Small Burgers, Huge Discounts – An Investment Idea on An-Shin Food Services

I completed an investment idea write-up today on An-Shin Food Services Co., Ltd (“An-Shin”), a Taiwan-listed company which is the franchisee of the MOS Burger fast food outlets in Taiwan, China and Australia. MOS Burger was originally from Japan and is relatively popular in Asia. In particularly, the MOS Burger brand has more than 1,600 outlets in Japan, Taiwan, Singapore and Hong Kong.

Instead of the usual 1 pager, this write-up was expanded to 2 pages. In reality, the main content still remains on page 1, just that the historical financial figures are now on the second page. In essence, this is an opportunity that has a large margin of safety from:

• 72.5% of market cap made up of cash and available-for-sale securities; zero debt
• Profitable business gushing cash
• Unjustifiably low EV/EBITDA of 1.9x compared to average private market transaction multiple of 9.8x and average listed-peers’ 14.9x

An-Shin is running a great business but it isn’t without problems. Most notably, its China operations are loss making. However, things aren’t as bad as it seems, especially since the China segment’s losses have been narrowing and cash flows have been more than healthy. It is also a relatively unknown and uncovered stock flying below the radar of institutions. With a market cap of just TWD2.44bn or about US$76mn, and its 2 largest shareholders controlling slightly over 50% of the shares outstanding, An-Shin is probably considered an obscure micro-cap without enough liquidity to attract institutions. This of course represents a potentially good opportunity for those investors  without the privilege of managing a couple hundreds of millions or billions to take a bite into An-Shin as an investment.

For the sake of jotting down my current thoughts and to keep track of how the business investment pans out, I would be comfortable with holding or adding to the position as long as:

• Continues to generate the kind of operating and free cash flows over the past few years, which would eventually increase the ‘undervaluedness’ of the stock, as cash  holdings builds up
• Healthy levels of dividends continue to be paid out (eg. 3% and above)
• Losses in China continue to narrow
• Measured store expansion pace, particularly in China and Australia

Even if one of the points does not ultimately come to fruition, it wouldn’t mean that it would be a deal breaker to the thesis behind investing in An-Shin. It would however, definitely be a red-flag that requires greater investigation to assess whether the quality of the business has deteriorated substantially.

To do your own due diligence of An-Shin’s financial statements, you can visit their investor relations website, which thankfully has English-translated versions. However, the earliest translated versions date back to 2014 while the traditional Chinese-based financial statements go further back to 2011 when An-Shin was listed. To view my write-up, you can click here.

As this write-up was completed over the Christmas holidays, I wasn’t able to put through a purchase order for the stock since the brokerages (Singapore) are only open tomorrow at the earliest. As such, I’m hoping to put through the order first thing tomorrow morning. If the last trading day’s volume of about 15,000 shares or about TWD1.1mn in value traded (US$35.1k) are of any indication, it should be sufficient for my order to hopefully be fulfilled.

Merry Christmas and a Happy New Year to all!

Exiting Ebix

I sold the last of my stock position in Ebix on 1 December 2016 at US$58.45. In this post, I look back on the journey and the lessons drawn.

The backstory as to how I first came across the investment idea was reading it off the September 2013 issue of Value Investor Insight. I subsequently jotted down my thoughts in a write-up on 14 March 2014

Before I continue with the rest of the backstory, I thought it would be good to bring the lessons learnt in point-form upfront for my easy future reference:

• It is important to look for behaviourial clues beyond financials such as the manner in which a deal is structured. To consider who benefits from the deal. Incentives matter
• Sell in stages rather than everything at one go. This leaves room to capture further upside, especially when the market starts to get really in love with the stock – reverse dollar cost averaging. Similarly, and in converse, take advantage of the market’s pessimism to buy and dollar cost average down when prices start to decline for no good reason
• Even if the price has marched upwards by a large amount, if fundamentals remain sound and earnings have kept pace such that valuations remain compelling, the right move is to buy rather than anchoring on the initial purchase price

At that time, Ebix received some really bad press, in particular, a short seller report by Gotham Capital alleged that Ebix was laundering money, evading taxes and had a host of accounting issues. Needless to say, the stock took a beating and was among the most shorted stock in the US.

At the initial stages, my thesis was that an investment in Ebix was going to be a binary outcome. It was either a giant fraud and will go to zero or it is an extremely misunderstood opportunity whereby the potential returns are going to be pretty great. I thought it was more likely that Ebix was misunderstood than it being a fraud. If it was a fraud, my investment was going to zero no matter what instruments I use. However, if I am right about Ebix, I wanted my returns to be asymmetrically skewed towards the sky. As such, I structured the investment accordingly by purchasing options in November 2013 at US$2.80 with a strike price of US$11.00, expiring in June 2014. At that point in time, the stock price was US$11.87. I then sold the 6-month option about 5 months later in April 2014 for US$6.01 for a 115% gain to lock in profits and as there was a relatively short duration left before expiry. I would have gladly bought LEAPs to let the investment stretch out over a longer period of time but as it was a small cap company then, there were no LEAPs available.

As I dug deeper into Ebix, I realised that the investment case was not as binary as I initially thought it to be. Beyond my thoughts jotted down in my write-up on 14 March 2014, I realised there was a quirk in the buy-out deal Ebix made with Goldman Sachs that was most interesting and gave me the confidence to then plough the proceeds generated from the sale of the Ebix options into the stock. Despite the negative news swirling around Ebix, Goldman Sachs continued on with the due diligence and came out saying they would proceed. That proved short lived. While the deal eventually fell apart, it appeared to be mainly due to mounting public pressure and embarrassment by association rather than any tangible business negativity they found in Ebix.

The interesting quirk that I mentioned was the fact that the going-private deal had a provision which enabled Ebix’s CEO to increase his stake rather significantly in Ebix AFTER it has gone private. Why would the architect of Ebix who allegedly perpetuated money laundering, tax fraud and cooked the books increase his stake in a sinking ship? That did not make sense to me. I would have thought the CEO, Robin Raina, would have been very keen to sell out his entire stake if there was any truth in the allegations. However, the market did not seem to take much notice of it. Along with the strength of Ebix’s financials and business, and with this important bit of information, I took the contrarian view and started purchasing the stock.

Over the past few years, I added to the position at different stages with the price ranging from US$16.10 all the way up to US$28.70. The stock price went way beyond my initial conservative price target of US$21.10 but the business remains sound and earnings, along with the price multiple outgrew what I initially assessed it to do.

As the price kept marching upwards, I assessed the valuation and grew increasingly nervous. I started selling the stock in May 2016 till December 2016 between the price range of US$45.84 to US$61.10. I felt that the FCF/EV yield was getting stretched and at a trailing-12-months yield of 3.3% given the stock price of US$59.70, I thought the stock price has gone way ahead of its fair value and it was time to completely sell-out for reinvestment into areas where the risk-reward ratio are more attractive.

I continue to love Ebix’s highly recurring revenue business model of charging its customers on a per transaction scheme rather than the conventional systems set-up model. While I doubt the valuation will ever come back to levels reached in 2013, if valuation starts moving towards a FCF/EV yield of 6% or better, I will definitely start to be interested again.

Between the first purchase of the option when the price was at US$11.87 till the highest price I sold the stock at US$61.10, it moved upwards by 415%. While the number is not entirely representative of the total returns generated as I bought and sold along the way, the 3 years journey culminates in probably the best percentage and absolute returns generated on my portfolio thus far on an overall basis. I highly doubt I’ll ever be able to see one of my positions move upwards in such a dramatic manner. The conditions at the point of purchase that set up this successful investment were unique and unlikely to be repeated in the exact same way again. However, the lessons drawn from this episode certainly are valuable and it would benefit me to keep them close to heart.