I last added on to my position in mid April at the peak of the previous market cycle. Big mistake. The market went down afterwards and that’s my first experience of “Sell in May and go away”.
Lesson learnt. What we buy matters but when we buy them matters too. It’s hard to keep a full bladder and that that’s discipline to manage and control.
A new resolution for me thus is to only buy when the market is fear, on dips and and on peaks.
I just bought more of QSR, LBTYA, SRG and KHC. Except for SRG, these are all ‘platform companies’ that relies heavily on M&A as a pillar of growth.
In addition to the above, there’s also LBRDA, LILA, BUD, AME, AXTA and ST. All are ‘platform companies’. Broadly speaking, I can group them into:
- Consumer goods
In an era of stagnated growth, what’s better than to create value through leverage and the reduction of cost? All companies are managed by top management with strong track records, especially John Malone and 3G Capital.
That said, I am concerned about the impact of raising interest rates. Right now, although these companies enjoy stable and predictable cash flow, they are all highly leveraged and higher interest rates will be a major dampener of their growth.
Fortunately, their respective access to capital appears to be in good shape. QSR and KHC has the further backing of Berkshire Hathaway with its mighty cash pile. For the John Malone companies, the proper hedging instruments (fixed i/r) are also in place. This helps them to avoid surprises.
All seems well then. But the risk is getting a little too high for me to stomach. Only BRK.B and AAPL are ‘safe’ in my portfolio, plus my cash holdings, and they make up 35% of it. But that will not do. It’s time to deleverage, and reallocate my portfolio to companies that will benefit from the raising interest rates. More of BRK.B, cash and maybe WFC then.
Bought more of LBTYA at 34.7.
EV/EBITDA ratio of 8.34, below the US cable tv average of 11.31 and its 10 year historical median of 9.53. (Kindly note that I did not examine if there’s any one off income.)
My benchmark isn’t quite accurate as Liberty operates in the Eurozone but it will do since I am managing my own portfolio. There’s also more to why I am buying LBTYA than valuation
It’s hard to value John Malone’s companies as they are always unorthodox in their practices. That said, his preference is for his companies to be valued by the cash they generate. The cable cowboy was after all the first person to use EBITDA and his track record showed that he does know how to use it to its fullest effects.
His strategies are multi-fold – leverage stable predictable cash flow, financial engineering, tax shield, and stock buybacks – to accelerate the growth of his companies. Truth be told, no one quite knows what’s going on with his companies.
So why am I buying into his company? 1) relatively cheap valuation, 2) tailwind for telecommunications and 3) John Malone and his team of world class operators!
I can go on and on about the alignment of interest between management and shareholders, the unique moat created by a series of other John Malone companies but what’s important are the 3 points above.
Check out the book Outsiders if you haven’t and you’ll know why I think John Malone is a world class operator.
Breakdown of Portfolio on Apr 2017:
Key Changes: Sold Hutchison Port Trust and Liberty Media, and took up positions in John Malone’s Liberty Broadband, Sensata and a new group of companies by 3G Capital.
Companies managed by 3G Capital follows the same formula that has proven to deliver market beating performance. 1) Strong Capital Allocation capabilities 2) management obsession with cost and 3) stable predicatable cash generating businesses.
Warren Buffett: 20%
- Berkshire Hathaway (BRK.B)
John Malone: 25.9%
- Liberty Global (LBTYA)
- Liberty Global LiLac (LILA)
- Liberty Broadband (LBRDA)
- Liberty Media SirusXM (LSXMK)
3G Capital: 12.2%
- AB Imbev (BUD)
- Kraft Heinz (KHC)
- Restaurent Brands International (QSR)
- Apple (AAPL)
- Ametek (AME)
- Axalta (AXTA)
- Seritage Growth Properties (SRG)
- Sensata (ST)
- Asia Pay TV Trust (S7OU)
Cash Position at 19.1%
It’s crucial to find a company that wins with its customers and suppliers. Otherwise it runs in the risk of incurring wrath from them.
If customers turns against you, you run the risk of depriving yourself of income streams. Look at Valeant and potentially Transdigm. They acquire companies that own monopolistic products and jack up the prices of the products after the acquisition. This corroborates with Citron Research view in its short report.
If your supplier turns against you, your cogs might increase, or you get lousier credit terms, or worse, you are held hostage if they refuse to supply you.
At the end of the day increasing your profit margins just because you can builds your company on a shaky platform.
Bought QSR at 56.41.
It is hard to value QSR properly. Based on traditional metrics like PE ratio, QSR is overvalued (PE Ratio at 39, PB 7.78, PFCF 22)
Given the company’s unique operating model as an heavily leveraged acquisition platform, I have eventually reached at EV EBITDA to value the company 12.43, which is lower than the Global Restaurent industry median of 13.12. The metrics is used as it is a capital neutral valuation metric and it suggests that QSR is fairly valued.
With 1) a strong culture of capital allocation, 2) the cost obsession of its management 3) meritocratic, performance driven and ownership centric management and 4) the Operator Owner model led by 3G Capital, QSR has the makings of a good company that is shareholder friendly.
Fundamentally, QSR has an asset light operating model that generates annuity from its Burger King business. However, acquisitions might change its operating model – Tim Hortons operations is more asset intensive at the moment. Nonetheless, as a whole the company generates substantial and reliable cash flow that can be leveraged to fund further acquisitions.
Finally, there remains tremendous room for QSR to grow its business. Global Rev 603bn vs QSR Rev 4bn in 2016.
First blog post!
Inspired by bloggers like AK71 (asingaporeanstockinvestor) and Kyith (Investment Moats), I have always wanted to do up a blog to monitor my investments, and to deposit my thoughts on Singapore’s financial system and reflections on books. Having consumed so many of their well written articles, I figured it’s time I contribute to the growing body of knowledge online.
After many start and stops, this blog is started as part of my new year resolution to be more proactive and disciplined in the things I do. Let’s see how long I will last in this journey. Hopefully I can last the year!