2015 Year End Results

By March every year all companies with fiscal year end on Dec 31 should have announced their annual results. Six of my holdings are summarized below. Overall all results are reasonable and make all six stocks overvalued. But I don't know why the market trades these stocks so cheap. I am not one to think too much of catalysts so I have no clue when will it end.

	EUPIC	PFHO	SEC	KCLI	Soundwill	KARE
Price (April 1)	€ 1.49	10.15	CAD$ 125.70	9.20	HK$ 9.20	€ 240.00
Marketcap M	€ 40.98 ($ 46.71)	8.12	CAD$ 354.47 ($ 270.59)	384	HK$ 2616.20 ($ 337.57)	€ 662.40 ($755.14)
PE	3.66	4.84	loss	13.15	loss	12.40
ROE	0.14	0.33	-	0.04	-	0.15
PTBV	0.51	1.58	0.53	0.58	0.16	1.89
Div Yield %	0.00	12.32 (one time)	0.00	2.70	2.17	3.54
Vol (basis)	0.51	6.89	1.06	5.52	2.41	4.13

The table summarizes the key metrics. I mostly focus on PE and PTBV. And for each company, one or the other shows the company is cheap. The last row gives the average daily volume divided by the total shares. The fraction is showed in basis points units. So PFHO daily volume, which is 6.89 basis points, is actually 0.0689% of total volume. I have found most companies with healthy volumes should trade at about 20 to 30 basis points (0.2% to 0.3%). The table shows that all the six companies trade at extremely low volumes. None are at 20 or 30 basis points. This may explain why the stocks trade so cheap, they have extremely small interest.

European Reliance Insurance (ATH:EUPIC) continued its growth streak by increasing pre-tax profits by 6.6%. Even better is equity growth at 13.3%. The stock is still super cheap. I presume the reason is the ongoing crisis situation in Greece. Warren Buffett used to say he could find stocks that trade at 2 or 3 or 4 times earnings. They exist now and you just have to look. Well, I found one here trading at less than 4x earnings! On top of that it is trading at half of book. Now if only the market can cooperate.

Pacific Health Care Organization (PFHO) had a rough third and fourth quarter. The stock went from the high twenties to as low as $6.50 after announcing that they will lose their biggest customer Amtrust in Q4. But after their official annual report, the stock managed to recover to $10.15. Q4 results show that subtracting Amtrust's waning revenues in the quarter, the company still did $1.2M in business. So at that conservative trend, the company can do $4.8M for 2016. At their current profit margin of 20%, that is still more than $1 a share. The company said in the report that they employed 36 people in mid-March. That is still more employees than they've ever had except for their record year in 2014. And the company is continuing its IT expansion. I am cautiously bullish on PFHO.

Senvest Capital (SEC:TSX) reported FY15 EPS CAD$(35.39), which is pretty much expected. However, the book value per share increased because of a 19% rise in the Canadian dollar relative to the USD throughout the year. That would give per share book value of CAD$271 at year end. And also with estimated hedge fund losses from the company's 13F and its website, we can expect expect book value after Q1 to be about $237. Today it trades at $127. So the stock trades at 53% of book. That is too low even by Senvest standards. And one big reason for the huge discount is the market's view that the company charges excessive fees. This year has been kind of flat, and so there is little if any incentive bonus. The salary drawn should be all the employee expense on the books which is $12.5M. Other operating expenses, which may include costs for expanding their New York office is $16.8M. I am not thrilled about the expense. But for a company that manages about $1.4B in net money for common shareholders, minority interests and hedge fund holders. One can argue the cost is reasonable.

Kansas City Life Insurance (KCLI) reported for the first time after delisting from NASDAQ. The company revealed it bought back 1.1M shares for an average price of $51.13. The shares included normal buybacks and the odd-lot tender offer of 906,500 shares at $52.50. There are now 9.6M outstanding shares. The company earned $29.2M for the year, which is flat compared to the previous two years. However comprehensive income was $(9.0)M due to unrealized losses in fair value of securities. The comprehensive loss along with the 1.1M reduction in shares, minus the dividend, meant that the book value per share was flat from 2014 to 2015 at $68.55. I anticipate that unrealized gains will be much higher in 2016 because interest rates will be lower than expectations at late 2015. Lower interest rates mean a higher valuation on the company's stock portfolio, with the drawback that the company may receive less revenue as people avoid the company's products due to their low yield.

Soundwill Holdings (HK:878) is a real estate company that renovates and develops buildings as well as lease properties, primarily in Hong Kong. It is dirt cheap on a price to book basis. But last year it turned a small loss mainly due to fair value adjustments on its investment properties and almost no property sales.

Soundwill owns some of the best retail properties in Hong Kong. But rents were ridiculously high. I heard some of their properties were the highest retail properties in the world! But now that less tourists are coming from China, rent prices have fallen. Along with rents the fair value of Soundwill's properties have also fallen.

In 2014, the company sold HK$2.5B worth of properties for a $1B gross profit. But last year they had virtually none. But that could be a simply a quirk of timing. The following table shows the company's yearly property sales as well as the total money held as deposit on properties under development. The sales seem to oscillate every two years, with a high amount on year followed by a low. But the amount under deposit on the low years does seem to foreshadow good sales the following year. So, I expect 2016 to have significant property sales as in 2014.

	2015	2014	2013	2012	2011	2010
Property Sales (HK$ M)	10.40	2466.00	199.00	1310.60	483.20	591.20
Deposits	735.00	421.00	1277.00	482.00	529.00	422.00

Karelia Tobacco (ATH:KARE) reported year end earnings of € 19.35 versus € 22.44 a year earlier. Revenues were up 15% and gross margins, net of excise taxes, were up to 14% from 12.7% a year ago. The difference in the bottom line is from a previously mentioned € (14M) adverse tariff decision. The appeal is ongoing which, if successful, would return € 14M to income.

Hong Kong and Greek Portfolio Update

I haven't posted the results from my holdings for a while. And there has been a slew of them. Almost all of them have not disappointed. But their stock performance has been disappointing. I guess that is the hard reality of investing in out of favour markets.

The Greek crisis that has resurfaced this year has stained my nerves. But my two Greek holdings have held up very well. European Reliance (EUPIC) reported H1 revenues up 7% yoy. Such revenue numbers are very encouraging considering how the Greeks are strapped for cash. On the other hand, I am not surprised that a consumer insurer does well in Greece because it fills a void left by the very cash strapped government. The H1 earnings are down slightly from $0.15 to $0.125. The difference was mainly due to higher operating expenses, in part because the company hired more staff. The company currently trades at 1.9x book and 4.2x TTM earnings. This company is one of the cheapest stocks I own. And I am very pleased that the company recently has begun to publish all their investor information in English.

Karelia Tobacco (KARE), also based in Greece, also did very well in H1. This one is less surprising considering that the company gets most of its revenue from exports. In addition, smoking is a mostly recession-proof industry. The company report H1 revenue up 15% yoy. Net revenue (without excise tax) was up an incredible 28%. Earnings went up only 3% mostly because of an adverse court decision regarding duties. The company said that they will appeal the decision even though they have already expensed the loss. Without this decision the H1 profit would have been around $12 per share instead of the $8.52.

In following Greek news through the crisis I also learned that Greece is a society with an all powerful elite. The Karelia family sure counts as part of that group and that is wonderful. They will defend their business interest from all the nonsense happening in the country. So that if the country somehow implodes, the company will find a way to do fine and protect its wealth, and by extension my shares also.

The Hong Kong stockmarket is down in sympathy with the turmoil in China's markets. I feel Hong Kong has some of the most undervalued stocks anywhere today. My two Hong Kong stocks are currently trading at very depressed values. Soundwill Holdings (HK:878), which owns some of the best retail properties in Hong Kong, reported H1 earnings that were similar to last year. Considering the China turmoil I am very happy it wasn't worse. Soundwill typically depends on the mainland China shoppers to to buy the luxury products and dine sumptuously at their prime rental locations. So, there will be downward pressure on rents now that the Chinese government has clamped down on illicit income and China's economy is slowing down. Anecdotal evidence says that some rents in prime locations are down 10-15%. That said Soundwill's rental income has actually increased yoy, albeit slightly. So, I don't see why the stock is trading at a ridiculous HK$9.50 today! Below I show how much the balance sheet is worth per share. Compare that with Hk$9.50 per share!

Soundwill		HK $ per share
Assets	Property under development	12.00
	Other current Assets	3.39
	Investment property	56.00
	Other non-current assets	1.00
Liabilities	All Debt	8.08
	Other liabilities	4.88
	Equity to shareholders	58.34
	Minority Interest	1.09
6 Month EPS		1.02

Someone who is still turned off by the stock can point to the overpriced real estate market. An overpriced real estate market means Soundwill's assets are overstated. Still the margin of safety is so big I believe Soundwill is a steal. And the company is regularly turning over its real estate. In the H1 report, the company said it will convert HK$0.75 per share of this investment properties into cash through a sale that is expected to close in the latter part of 2015.

My other Hong Kong stock is New Century Group (HK:234). The company is profitable and also has a tremendous balance sheet. It trades at 14.1 ¢! Below shows the balance sheet and note that the vast majority of the debt is an interest free loan from the majority owners.

New Century Group		HK ¢ per share
Assets	Equity investment	6.6
	Other current Assets	1.3
	Investment properties	10.9
	Other non-current assets	1.5
	Cash	8.9
Liabilities	All Debt	2.7
	Other liabilities	1.1
	Equity to shareholders	25.5

The company announced recently that it will acquire a cruise liner in addition to the two it already owns for about HK$170 M. That is approximately 1/3 of the company's available cash. But the purchased cruise liner has generated charter income of about HK$20 M in each of the last two years. So that is a greater than 10% return on investment if it continues. I think it is a very reasonable way for the company to deploy its cash.

Why I Bought Karelia Tobacco

I believe the biggest hardest thing to do for the average advanced investor is to put matters in perspective and being objective. Warren Buffett used to ignore all outside analysis when he evaluates a stock. And he would make relative comparisons of two comparable investments, so that the analysis is more objective than in a vacuum.

I've owned Philip Morris International (PM) for 15 years, although in the last few years I have reduced my position considerably. The market used to regard tobacco as a sickly industry with a lot of litigation and regulation risk. But today PM has grown to 17 times earnings. This large a PE means the market sees tobacco as a growth industry, at least in the international markets where PM operates. Worldwide cigarette consumption is almost 6 trillion cigarettes per year. The international tobacco industry has grown steadily in recent years. But more importantly cigarette makers now have the pricing power to grow faster than inflation. That is in no small part due to the addictive properties of nicotine.

With PM so richly priced I turned to look at other public tobacco companies and noticed that they had even higher valuations: for example, American Reynolds (NYSE:RAI) trades at 27 times earnings! The one exception to the nosebleed valuations is Karelia Tobacco (ATH:KARE), a small cigarette maker in Greece. The company has a hundred year history, and when it joined the EU it began to expand globally. Today Karelia gets 85% of its sales internationally. Karelia has 0.3% of the world market versus 15% for PM. So obviously Karelia has much more room to grow than PM. This is the size handicap that Buffett so often talks about.

	Karelia	PM
Price	€ 225.000	$ 84.500
Market Cap	€ 621.00 M	$ 130.71 B
P/E TTM	9.8 x	17.1 x
Div yield	4.1 %	4.6 %
ROIC	61.1 %	23.1 %

Both Karelia and PM have increased sales at the same rate over that last five years — about 20-30% total. However, PM has increased EPS only 20% over the last five years while Karelia has almost tripled! The difference is from improved margins at Karelia. Karelia has worked to improve efficiencies through automation and sales channels. PM on the other hand increases earnings through a ton of share buybacks. Share buybacks trade equity for earnings. It's equity is now –$11B! Also comparing PM and Karelia is not all straightforward as PM reports in USD and Karelia reports in Euros. PM's bottom line has suffered from the strong dollar while Karelia has benefited from the strong dollar.

I like tobacco because it is a simple industry. Tobacco companies sell an addictive product, so they have steady reliable demand. And contrary to what some may believe, world cigarette consumption has not decreased in the past. I would guess that will continue for the next 10 years. Sure, it is down in developed countries, but the crucial market for tobacco is going to be developing countries. Just like many other industries, emerging markets is where growth will come.

The one downside to tobacoo is litigation risk. But I don't see a litigation risk discount. The other risk is illict cigarette sales that circumvent excise taxes. Taxes are the biggest part of cigarette sales, and the governments that impose it are also the biggest nemesis to tobacco companies. So the nemesis is also the biggest financial beneficiary of tobacco. That's why I am confident that governments will protect their golden goose by keeping a lid on illicit cigarette sales.

Within the tobacco industry I only see Karelia as cheap. Compared with PM, Karelia earns much more per share. Karelia has € 263M of cash and no LT debt. But PM has $27B of LT debt and negative equity.

Karelia could also be an attractive buyout target. The tobacco industry worldwide has only a few huge players. I am sure the company has had offers in the past that no one knows about. But it is 90% owned by the founding family, so that makes it an unlikely prospect. But who knows, it can happen.