Earnings on tap: McRea Industries, Senvest, EUPIC, CMH, Putprop

McRae Industries (MCRAA) recently reported H1 2015 results. Revenue in H1 was $57.31 M versus $58.26 M the previous year. And the gross margin was 28.1% versus 30.9% the previous year. This resulted in a H1 income drop of $3.80 M versus $4.55 M the previous year. Despite the slight disappointment, management tone was upbeat. They attributed the lower margin to two main factors. The first is higher costs associated with hiring and training new personnel, which is encouraging because it says they are expanding capacity. The second is due to higher import costs, which is worrying. One would expect that with the dollar getting stronger and stronger that import costs would decrease. On the other hand if most of their imports is from China then that would not apply as the Yuan is actually appreciating versus the dollar. The company did express optimism that demand remain strong in all product segments, so this year results should be on par with last year's record results.

Senvest just reported 2014 results which was as expected given the company posts the results of its funds monthly. Shareholder's equity at year end stands at CDN$738 M or CDN$264 per share. The company currently trades at 64 % of year-end book value. However, it should be even lower considering that after Q1 2015, the Senvest main funds Senvest Partners is up 7% and the Senvest Israel Partners is probably up around the same. The stock today probably trades at less than 60% of book!

Senvest	year end 2014	year end 2013	year end 2012	year end 2011
Common equity (CDN$ M)	738	565	331	263
yoy equity gain	31%	71%	26%
Employee compensation (M)	32	43	12.5
Compensation as a percentage of equity	4.3%	7.6%	3.8%

Senvest is a steal in my opinion. But, there is a lively debate in stock forums and the blogosphere whether the stock is indeed undervalued. The debate centers on whether the management deserves the compensation for the alpha, or lack of, that they generate for their portfolios. The above table shows the employee compensation (management fees) for the last 3 years and their percentages of equity. The fees are from the consolidated balance sheets which is shared by not just the common shareholders but also the outside owners of the Senvest funds and the minority interests. I estimate that the outside owners pay about 1/3 to 1/4 the management fees. And the minority interest is another 10%. So overall, the common shareholders directly pay around 60% of the total employee compensation. So, with this in mind, the fees are around 2.5% in a bad year, when incentive bonuses do not kick in, and it is around 5% in a good year, when incentive bonuses kick in. I think that is reasonable. Back in the day, when I was still buying mutual funds in Canada, the mutual fund management expense ratios could run as high as 2.5%!

I'll be watching the employee expense numbers closely in the coming quarters as the company also said it is expanding its work force in New York.

European Reliance of Greece (EUPIC:ATH) reported earnings of € 0.37 in 2014 versus € 0.35 a year ago. Equity grew to € 70M from € 58M a year ago. This means that the company is now selling for 1/2 book! No doubt the underpricing is due to the ongoing Greek debt crisis. I definitely need to think of the company's contingencies in the event of a Greek exit from the Eurozone, because if I can access the downside I can have a better gauge of whether this company should really be priced at 1/2 book.

Next up are my two South African holdings. CMH, an auto retailer, pre-announced that 2014 headline earnings would be between R2.04 and R1.88 versus R1.58 a year ago. Actual EPS would be between R1.73 and $1.57 versus R1.57 a year ago. Beyond that the company didn't give any more details. So it appears that the company has some one-time charges in the last year, which lowered earnings in a otherwise excellent year. Today the company trades at 9x earnings.

My other South Africa holding Putprop reported sales in line with last year. But a flurry of news made me just too scared and I sold. I think real estate companies are not for my style of investing and it'll be a while before I'll buy another. In the last six months Putprop reported its primary customer was in arrears with rent. It also announced it was doing a rights offer at R6.30 when the stock was trading at R7.00. However, when the rights offering time came, the stock was trading at R6.20! And several board members were replaced at around the same time. All these borderline red flags and the stock's poor performance made me give up on Putprop.

Recent Portfolio News

IEHC recently reported Q3 2015 results. Q3 revenue was $4.73 M versus $3.66 M the same period a year ago. Income was $0.59 M versus $0.19 M the same period a year ago. EPS was $0.26 versus $0.08 the same period a year ago. EPS for the first 9 months was $0.65 versus $0.51 a year ago. So the company is on track for another record year!

The gains came from increased revenue and improved margins. Gross margin was a eye-whopping 39.8% in Q3 versus 31.2% a year ago. It was 35.9% for the last fiscal year, which was a record year. If the company can maintain a close to 2% margin improvement in the current year that would mean a more than 20% income improvement even if the revenue is flat.

The company credits the commercial space for the great quarter. While the military business is a more traditional customer for IEHC, I feel it has plateaued. Instead, I feel the growth will come from the commercial space, in particular the medical and transportation areas.

I feel IEHC is a $8 stock.

Tachibana Eletech just reported earnings that show it is also having a record year. The company earned ¥ 203 for the first 9 months versus ¥ 133 for the same period a year ago. Tachibana is a distributor of factory automation and electronics equipment made by Mitsubishi Electrics. Tachibana serves the Asia region and China is a lucrative market as it modernizes. Exports to China is made even easier because the Chinese Yuan is virtually pegged to the US dollar as it appreciates against the Yen.

Tachibana stock has doubled in local currency in the two years that I've owned it. And to get a better sense of why, I compiled the following data on both companies. The chart shows Tachibana's revenues and that of Mitsubishi Electric. It also shows the revenue of the Mitsubishi Factory Automation (FA) group and the Electronics group. But if we focus on the red and purple bars which are the Tachibana revenues and the Mitsubishi FA revenues, we see they move in tandem. That is very reasonable as FA accounts for almost 50% of Tachibana's revenue. Mitsubishi's stock (TSE:6503) has also doubled in local currency in the last two years. So, Tachibana's success has really been the result of Mitsubishi's success.

Putprop announced it will do a R100M (US$9M) capital raise to buy more properties and diversify away from Larimar, the bus operator that is responsible for 80% of the company's revenue This is a rights subscription to buy shares at R6.30 whereas the stock is at R7.00. So, I feel it is in the shareholder's interest to participate, or sell the stock before the deadline. This capital raise should increase the company market cap from US$20M to US$30M. I haven't decided on my choice because earlier this month the company announced that Larimar was late with the rent. Larimar seems to have some financial troubles and needs a few months to be current with the rent payments. Maybe this is nothing but it caused the stock to drop 10%, and it is factoring into my decision for the rights description right now.

Putprop Earnings Looks Too Good

Putprop finally came out with the year end results after two pre-annoucements. The company earned 2.48 Rand per share which, on the face of it, is fantastic for a company priced at 7.35 Rand per share.

Putprop is a South African real estate company primarily engaged in renting to businesses. South Africa follows the IFRS accounting standards, as is most of the world but notably not USA. IFRS defines what is the standard regular earnings, but it also allows companies to report a variation called headline earnings. I read that companies use headline earnings to present a more meaningful measure of operations. For Putprop, regular earnings is equal to headline earnings plus its share of associates' earnings plus fair value gains on property. In other words, headline earnings removes the effect of mark-to-market accounting and focuses only on the core company's earnings. But the mark-to-market gains are huge, worth 39% of the regular earnings. The company's gains from the associated companies Belle Isle Investments Proprietary Limited and Pilot Peridot One Proprietary Limited are also large at 26% of the regular earnings.  This leaves headline earnings per share of only 0.86 Rand.

Company management emphasized they have been diversifying away from renting to the bus business which is their largest customer by far. To that end, the company acquired shares in other rental companies. This made a dramatic contribution to the bottom line, adding 19 M Rand to earnings versus 1 M in 2013. This is the bulk of the 0.74 Rand earnings per share increase between 2014 and 2013.

I think the regular earnings per share is the most useful number to gauge the company. But doing so implies the company trades at 3 times earnings! How is that possible? Well, my impression is that the market uses the headline earnings as the gauge. A month ago the company pre-announced that its earnings this year would rise significantly over a year ago. The stock shot up 30%. However, two weeks later the company revised its pre-annoucement. It maintained its regular EPS but removed the associates' income from the headline earnings. The stock then dropped back to its previous levels. See the table below.

	Official EPS	Headline EPS	Subsequent Price
2013 results	1.74	0.87	7.00
1st Pre-accouncement	2.40	1.50	9.00
2nd Pre-accouncement	2.40	0.86	7.35
2014 final results	2.48	0.86	7.35

The company also announced it will maintain its dividend, which is a 5% yield. And the stock trades at 56% of book with no long-term debt. I don't know why this stock hasn't doubled yet.

Summer Quarterly Updates

Tachibana Eletech reported Q1 total income increased 18.9% yoy; revenue increased 6.7% yoy. This improvement was partly the result of strong industrial demand in Japan. The results are even more impressive because the market presumed that last quarter's results were good because customers moved forward purchases to avoid the impending consumption tax increase. Q1 results were the first that included the consumption tax increase, and the results would have been impressive even if there was no tax increase!

The company also upped its year end EPS guidance from ¥161.41 to ¥170. The stock has rallied recently but it is still selling for only 8 times EPS guidance.

Riken Keiki reported earnings increased 19% yoy. Revenue increased 6.6% yoy. This company is firing on all cylinders. Last year its earnings increased 14% and the year before it increased 22%. This is my best performing Japanese holding, increasing by 90% in the 18 months that I've held it. When I initially bought the stock 18 months ago, the fact that it was a netnet was my margin of safety. Now it has risen 90% and is no longer a netnet. The market has priced it more as a earnings growth engine. But the stock still trades below book and and at 11x EPS guidance. This is Ben Graham's value investing at work: buy a good cheap stock, and usually something good happens!

Fujimak reported a ¥ (38.39) loss per share versus ¥ 3.5 a year ago. Revenue decreased 5% yoy. This was a surprise...no... a shock! The company said much of this was the result of a natural pullback from its knockout Q4, when it earned ¥ 99 a share, and to a lesser extent the consumption tax increase.

The company gave an EPS guidance of ¥98, which I hope is true but I also fear may not be met. The company trades at 8x EPS guidance.

Now on to US stocks. Seaboard Corp had one of its best quarters in history. Because of record pork prices, EPS was $79 versus $33 a year ago. H1 EPS was $119 versus $81 a year ago. The stock didn't budge after the earnings reports. In fact it dropped a bit because of plunging pork futures. Pork meat was regularly around $0.80/lb for the last several years, then it suddenly jumped to a high of $1.30. Today, futures for delivery in the next several months is back at $0.90s. Next year delivery dropped but now is back in the 90s also! So the weak stock performance is understandable.

Kansas City Life Insurance reported Q2 earnings slight down. Q2 EPS was $0.77 versus $0.98 a year earlier and premium revenue was down 5%. Book value has grown steadily and now the stock trades at 2/3 book. It also pays a 2% dividend. I feel this is one undervalued and neglected company.

Investors Title Insurance Company reported earnings were down 20% yoy. Premium revenue was flat yoy, which is encouraging considering the exceptional refinancing activity last year. The decrease in earnings was primarily the result of increased commissions. The company now trades at 1.1x book.

Putprop pre-announced that the company's earnings will be approximately ZAR$1.50 vs ZAR$0.86 a year ago! That is a 75% increase and even after the stock jumped by 30% from my initial purchase, it is still trading at 6 times earnings!

IEHC reported Q1 EPS $0.17 versus $0.23 a year ago. Sales was down 4% yoy. I would've liked to see better yoy results, but last year's Q1 was exceptional. I don't really know what to make of this tiny company. I had hoped based on my reading that this company's sales would take off in the last several quarters. But this hasn't happened. The company's sales are quite erratic. I'll pay close attention to this one in the coming quarters.

Why I Bought Putprop

Price	ZAR $ 7.00
Market Cap	ZAR $ 201.60 M ($ 19 M USD)
P/E TTM *	7.7 x
Div yield	5.1 %
P/TBV	0.59
ROE	7.7 %

While searching the world for cheap stocks, I typically choose a country and then do my research and run a screener looking for anything that strikes my interest. Last week, I decided to look at South Africa, which is a country I have never previously paid attention to.

South Africa a country with 50 million people. Its unemployment rate is high at about 25%. It has a 5.8% inflation rate, and it has about $50 bil USD in gold and foreign exchange reserves. In the last several years the South African Rand (ZAR) has dropped by a third. Today 1 ZAR is worth $0.095 USD. I guess this was in part due to the general decline of emerging markets all over the world. Interestingly, South Africa ranks quite high in corporate governance. Its corporate governance is higher than Singapore, Hong Kong and Germany.

So I looked at South Africa stocks and I was lucky enough to find a cheap smallcap that suits my style. The company is Putprop. Putprop is in the real estate rental business. It is not a REIT as far as I can see. I like the company because it has little debt, is very profitable, and sells for less than book.

So far it is all great news. But as with every great stock story, there usually are some skeletons there also lying in the closet.

Putprop gets 85% of its rental business by renting bus terminals and garages to Putco. Putco is South Africa's largest bus service that serves many disadvantaged areas. I am not an expert on South Africa, but for me cheap buses conjures up images of an integral segregation tool. The poor black population can work in areas where whites run businesses. But after work, they are forced to leave on crowded, rundown and dangerous buses. And Putco has a long history going back to the heyday of Apartheid. At that time it was run by Albino Carleos. At some point Albino Carleo also created Putprop.

Today Putco is still a rundown bus service. But it has less ridership than during the Apartheid days. Taxis and better shuttle services have cut into Putco's business. Putco has also changed ownership. I believe it is now mostly owned by blacks. Albino Carleo is no longer the CEO. And it has delisted eleven years ago. But Putprop still remains in the family. It is run by Bruno Carleo which I presume is related to Albino Carleo's, possibly his son, although I cannot confirm that.

Putco is obviously important to Putprop's well-being. But I think Putco's image also depresses Putprop's stock price. And I think the image portrays a bleaker picture than the reality. Therefore, Putprop is my kind of contrarian stock. The Putprop management says it wants to diversify its customer base. But considering that Putco is 85% of revenue, either management isn't trying very hard or management is very conservative. Still, I would want the company to err on the side of being too conservative rather than rush into reckless expansion. I also think Putco ridership can improve, no matter how bad the buses, South Africans are desperate for jobs, when the jobs come they will put up with the buses.

Putprop is a company with only a $19M USD marketcap. However, the South African Rand is cheap compared to the USD. Therefore, Putprop can be considered a much bigger company than a company with similar marketcap in the US. The company has great earnings power. However, they account for it strangely. The company assesses the value of its properties annually, and counts the unrealized gains or losses in the income statement. I am not used to seeing gains treated this way. I always used to see it as part of comprehensive income, but not regular income. This treatment has greatly exaggerated their reported income. The stock is 4x their 2013 income! For my purposes, I backed out the unrealized gains, and the caption box shows their adjusted earning and numbers.

In addition to the great earnings, the company pays a high dividend. And the company can easily keep this up as it trades at half of book, with no long-term debt.

A final issue to consider is the value of the Rand. South Africa has a slight trade deficit but the country is not desperate for foreign cash. So the currency is not at risk of devaluation. However, the Rand has depreciated by about a third compared to just five years ago. The Rand is at almost the all time lows. Of course, the flip side is that the Rand is low and can only go up.

That is about all I know about this company now, if I find any more info I will update.