stressed seller, page-19

Onyx, the most important thing to learn is that no-one is ever completely fully informed....there will always be something that is missed.

The important thing is that for every ten investment decisions that are made, at least 5 should be outright winners (for me in recent times ARP, BRG, BSA, CPB, CPI, DTL, EMB, GWA, SGN, SKE, SLM and TWO) and four can be just so-so (ASZ, COU, TLS, WHG, WOW). That way, when a tricky one like COF does come one's way, it doesn't destroy wealth overall for you.

As for CSV, if you look back to August last year under the CSV thread last year, I proferred my opinion that I didn't see CSV as an investment grade business. To save you the trouble, I've copied my thoughts for you (apologies to COF holders):

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"As a rule, I do not invest in companies - public or private - from which I am unable to observe how resilient or otherwise earnings and cash flow are during economic downturns. This means I typically study financial performance of prospective investee companies over at least one, and preferably more, business cycles. It is all part of my investing objective of protecting-the-downside even under a worst-case scenario. So that certainly rules out CSV, with only a limited history as a listed company. [It probably rules out DWS, too, but this is a company that I will continue to actively monitor in coming years, as I see it as an investment grade business, although I think it is too expensive at the moment.]

But back to CSV, I had built a model of this company in early 2009, when the share price was well under $1.00. However, when I studied the 2009 annual Report I ceased any further active research on the business given some fundamental concerns that arose from my study of the Annual Report, things that I still consider to be an issue today. So even if I did have some transparent see-through into its long-term financial performance, I don't see CSV as an investment grade company.

Here are some of my main reservations with CSV:

1. Some Aspects of Governance Fail my Tests of Reasonableness.

The related party transactions really rankle with me (refer to note 22b on the 2009 accounts: over a million dollars in helicopter and aircraft rental from an entity related to the MD, almost half a million dollars paid in rent to directors and their associates, and $10,000 for the rent of artwork (!) from one director, are collectively not a good look. As a matter of prudential principle, I draw the line at executives (including the board and particularly the MD) deriving any benefit whatsoever from my company other than market-related remuneration and upside participation in the uplift in the valuation of the business. When the MD earns $400k for doing his job, but 4 times that amount in the renting of assets out to the business by entities with whihc he is associated, I struggle to be convinced that this is best practice. Put another way, transactions with director-related parties totalled $1.6m in 2009, which is highly material in the context of around $33m in pretax profit. And why do these various forms of aircraft need to be rented in the first case? Where are company officials flying that there are no commercial services available? Why can't they fly around in the same way most CEO's do? And do the costing exercise yourself on the >$1.0m in aircraft and helicopter hire. Assume - even generously - that the cost of a return domestic airfare is $1,000. That's 1,000 man-trips per year! Who would possibly be doing all that jetsetting around? In my view, it smacks of sub-best practice.

Another governance gripe I harbour is that the MD also sits on the nomination and remuneration committees, which I consider to be less-than-best governance practice. One of my single biggest tenets in owning businesses is being able to unequivocally believe directors and executives to be able to create value for shareholders. Otherwise I will not invest. And CSV fails my filter on this criterion.


2. Free Cash Flow Generation

Contrary to some assertions, I don't see CSV as a strong free cash flow generator at all. OCF covers capex by a little over 2 times, and with the recent highly material acquisitions of Konika Minolta Business Services (KMBS) and Leasing Solutions (LSL), I don't know what steady-state capital requirements (i.e., stay-in-business capex) is for this company. Over the time period that is publicly observable (2007 to 2010), cumulative OCF amounts to some $116m, while capex consumed is a very big slug of that, viz. $52m. Based on the past year, which represents the culmination of $200m in acquisitions (some $95m between 2007 and December 2009, and almost $110m since then) capex was $27m, supporting OCF of $35m. In addition the level of disclosure of the performance of the acquired business has been below minimum requirements for a listed company, in my opinion. So my problem with CSV is, because it has been a company of such fluidity in what it is and what it generates, cash flow wise, I just have no idea what I am really buying. And one of my golden rules, is that I need to know almost exactly what it is I am buying when I invest. With CSV, forecasting how much cash flow it will generate, and how much it will need to consume to support its business model, and how much will be spent on acquisitions, and what sort of acquisitions, is beyond my circle of competence. Some cleverer people than I might be able to do it, but I can't. And if I can't dimension cash flow I don't invest. Period. There are plenty of other investment opportunities bubbling on the stove at any given time.

3. Business Model and Strategy.

This management team has been on a significant acquisition campaign over the past three years, spending about half the company's current market value on buying businesses. And the problem I have is that I don't understand the acquisition strategy. It's a big "trust-me" exercise, in my view. I fail to see the business sense in going further up the capital-intensity curve in the Print Services industry, which what the KMBS and LSL acquisitions are all about. I don't see how becoming a wholesaler of printer and copier devices as well as getting involved in facilities management and document management/production garners any great everlasting competitive advantages. And as for getting involved in the servicing and maintenance of copiers and printers as a compelling commercial opportunity... And don't get me started on the likely working capital requirements in the supply of printer/copier related consumables such as paper and ink cartridges. And then there's the finance leasing business, LSL, which will be a new concept for CSV management, and I am not adequately convinced that it has the experience/skills to manage a financial intermediary.

The fact that these acquisitions came with a $10m break fees says a lot about the motivation of the vendors, I think. Already, the Print Services business generates 45% of the group EBIT, but consumes almost two-thirds of the group's capital, a ratio that only looks set to get worse. While I don't have any issue per se with New Zealand as an investment destination (on the contrary I think now would be a good time to pick up distressed assets given the parlous state of the NZ economy), I just cannot come to believe that printing and printing-related businesses are fundamentally good businesses.

Sorry to rain on your CSV parade, many might indeed "make money" investing in CSV, but it falls well outside of my investment process that encompasses Durable, Cash-Generative Business Model, Management Expertise and Accounting Quality. Don't get me wrong...CSV might "go up", but I'm not clever enough to be able to predict when, and why. I miss many stocks that "go up", but I have an investment discipline that is grounded in sustainable, forecast-able cash flow.

So my missive shouldn't be taken as advice to buy - or otherwise - any of the stocks listed herein. I am merely sharing my personal investing philosphy."

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Nothing I have seen since then has changed my mind.

Sorry.

Cam