but I don’t yet know why I’m wrong. The reason should become clear in a couple of years

Portfolio today:

Alibaba Group 28.3%
Viafin Service 25.6%
Saga Furs 20%
SRV Group 12.7%
Inderes 11.6%

Cash 1.9%