just some old news and commentary

Just some old news and commentary I found after the profit down grade was announced.

Penrice Soda Holdings' dreams turn to ashes
CRITERION: Tim Boreham From: The Australian April 29, 2010 12:00AM:00AM




INVESTORS beware: with only two months until financial year's end, companies should know whether their full-year earnings will miss the mark and confessions will start to flow faster than those from a Stalin-era kangaroo court.

Following last week's disclosures from Wotif and Gunns, soda-ash producer Penrice Soda Holdings (PSH, 64c) yesterday came out with a shocker -- and one which casts wider doubt on demand for glass in the packaging and building sectors.

In early March, chief executive Guy Roberts cheerily reaffirmed current-year earnings would be higher than last year's $7.1 million, despite Penrice earning only $2.4m in the first half.

Now the full-year number is expected to be $5-6m, with negative cash flow of $7-9m.

According to Roberts, orders from three glass makers -- accounting for 70 per cent of Penrice's soda-ash production -- suddenly dried up.

Management also cites lower sodium bicarbonate sales, the result of lower stockfeed demand following eastern seaboard rainfall.



No-one can predict the weather -- not even the weather bureau -- but how could demand conditions change so violently? The answer is that, while based on three to five year deals, Penrice's contracts were overly flexible in favour of the client.

Roberts contends the three main glass customers, Amcor, CSR Viridian and Owens Illinois, kept their plans close to their corporate chests.

"Our customers aren't necessarily reliable witnesses as to what's happening in their businesses," he says pointedly.

Penrice sees redemption in the guise of a recovery in housing starts and a general improvement in food and beverage demand. Amcor Glass is completing a third line at its Gawler wine bottle plant which will increase output by 50 per cent.

Criterion had Penrice as a long-term buy at 86c on February 24. The shares lost 7.5c (10 per cent) yesterday and we now ascribe a speculative buy.

In the meantime, the company should expect a knock on the door from the bourse's inquisitors, given Penrice shares fell 4c on heavy volume on Tuesday.

Learning from Disappointments Penrice Soda
APRIL 30, 2010 10:45 AM BY DEAN MOREL
A regular commenter asked for my thoughts on Penrice and why I recently sold half our position at $0.80. Penrice closed at $0.58 yesterday after lowering their earnings guidance two days ago.

Penrice Soda Holdings Limited (PSH.AX) Disappoints Investors
Here is my original writeup from last December and follow up comments, in which I said the following.

Why I Bought

Penrice is in my 5-10 P/E strike zone. Viable companies sporting those P/Es have higher average returns than any other group. Buying in that range increases my probability of success.
High probability of earnings rising and ratio expansion. The simple combination which propels the low P/Es out performance.
Return on capital has lots of room to increase from 2009s low level of 9% . Orica for example returns mid to high teens.
Boring, easily understood business. I consulted to chemical companies like Kemcor and Orica and numerous mining companies, so Penrice is in my wheelhouse. The fundamental story and performance make sense and managements responses appear likely to bear fruits. This isnt high tech, chemicals are already a commodity and the demand is strong.
Good shot at 10% after tax dividend within 2-3 years and a possible capital double over the same time frame. [That's the target valuation, not the conservative valuation.]
So why did I sell out a few weeks back and why the forking hell did I only sell half!

Despite still owning a position in Penrice with a cost basis of $0.80 and the shares now selling at $0.58 I fell OK. Not because I have a lot of faith in Penrice, but because I was correct in changing my opinion. Ive found that once Ive established a position I tend to become married to it. Anyone else have that problem? I find it difficult to re-evaluate positions in an open, honest and fresh way. This is not an unusual tendency, I believe most investors have it. It is a terrible bias and one that I wish to overcome. Heres what Less Wrong have to say on this problem. Between hindsight bias, fake causality, positive bias, anchoring/priming, et cetera et cetera, and above all the dreaded confirmation bias, once an idea gets into your head, its probably going to stay there.

Changing my mind on Penrice was a small steps on my path to conquering what Im calling sedentary bias. I first became uncomfortable with Penrice in early February. I became more uncomfortable when I emailed the company some questions and they did not reply. That appalling lack of respect for shareholder communication did not sit well with me. I then re-read their reports and became uncomfortable with the language they used. There was no honest and frank discussion. They overemphasised what they did well without taking responsibility for what hadnt been going so well.

Rather than dig into the past lets take a look at the earnings downgrade from two days ago. Their headline, GFC SLOWDOWN IMPACTS. The CEO Guy Roberts goes on to use phrases like outside our control. Wake up Guy, its always outside of your control! Do you think Apple control people and make them buy their products? Where is this mythical company that has total control over their supply chain? Why cant you forecast a piddly couple months ahead? Why cant you stand up and take responsibility for your problems rather than blaming the GFC and things outside your control? I wont even start on the Open Briefing where Mr Roberts blames things like the strength of the AUD, as if that was a big unknown two months ago when he forecasted NPAT above $9M.

Woops, I got carried there, lets get back to February. With the share price then up 15-20% in two months I thought I should take my profits and run. Alas I focused on my numbers and with the economy improving I thought their guidance of over $9M NPAT was in the bag and thus despite then not liking the management and having concerns over their aging plant and customer concentration I remained invested.

Fast forward a couple months to the beginning of April. I was running the ruler over our Australian positions and Penrice was the only one that didnt measure up. While the possible returns still looked attractive I decided they simply were not worth a punch hole in my card and Id sell. I didnt like or trust the management, there were potential problems from the aging plant causing loss of production, customer concentration and an environmental pollution problem. The later of which I am uncomfortable with and can have financial implications. I was going on holiday and as our position was split over two accounts I decided to sell out of one of the accounts and dig deeper when I returned.

Will I be selling my remaining half today? No. Despite my concerns about management, their obvious inability to accurately forecast and possible maintenance issues, at the current price Penrice looks cheap. Part of the reason I kept half our position was that its a small position to keep me interested. While I often rally against the notion of needing to have skin in the game to bother digging deep and remaining alert to a company, at the moment it works for me.

By the Numbers
Penrice now expect $5-6M NPAT for FY10 down from over $9M guidance and $9M last year.
Net cash flow negative this year of $7-9M, missing major target of break-even net cash flow.
Third line at Amcors Gawler plant will flow through to increased sales of soda.
Dividend highly unlikely in the near term.
I hope that answers your question Sean.