upgrading cix to strong buy, page-12

Hi Cameron

Excellent post - and agree entirely with what you have said.

The problem with the franking credits is they can only be applied to profits; and based on what we have seen it could take years (and years) to use them. If you apply some sort of PV formula to those credits - with a long lead time - they are actually not worth much at all. Calliden has, from time to time, come out waving the "we've got franking credits" flags; but in reality these aren't worth much if it takes you 20 years to realise them!

The problem then with both the franking credits and the carried forward tax losses is that to a potential purchaser they aren't worth squat. Any substantial change in ownership (in fact, any substantial change in the core registry - I think it is 50% since consolidation, from memory) wipes out those credits and losses for eternity. A buyer - unless they come from one of the current major shareholder - gets zero value from those upon moving on Calliden.

As I see it, the crux of the real issue faced by Kirk and his pals is that CIX has failed to "scale up" as quickly as they wanted. The AUGIL and FMG purchases attempted to do this, but what I see of lack of planning (or perhaps poor execution) on the IT side of things soon put pay to any momentum gained from those purchases.

Additionally, what CIX needs to realise is that insurer's (particularly those who rely heavily on reinsurance and quota share arrangements) are, in essence, investment companies. Any goose can run an insurance company if you reinsure to the hilt; but to make "real" money you need to actively manage your investments. CIX have failed to do this, and seem to have lost their way. For example, in the past two years they have dropped from being number#1 (in terms of ROA on investments - see 2007 and 2008 as an example) to last in the list, mainly due to lack of duration and credit management. A simple case of being conservative to the point of extinction.

Personally, I think the Board is at fault, not just Kirk. Conservatives such as Lowenstein (a known market contrarian) would rule the Board on investment decisions, and my guess is that his fear of everything (credit, duration, objects that go bump in the night, etc) put a quick end to any attempt by the executive management to make a decent go of this company.

Must admit - also not a fan of the "fluffy" annual reports of the past year or so. I for one really don't like "thought bubbles" from management (which were present in one of the recent reports), nor do I really give two hoots what someone does for a hobby: what I care about is how much money these guys will make me, as a shareholder.

Solution is a rejig of the Board - but I can tell you that this is not going to happen. Too many "jobs for the boys" on the Board - the proxies always vote in favour, and having attended two of their AGMs I can tell you that the answers are always perfectly scripted to anyone who dares question the Board's position on any subject.

All that said, I believe that every dog has its day, and at the current share price this "pound puppy" is worth a punt.

Best regards
Kit