Case I- Credit Foncier Franco Canadien.
This is one of Cundill’s early investments that he sold for a multiple of his cost. Credit Foncier was, as he described it, “a treasure trove of wonderful assets.”
Credit Foncier was founded by what is known today as Paribas, for the purpose of entering into the mortgage lending market in Quebec. It had become a major player in the Prairie Provinces (Alberta, Saskatchewan, Manitoba) as the area was being converted into one of the world’s greatest grain-producing expanses. Credit Foncier had been providing substantial financing to farmers and enterprises, and the profit it earned enabled it to acquire a significant commercial real estate portfolio in Eastern Canada.
Furthermore, during the crisis from the late 1920s to early 1930s, Credit Foncier foreclosed on many of the farmers but allowed them to remain tenants on very favorable rental terms. Therefore, Credit Foncier had become the owner of swathes of farmland, including the underlying mineral rights, and whenever the land had been sold, Credit Foncier was able to keep those mineral rights.
Cundill also noted that “the accounting policies at Credit Foncier had remained ultra conservative, with the entire real estate portfolio carried on the balance sheet at book cost with no attempt to put a realistic value on the mineral rights.”
In Cundill’s assessment, neither the cash nor the real value of the assets was even remotely adequately reflected in the share price. Furthermore, Credit Foncier had been consistently profitable and paying dividends for many years.
Cundill’s estimate of liquidation value appeared to be in excess of $150 value per share while Credit Foncier’s stock was trading at around $43 per share. Cundill loaded up on Credit Foncier’s shares after his analysis. Credit Foncier turned out to be a multi-bagger.
· Balance sheet vastly underestimated the true value of assets.
· Market price was significantly lower than the reasonably estimated liquidation value.
· The company had been consistently profitable and paying dividends for many years.
Case II – J. Walter ThompsonJ.Walter Thompson (JWT) is a household name in the advertising industry. During the recession of the 1970s, the advertising industry was hit hard more than most other industries with “sharply falling revenues, much publicized redundancies, and gloomy predictions that the market would never fully recover and margins would be squeezed for years to come. “
JWT went public in 1972 at more than $20 per share. As the result of both the recession and the added negativity that H.R.Haldeman, President Nixon’s ex-chief of staff, who had been previously head of JWT’s LA office, had recently been imprisoned for his part in the Watergate Conspiracy, JWT’s stock sank to around $4.00 per share.
Cundill scrutinizes JWT’s 10-K and discovered that the company “had a hard book value of $18 per share, not including its freehold building in Paris and Tokyo, and had a long-term lease in Berkeley Square at the heart of London’s Mayfair.” Furthermore, JWT was still profitable and was paying a dividend.
Cundill started accumulating JWT’s shares until it reached to 10% of the assets of the fund with the average cost of just over $8 per share. A year later, he sold his position at well over $20 per share.
· Great business franchise hit hard by recession and temporary negativity.
· Hidden assets value not reflected on balance sheet.
· Market price was significantly lower than the reasonably estimated liquidation value.
· The company had been consistently profitable and paying dividends.
Case III - Tiffany and Co
Tiffany and Co is the iconic luxury jeweler and silversmith. In the 1970s, the perception of Tiffany turned negative for two reasons. “First, because Tiffany had lost money for several years in the 1930s, when luxury goods had been neither fashionable nor generally affordable, there was a consensus that the 1970s were likely to see a repeat of this so luxury brands were definitely out of favor. Second, Tiffany’s equity was controlled by Walter Hoving, its CEO, who, although recognized as a talented and energetic manager with real creative flair, had roundly declared in public that he would never ever sell."
Tiffany’s revenue and profits had also grown steadily through the recession period with net income crossing over the $1 million mark for the first time ever in 1974.
“For Peter, the clincher in making an investment decision would always be the value of the net assets and in Tiffany’s case there were plenty to choose from. The most obvious and high profile one was a massive 128.5 carat canary-coloured Tiffany Diamond carried on the books for $1.00 although it was widely known that the company had recently turned down an offer of $2 million for it. Furthermore, Tiffany’s freehold of the Fifth Avenue store was sitting on the book at $1 million since 1940. On top of this, there was a factory of 120,000 square feet in Newark and a very conservative valuation placed on the inventory of the retail stock.”
Tiffany’s shares were trading below book value of $10.5 per share and in Cundill’s judgment well below the company’s realistic liquidation value. Cundill accumulated Tiffany’s share at an average of $8.00 per share. Within a year, he sold his entire position at $19.00.
· An iconic luxury brand with growing revenues and profits suffered from negative perceptions.
· Value of prestigious hard assets underestimated on the balance sheet.
· Market price well below realistic liquidation value.
Case IV – Cleveland Cliffs
Cleveland Cliffs was the largest supplier of iron ore pellets in North America. The periods following the recessions of 1981-83 were harsh ones for the iron ore industry. In response Cleveland-Cliffs shrank its operations. It had a series of joint venture investments that could not be regarded as liquid assets. Book value had declined from $30 to $22 while stock price had declined from $40 to $18.
Upon examination, Cundill found out about a power plant in Michigan that was carried on the balance sheet at a negligible value. He was not sure how much this power plan was worth so he called two of his friends to visit the plants. Both friends reported back to Peter that the plant was worth “a lot of money.”
What’s interesting about the Cleveland Cliffs case is that after Cundill’s initial purchase at $15 per share, Cleveland Cliffs’ shares slid relentless to $6 per share. Cundill bought the shares on the way down at an average cost of $9.75 per share. In two years, the shares hit $20.
This is not the end of the story. During the market crash in October, Cleveland Cliffs’ shares plummeted again and Cundill bought back all the shares he had sold. The fund exited the position in 1991 with an annual compounded rate of over 30%.
· A neglected security selling below book value with hidden assets not reflected on balance sheet.
· Using Cundill’s own words, “There is almost always a major blip for whatever reason and we have learnt to expect it and not to panic.”
Case V – Angelo American
As Cundill has written a great investment analysis for Angelo American in his journal, here I will let the guru himself help us navigate through his thought process:
“Angelo American is a South African holding and management company providing a complete range of technical and administrative services to 285 companies worldwide. In addition they hold significant equity interest in a group of international mining, industrial, and investment companies including De Beers, Engelhard, Charter Consolidated, Hudson’s Bay Mining and Smelting, Amax, and Anglo American Gold.
De Beer controls over 80% of the world’s diamond output and Anglo’s investment has a market value of over $200 million. Anglo’s mining interests last year produced 29% of the Free World’s gold production and substantial quantities of coal, uranium, copper, iron ore, platinum, nickel, and zinc. They have invested in a number of successful petroleum consortia in the UK and Dutch sectors of the North Sea, including the Forties and Argyll fields. Through Charter Consolidated they have a sizeable interest in Rio Tinto Zinc. Anglo American of Canada owns 38.5% of Hudson Bay Mining and Smelting. There are smaller, but still not insignificant, investment in timber, real estate, asbestos, potash, and citrus fruit groves.
Anglo is holding cash and equivalents of $235 million. Their investment portfolio is carried at a cost of $600 million against a value for the quoted securities alone of $1.1 billion. The shares at $2.50 are selling at a ten year low with a capitalization of a mere $313 million, the company is profitable (will earn about 60 cents this year), and the dividend yield is 10% and more than twice covered. The numbers are solid but the share price is clearly signaling a problem or problems – precisely what we like to see. As I see it, first of all there is the gold price, which has recently sunk back from $170 and is now teetering on the brink of $100, and I take this to be a psychologically important resistance point which may or may not hold. At the same time mining costs have risen sharply, so it would be sensible to assume that Anglo’s dividend stream from its gold-producing subsidiary will be substantially reduced for the next little while. In a worst case scenario this could lop about 20% off the earnings, but still leave the dividend twice covered – a considerable margin of safety in itself and the debt/equity ratio at 0.7 is more than satisfactory. As the direction of the gold price – who can tell, but this is an unsettled and inflationary era and it is not hard to imagine a further rush of financial assets to safe heaven, one of which is gold.
The other problem is clearly the politics, which the harbingers of doom predicting a collapse of order as black South Africans press more violently for equality, the demise of white supremacy, and a fair share of their birthright. The risks of labour unrest are undoubtedly realand might include sabotage and the spectre of expropriation if things really got out of hand. My instinct is that the worst case scenario is highly unlikely and even if it were to happen, Anglo’s internationally acknowledged expertise is in mine-management and someone would still have to manage and expropriated mines. However the true margin of safety lies in the diversified portfolio of assets outside South Africa. ”
Cundill bought Anglo America in 1977 and sold it in 1979 with over 100% realized gain.
Case VI. Tokyo Broadcasting System.
Tokyo Broadcasting System is a classic Peter Cundill play in the Japanese market. It was the third largest television broadcaster in Japan. As a result of the stagnant Japanese economy through the 1990s, broadcasting companies in Japan suffered from severe revenue and profit decline. TBS owned valuable property, a lot of cash and a competent management team.
TBS’s share was trading at 1,500 yen per share at the time with the value of real estate per share of 1,000 yen per share and cash and investment per share of another 500 yen. At 1,500 yen per share, you were buying the business for nothing and Peter valued the business excluding cash, real estate and investment portfolio at 2,000 yen. Adding this 2,000 yen to cash, real estate and investment portfolio, Peter arrived at a “fair value” of 3,500 yen.
Peter began buying in 1998 and accumulated the majority of his position through 2001 and 2002 at prices below 1,500 yen. Most of the position was sold at between 2,500 yen and 3,500 yen. Incidentally, TBS’s share eventually reached Peter’s fair value of 3,500 yen.
· A leading Japanese broadcaster suffered from stagnant macro environment.
· At 1,500 yen per share, you can buy the cash, real estate and investment portfolio and get the rest of the business for free.
Case VII - Sibir Energy
Sibir Energy is a Russian Oil Company and the largest company listed on London Stock Exchange’s Alternative Investment Market (AIM). It was founded in 1996 and obtained an AIM listing on the London Stock Exchange in 1997.The opportunity came after the Russian debt crisis when Sibir’s share price plummeted along with every other Russian Stock.
“Sibir owned a UK operating that was cash flow positive and worth approximately half the company’s market capitalization. It had a rag bag of assets in Italy, whose value probably represented another quarter, which left a collection of assets in Russia, including one mature oilfield that was also cash flow positive and worth between 25% and 50% of the market cap. The rest of the assets were thrown in for free. But most important elements of the package were 50% interest in two oil fields, both in Siberia, one in partnership with Sibneft, controlled by Roman Abramovih, and the other a rather loosely constructed joint venture with Shell. ”
Peter’s friend James Morton, who was helping Peter with the Sibir Energy investment, calculated that from the sum of parts standpoint, “you were paying mere 10 cents per barrel in the ground for the Russian reserves, well below the value of any other listed Russian Oil Company.” Peter, however, “remained to be convinced as he believed that nothing in Russia was ever straightforward.”
Peter’s cautionary notes proved to be prescient. “Everything that could go wrong did.” “Shell tried to squeeze Sibir out of the Salyn oil field by accelerating the cash requirements to bring it on stream to a level that it believed Sibir would be unable to support.” Sibir had to take a loan from its largest shareholder and sell off its UK and Italian assets to fend off Shell’s tactics. Next, Sibir had to fight the battle against LukOil and Sibneft (the other partner in Siber’s 50% interest in one of the two oilfields) to gain control of a strategic refinery. Although Sibir won the battle, Sibneft retaliated and diluted Sibir’s interest in the Siberian Joint Venture with Sibneft from 50% to 1%.
All the turmoil made Sibir’s shares extremely volatile. In 2008, Sibir’s largest shareholder, Tchigirinski, who helped Sibir during the Shell fight-off, asked Sibir’s EO Henry Cameron to lend him $500 million because he was running out of cash. The board refused to authorize the transaction but it happened anyway. When the news broke, Sibir was suspended from AIM market and Cameron was fired.
Throughout the Sibir drama, Peter and James remained rational by “running and rerunning the ‘sum of the parts’ calculations to reassure themselves that the margin of safety is still intact.” In the end, the Sibir investment turned into a “ten bagger.”
Key takeaways from Christopher Risso-Gill:
· “What was required was an asset-based margin of safety significantly greater than would be considered adequate in the more developed markets.”
· It was also fairly obvious that in these less developed markets tangible fixed assets were superior to cash, which had a nasty habit of evaporating.”
If there is one common theme in all the cases above, it is the built-in margin of safety provided by assets value. The Peter Cundill approach will require an in-depth analysis of the balance sheet and even on-site visits to identify undervalued and hidden assets. Not surprisingly, some of Peter’s best investments involved purchasing great businesses trading below reasonably estimated liquidating value due to temporary fixable problems as demonstrated by his investments in Credit Foncier and Tiffany and Co. Also important to the Peter Cundill approach is the ability to stay patient and convinced during adverse periods as we see from the Cleveland Cliffs case and the Sibir case. Peter’s writings and experiences again remind us that combining a margin of safety mindset with the right temperament is likely to result in more than satisfactory investment returns over the long term.
Let us end this article with three fabulous quotes:
"There's always something to do. You just have to look harder, be creative and a little flexible." - Ivan Kahn
“We always look at the margin of safety in the balance sheet and then worry about the business.” - Peter Cundill
“Patience, patience and more patience. Graham said it, but it is true to all investment disciplines, not only value investing, although it is indispensable to that.” -Peter Cundill