We believe that in reviewing our investment thesis, it not only is a useful method for us to look back at our original thesis but beneficial to students of value investing as a case study to learn from.
Avi-Tech Electronics was not only a classical Grahamite stock but presented itself as a special situation as well.
Market Capitalisation: SGD 24 million
NCAV: SGD 27.3 million
NAV: SGD 40 million
Upon discovery, Avi-Tech Electronics was trading at a slight discount to NCAV of approximately 12% and a discount to NAV of approximately 40%.
From the period of Nov 2014 to Jan 2015, we see that the CEO himself was aggressively buying back his own shares between the share price of 6.6cents to 7.8cents, increasing his stake in the company from roughly 31.3% to 32.3% through this entire period.
With effect from 3 September 2014, the Company was placed on the watchlist by SGX, pursuant to Rule 1311 of the listing rules.
Discontinuity of US Operations
The main reason for the losses incurred by the company is due to the multiple failed acquisitions by the management namely – Verde Designs and Aplegen. Having recognised this, the management have decided to discontinue these 2 loss making divisions in 4Q2014.
Furthermore, from the general discussions from the public, pessimism could be seen by the fact of a certain letter to shareholders in the 2014 AR by the CEO.
“Our balance sheet remains robust and able to support potential initiatives, whether through mergers and acquisitions or any other structured transactions or businesses that will add value to our shareholders and the Group.”
As mentioned above, the reason the Company is in this current state is due to past failed acquisitions. Yet, with the discontinuity of these failed acquisitions we see management still eyeing for potential mergers and acquisitions. This resulted in pessimisms by the public that management may not have recognised their mistake and still going down a dangerous path.
Having assessed all the above-mentioned points, we felt that firstly, our downside was more or less protected by the NCAV without even considering for the value of the PPE owned by the Company. While the pessimism was warranted by the public, insider buybacks were not accounted for. Would the CEO himself risk his own money in at this current point in time when the Company is being placed on the Watchlist? True, sometime in the future he may just commit the same mistake again, however, as of this point in time, we believe that management would be more focused on getting the Company out of the watchlist than actually trying their hand at another M&A deal. Moreover, with the CEO himself putting his own money in, it probably signifies that he knows that the Company would be turning around soon. Having weighed all the factors, we took a stake in Avi-Tech Electronics.
Having held it for roughly more than two quarters, we see the Company turning itself around, gaining greater analyst coverage and us being rewarded by the increase in share price. After assessing the reasons for buying and current valuations, we believe that our investment has run its due course and it was time to divest from it.