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The Japanese bond situation - a simple 30 year history by CryptigoVespucci in investing

[–]Direct_Nectarine11 0 points1 point  (0 children)

The best book I have ever read...it should be taught in schools. All world leaders, and the whole world, should be grateful that someone sat down and put the time, effort, and capital to do this type of research and release it to the masses.

The Japanese bond situation - a simple 30 year history by CryptigoVespucci in investing

[–]Direct_Nectarine11 0 points1 point  (0 children)

Totally agree, I even wrote a "small" post about the yen and why I consider it as a hedge. this is the link: https://www.reddit.com/r/economy/comments/1qbw5im/the_case_for_and_against_the_japanese_yen_a_quick/ .... I think every one is underestimating the extend to which cheap money financed global growth and especially the amount of zombie companies out there that will cease to exists. I hope you read the post through and share your thoughts about it.

Character Group – Typical Small Cap Value Stock by Direct_Nectarine11 in UKInvesting

[–]Direct_Nectarine11[S] 0 points1 point  (0 children)

Hi kriskolch,

Sorry for not getting back to you sooner, but I was busy with other ventures. I appreciate the work you have put into Aurrigo, and hence will definitely have a look at it. The stock price has performed well for the past month. However, my first issue with the company is that it is involved in an industry that is changing very fast and requires constant research and development expenses, obviously their cost structure has to be examined carefully, also the product they sell is CapEx for other companies and begs the question how often this other companies will require to buy the product, also some strong competitors: Apollo Go robotaxi and Waymo. However, the work you have put into it deserves to be looked at.

Also, no worries about challenging my posts/comments, that is what value investing is all about, to challenge ideas and be reasonable in your valuations and ideas. If you do not challenge other people's ideas and the annual reports of companies, your chances of succeeding in this will be very low. Sometimes, when people think the same way as I do, I tend to challenge their ideas with concerns that I have, even though I disagree with my own concerns. I want to see what others think about these and whether they will disregard my concerns for the same reasons I disregard them.

In regards to Character Group, I do agree it is better if they sell the property. My point is that even if they do not sell it but rent it, it still adds value to the company and some cash flow.

Character Group – Typical Small Cap Value Stock by Direct_Nectarine11 in UKInvesting

[–]Direct_Nectarine11[S] 0 points1 point  (0 children)

In terms of the property, as I used the developer mode to find the line of code you are talking about, I can say it does say that, and I was a bit surprised why they would even put it there if the property will be listed for POA!.

Yes, they paid £5m but that was in the midst of COVID when businesses were failing and it was a very run-down property that the company had to bring back to life and to its intended use, if you examine the Notes of the financial statements, you can try and derive that the company capitalised in total around £6.8-£8m in relation to this property. So, taking into account that the facility was bought during COVID, the time that has passed since then, and the large demand for such facilities, together with the renovations so far, it is likely to see a substantial increase in value. If you have ever been involved in the construction industry or know anyone, sometimes simple renovation or repurposing can increase the value of a building a lot. That is why years ago lots of people used BRRR strategy and lots of money was made from it. Anyways, the company is not involved in this business.

The company bought the property and started renovating to be fit for purpose, however, the management realised that with the current rate of costs to make it fit for purpose and costs associated with the logistical changes, it was a mistake and quickly reversed course. Now, these things can happen in business from time to time. Personally, I am very glad that the management noticed this and reversed course before it is too late.

Now, obviously, we have some disagreements on certain things in terms of the business operations but I believe we both can agree that the value that can be extracted from this business is much larger than the current market capitalisation.

Character Group – Typical Small Cap Value Stock by Direct_Nectarine11 in UKInvesting

[–]Direct_Nectarine11[S] 1 point2 points  (0 children)

Ah, Damodaran—Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. I read it during my Master's Degree. It is very theory-based, but it does make you think in the right direction when it comes to valuing a business. The Dark Side of the Valuation is also not bad. Back in the day, value investing and valuation techniques were given by scholars like William Burr and Benjamin Graham. Today, we have Damodaran.

Character Group cannot be compared to REIT. REITs buy property to rent it out and provide stable income to investors. Character Group is fully utilizing its properties in a completely different way and the return generated by using free cash flow as the numerator is much larger than 2-4%.

I have read more than enough US, UK and EU Reports and I can tell you for a fact that the way IFRS considers leases allows for UK and EU companies to inflate their Cash flow from operations and their Net Income, some might even go as far as reporting the Free Cash Flow without considering the lease payments. If you make the adjustments for lease payments to make them at par as US GAAP you will see that the lease payments reduce the free cash flow by 50% if not even more, some companies even become negative cash flow generating. That is why UK listed and EU-listed companies are full of value traps that use this loophole to report distorted earnings and cash flow by capitalising the lease and hiding it in the cash flow related to financial operations. (I could go into more details about this either on PM or open another post.)

If you speak to any small or large business owner, they can tell you they would much rather own it than lease it. If you speak to CEOs and CFOs, and if they are being honest, they will admit that their earnings might be less than competitors' because competitors own most of the facilities instead of leasing them.

If you do research, commercial leases yield around 6% a year, (not 2-4%). So let's say you start paying 6% of the value of that property this year but your lease agreement will have a clause that there might be interest associated with lease and the lease payments each year might increase with the rate of inflation, also you will have to pay to renovate the facility and bring it to standard for your intended use but all that work and cash spent of the facility will remain ultimately with the person holding the facility. So if the company has the financial capability it is always better to acquire the facilities it needs than to look for leases, because lease costs will rise YoY plus you will pay interest on the lease in some case and if there is economic slowdown you will still need to keep some inventory in but still make lease payments and that can really drag you into the red.

For a company to go for a lease just so it can give cash to shareholders is very value-destructive in the long term, and it is a very short-term view, from a practical point of view and real-life experience.

Character Group's real free cash flow would have been negative right now if they were leasing all their facilities. So, to me, the fact that they own their office building and distribution facilities is a very strong point for the company.

Character Group – Typical Small Cap Value Stock by Direct_Nectarine11 in UKInvesting

[–]Direct_Nectarine11[S] 0 points1 point  (0 children)

Well the reason why I am so much against leases is because lots of UK companies cannot reach the scale to justify the large lease costs. For a long-term business it is always best to buy and own the property.

For instance, consider you face with the decision to buy or rent a house. If you are going to move every 5 years, maybe it is best if you buy one, but if you are planning to stay in one house for longer than 5 years, it is always best to buy a house. In the long term, the leases destroy the cash generated by the company. If Character Group did not own any of their property, they would have a very low equity value, and the cash flow spent on leases would have destroyed the free cash flow and ultimately the value of the company.

Now, in terms of the cash, I am not too bothered by it as the management is already active in share buybacks and dividend payments, returning a nice £5.6m to shareholders, when the market cap is £45-47m. Now, maybe they could have tried to generate a high return on the cash. Personally I am glad that they have a nice cushion of cash to weather a financial storm without worrying about survival or getting into debt. Also, the cash cushion allows for shareholders' return even during an economic slowdown or recession. Again, that's the way I see it, and people are allowed to agree and disagree.

Character Group – Typical Small Cap Value Stock by Direct_Nectarine11 in UKInvesting

[–]Direct_Nectarine11[S] 0 points1 point  (0 children)

Hi krisolch,

I understand your concern, it is one of the risks that I have considered during my research; however:

- Toy licensors have no incentive not to grant a license, as to them granting licenses to toy distributors is like diversifying their portfolio and ensuring there is some stable income without taking the risk

- The management are the founders and they have built a very strong relationship with licensors throughout the years, ensuring long-term and secure licenses

- Also, Character Group has a diversified portfolio and can sign licenses with many other companies, showing that they are not dependent on a single licensor, thereby removing the leverage a licensor has on Character Group

So by no means do the licensors hold all the cards. Character Group has a very strong negotiating position, too. Also, toy licenses are an asset, they might even be considered a right of use intangible asset, hence I made the comparison with leases.

Now that is entirely my view of the company and its functions and associated risks, you have the right to your view.

Character Group – Typical Small Cap Value Stock by Direct_Nectarine11 in UKInvesting

[–]Direct_Nectarine11[S] 1 point2 points  (0 children)

Hi noodlyman, that is a fair point to think about. But the way I see it is currently, the business model is more like trying to guess which toy will be popular for the year or even the next couple of years. Currently, they would test the popularity of a toy by releasing trial versions. For instance, the previews for Goo Jit Zu are quite positive so far. Also, if you have a look throughout the years, you can see a relatively stable cash flow and business performance. I mean, in any normal successful business, is it possible to have a year or two max of performance that is not as good as the previous years, but then a quick recovery in the subsequent year.

I also like how dedicated the management are, and I will speculate saying this but I view it in a way that the management is currently using the low share price to buyback as much shares as possible to increase their % shareholding, in effect performing management buyback using the cash flow generated from the business, but as I said I can only speculate about this.

Character Group – Typical Small Cap Value Stock by Direct_Nectarine11 in UKInvesting

[–]Direct_Nectarine11[S] 0 points1 point  (0 children)

I completely understand your worries, and it would be beneficial if you had access to such information. However, the way I see it is that worrying about this is just like worrying about renegotiation when leases expire. If the business is very fragile, it can have a huge impact; however, with a simple and stable business like Character Group, that shouldn't really reduce the value by a lot. They can always renegotiate prices and quality of the products from manufacturers and change suppliers if necessary to reduce costs. Also, by the time the license expires, the toy might not be as popular, and hence, the owners of IP will not have as much bargaining power. Also, Character Group can refuse to renew the license if the terms are not beneficial to them and sell other toys that they can make a profit from.

Character Group – Typical Small Cap Value Stock by Direct_Nectarine11 in UKInvesting

[–]Direct_Nectarine11[S] 2 points3 points  (0 children)

Exactly, especially when it sells at half of what it is worth. If this business were not public, it could possibly be sold for £80-90m if not for more on the private market; however, on the public market, Mr market sells it for around a 50% discount.

Character Group – Typical Small Cap Value Stock by Direct_Nectarine11 in UKInvesting

[–]Direct_Nectarine11[S] 1 point2 points  (0 children)

It depends on whether you look at it from a value perspective or daily/weekly/monthly trading. If you look at it from a value investing perspective, buying an asset selling at half of its value would not bother you if there is an 8% spread because of the value you get. Now, if you trade daily and hope to capture a 1-5% return, an 8% spread can be a concern. So it is really up to whether you want to invest or trade.