During my research and screening processes I look for three different styles of potential share market investment opportunities:
- Great companies at a fair to discounted valuation.
- Solid cyclical companies at a large discounted valuation.
- Asset Plays – Companies trading at a large discount to their tangible assets.
This is my order of preference, with great companies at the top of my list, cyclical companies second and asset plays third. The reason for this is a great company should keep churning out large profits well into the future, a cyclical company as the name suggests will require you to keep an eye on the cycle and price more closely, and an Asset Play will be an investment you need to watch closely and will usually sell within 3-5 years once the market has realised it’s value or not.
All three styles all based on a value investing framework and my goal is the same for each: ‘To produce long term compounding annual returns over 15% (preferably 20%).’
A Quick Look at SKB
Whilst recently screening for companies I took a quick look at Skydive the Beach Group Limited (SKB). SKB is a potential ‘Cyclical company style investment.’
Here are my notes:
Skydive the Beach Group (SKB)
What looks good about Skydive:
- Founder still owns 45% of the company.
- Operating margin over 20%
- Debt to Equity is down from 29% (2015) to 14.8% (2016) – whilst I like a company with low debt levels, capital raising can make me nervous – see below.
- In their 2016 Annual Report SKB state, ‘A key market indicator industry report indicated the industry grew at an CAGR (Compound Annual Growth Rate) of approximately 8% over the past 6 years in Australia and New Zealand.’ This is a solid backwind.
- It appears the skydiving business almost has mini-monopolies built into it, with usually only one, maybe two operators working out of a location. For example, I have personally been skydiving twice where I used to live in Coolum Beach, Queensland and both jumps were with the same operator – as they were the only operator there. I had to pay whatever price they charged, if the price was too expensive I probably just wouldn’t have jumped – but there was no other competitor there for me to compare or haggle them against if I had wanted to.
- Economies of scale advantages to putting all of these sky-diving businesses under one roof – Planes, plane maintenance, training, parachutes, marketing, administration, finances etc.
- Based on current Net Tangible Assets per share ratio to the share price of 4.3, SKB seems like fair value – but will those assets convert to strong, stable, long-term earnings?
Further thoughts about SKB:
- SKB listed on the ASX on the 25th of March 2015 with 293.4 million shares outstanding at a price of $0.25, there are now nearly 434 million shares outstanding and the price is about $0.52. So, by my calculations whilst the share price is up 108%, the total shares outstanding have also rising by 48%, thus diluting the returns by almost 50% on what they appear to be on the surface.
- Capital raising’s make me a little cautious. My feeling is a great company should spin off enough cash to more than cover their own requirements, plus further investment. The only time I do like to see a capital raising is when a great company is raising more funds to buy another great company and even then I am cautious.
- SKB’s reasons for the IPO and three capital raising since were (from the SKB website):
- 2015 (March): The successful completion of an initial public offer (IPO) and listing on the Australian Stock Exchange which was oversubscribed and raised a total of $25 million. Funds from the IPO were primarily used for the acquisition of Australia Skydive Pty Ltd which was completed in March 2015 and increased the number of drop zones in the STB Group to 16.
- 2015 (October): The successful completion of a capital raise through an Accelerated non-renounceable entitlement offer, thus enabling SKB to complete its first international acquisition, acquiring Skydive Queenstown Group (trading as NZONE and Skydive Paradise).
- 2016 (June): The successful completion of a capital raise through an institutional placement, enabling SKB to complete its second international acquisition, acquiring Skydive Wanaka.
- 2016 (October): The successful completion of a capital raise through an Accelerated non-renounceable entitlement offer, thus enabling SKB to complete its first non skydive adventure tourism acquisition, acquiring Raging Thunder Adventures.
- If you trust the combined thoughts of all market participants it appears on the surface when reflected by the share price that every dollar of capital raised is adding about $2 of value to the company. But as a value investor it is my job to have an innate distrust for the market so I’ll need to have a deeper look into each of these transactions to decide if all of the capital being raised is adding value or diluting shareholders?
- Current PE Ratio is over 20, so it doesn’t look cheap based on this ratio. Especially if they keep raising capital to invest/expand and if one of the investments doesn’t turn out well.
- Since SKB has only been listed for a short period of time there is not as much historical financial information available as I would like.
- Return on Capital (ROC) is lower than I usually look for: 7 (2015), 10 (2016). I look for ROC over 12, preferably over 15.
- Interesting company and I can see the potential. I can also see potential for tough times which could possibly produce an opportune and cheap buy price.
- Ticks a lot of the boxes I look for in an investment, but I need to understand the capital raising vs earnings per share dynamic to gain a better understanding.
- I would like to understand the competitive advantage of SKB and the benefits of this business model in the Adventure Tourism business – strength of locational advantages and economies of scale?
- I’ll do some more research before considering SKB for my Watchlist and determining a potential buy price.