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With the dust hopefully having settled here, it finally seemed like the right time to give this post one last polish & get it out! Maybe now, readers are  in the mood again to actually contemplate a potential new buy or two? As for me, almost inevitably, my top holdings tend to be my favourite buys…

Okay, maybe that’s not strictly true – each & every day, I’m still distracted by siren stocks I pine to own! But buying a new stock is equally about selling an existing holding*, one you (should) already know far more intimately. [*Unless you’re hoarding piles of cash…which would be pretty silly, right?!] And that’s an important & valuable hurdle for any investor. Because anything that might help reduce portfolio turnover is invariably a good thing! Which is no damn excuse for hanging on to losers…but it is a compelling incentive for really understanding the stocks/businesses you currently own. In particular, because learning how not to sell potential multi-bagger growth stocks is ultimately the biggest challenge most (experienced) investors will have to face, as I lamented in my last post.

So let’s crack on: For each of my disclosed holdings, I’ll comment briefly on its 2017 performance, then focus on its current prospects & valuation. NB: All share prices & market caps are cob Feb-27th, but individual stock allocations are listed as of year-end 2017 (essential to my 2018 portfolio performance tracking). Of course, any questions/comments you may have about these holdings are always welcome here (& by email):

i) Zamano (ZMNO:ID) (or ZMNO:LN) (1.8% of year-end portfolio):

Share Price:   EUR 0.04

Market Cap:   EUR 4.0 Million

2017 Portfolio Gain:   (25)%

Yeah, unfortunately they can’t all be potential multi-bagger growth stocks…

Zamano’s a bad romance which, almost inevitably, kept getting worse – a good awful reminder stop losses are something all value investors should actively consider…but alas, almost never do. In fact, value purists will argue fervently against them, while ducking the question any trader would ask: ‘If you’re so damn smart, how come you’re losing so much money?!’. I was wrong here to hold out for my fair value estimate (which proved more theory than fact), wrong to hold out for a takeover offer that never quite materialised, wrong to assume the board & major shareholders could still reliably line up an exit & extract value before it evaporated. But in the end, the real blame lies squarely with Zamano’s executive management – they failed to deliver a single acquisition, they failed to deliver on any new business/growth initiatives (like direct carrier billing), they had zero skin in the game to ensure a takeover offer actually made it over the finish line, they presided over the implosion of the company’s business, and then they ended up actually getting paid to walk away with the dregs!?

The end-game here (i.e. a wind-down) was announced over a year ago…and yet, we still await the cash!? No surprise really, the shares puked out another (25)% decline last year. But at this point, I remain grimly invested, as ZMNO’s de-listing draws near: The London listing terminates in early-March, so we can expect an announcement shortly…and it’s only fair AIM shareholders have a final plan/schedule in front of them ahead of the de-listing. But noting its tiny market cap, potential upside from monetising the Dublin listing (which has another 6 months to run) is compelling, so I suspect the board will continue to pursue that option (even if the odds of success are slim). Therefore, the key decision in the next week or so is whether they announce an imminent return of capital, or hang on to it for another 6 months as a possible component of a potential reverse merger deal. But by default, shareholders can expect a (tax-efficient) payout sooner or later this year of Zamano’s €5.3 million residual cash (or maybe €5.2 million, assuming another half year of cash shell expense).

So that’s an expected 30%+ gain vs. the current €4.0 million market cap, with a (small) possibility of benefiting from a monetisation of the listing itself. Wow, Zamano might finally be an excellent event-driven investment here!? But hey, I’ll leave that for each of you to decide…

iiRasmala (RMA:LN) (2.0%):

Share Price:   GBP 145p

Market Cap:   GBP 21.5 Million   

2017 Portfolio Gain:   +50%

And here’s another stock from the bottom of the value bucket

Does that seem churlish after a tender offer-induced +50% gain last year!? Maybe, but it does feel like shareholders are back to square one here again. Granted, a 29% surge in AUM to $1,235 million in the H1-2017 interims is encouraging…maybe Rasmala’s finally found its groove in (logistics-focused) property investment & can really start to execute/repeat/accelerate/scale up AUM here (property’s inherent leverage potential obviously helps). But while an (aggressive) growth trajectory would improve what’s now a marginally loss-making business, I’m still not convinced it can deliver a decent return on equity – a perspective (see i) here) the CEO would disagree with vehemently, even though he’s never refuted or countered it with me (or shareholders). On the other hand, he has ultimately delivered since on all the major proposals I set out in that same letter to the board!

Fortunately, the last tender flushed out more sellers & delivered huge NAV accretion – I calculate NAV jumped almost 50%, from an end-June 280p per share to a post-tender 417p per share. For a MENA-focused asset manager with a strong balance sheet, a 0.35 Price/Book multiple is ridiculously cheap. [Though 25% of net equity is now intangible…but this implies a $21 million potential M&A multiple for Rasmala’s $1.2 billion AUM, which looks pretty reasonable]. However, CEO Zak Hydari (& HBG Holdings) still hold the driving seat & it remains unclear what the end-game might be here. Somers’ tender exit was also unwelcome…though I don’t think it should alarm investors. [They prefer active involvement in the management & strategy of their investee companies – presumably, that proved a non-runner here, so the tender was an opportunity to exit, rather than build a far larger holding & adopt a more aggressive stance]. Not to mention, the lack of post-tender Holding RNSs is puzzling, esp. from HBG Partners themselves (after confirming their participation in the tender).

All in all, Rasmala obviously remains an unloved & neglected stock – one with some lingering corporate governance concerns – but arguably it’s still worth at least 0.6-0.7 times book as things stand today. Realistically though, who knows if & when such a revaluation (& improved investor sentiment) might actually occur? Meanwhile, RMA has once again become an event-driven stock – noting it still boasts almost £80 million in balance sheet assets, I’m willing to bet on the probability of another tender offer (at a substantial share price premium) within the next 18 months.

[NB: Sale – in the footnotes of my last post, I noted a part sale, but let me formally confirm here a reduction in my Rasmala holding (via the tender offer) from 2.8% to 2.0% (as of year-end). This was more house-cleaning (than active selling), as I eliminated smaller RMA holdings in other accounts/family names – these would have potentially gamed tender offer terms, which can prove highly advantageous (but in the end proved irrelevant here).]

iii) Saga Furs (SAGCV:FH) (2.9%):

Share Price:   EUR 14.75

Market Cap:   EUR 52 Million

2017 Portfolio Gain:   (23)%

This was pretty unexpected…in fact, seeing the shares down (23)% last year was quite the disconnect vs. the underlying business itself, which boasted a huge turnaround in sales & profitability. Auction sales were actually up +31% in FY-2017 to €437 million, on higher pelt prices – for comparison, that’s similar to FY-2010. But despite more recent restructuring, expenses are still 25% higher today…fortunately offset by a steady increase in Saga Furs’ turnover (i.e. auction fees) ratio to 12.1% (vs. 10.2% in 2010, I’ve already highlighted this counter-cyclical feature of the business model), so last year’s EUR 2.05 EPS ended up much the same as 2010.

Now sure, that kind of round-trip volatility probably deserves a lower multiple, but does it really deserve a 7.2 P/E & a 6.8% dividend yield?! I think not… Not to mention, a sub-0.6 Price/Book multiple, despite an 8.0% return on equity. Granted, the company did offer a cautious outlook (but that’s par for the course), but for a luxury goods/auctioneering/emerging markets-focused company, those are still extraordinarily cheap multiples. [Noting in particular, underlying demand – annual pelt sales have been growing, slowly but steadily]. Unfortunately, the emergence of Chinese breeders in the last decade has exacerbated the normal wholesale volatility of the company’s business model. They focus predominantly on price, not quality, and obviously operate in an (animal welfare) regime which allows them to quickly enter/scale up/exit the industry pretty much at will. More than ever, the European fur industry must pursue the opposite strategy – i.e. like any luxury goods company, focus on quality & branding, not price – and step up its lobbying & marketing efforts (plus its commitment to animal welfare), to ensure the apparel/luxury industry & consumers appreciate/value the distinction (vs. Chinese fur).

Ultimately, I still believe Saga Furs is a cyclical growth company – in due course, I’d hope to see auction sales double again (and earnings triple) to reach/surpass the prior peak we saw in FY-2013 (& in FY-2006 before that). If I’m wrong: Well, again, it’s dirt cheap…the stock now trades on 1.0 times sales, even though it boasts an average 20%+ adjusted operating margin (operating profit plus financial income) over the last decade, and a sub-€1 million/(2.2)% adjusted operating loss in its worst-ever year. But if I’m right, what’s obviously a small & unique stock could quickly transform itself from neglected to multi-bagger status…

ivTetragon Financial Group (TFG:NA) (or TFG:LN, or TGONF:US) (4.1%):

Share Price:   USD 13.20

Market Cap:   USD 1,249 Million

2017 Portfolio Gain:   +10%

Shareholders regularly express their frustration to me, but I must say: Tetragon may actually be the perfect value stock! Seriously!? The problem with most value stocks is they’re essentially slow-motion event-driven investments – management and/or the business clearly aren’t creating/compounding value, so what you’re really betting on is the potential closing* of a value gap…and your IRR gets worse & worse with every passing year. [*Since management’s almost inevitably part of the problem, this often requires external intervention – an acquirer, or shareholder activist – unfortunately, this occurs more rarely than we’d like to assume]. But with Tetragon, shareholders really don’t need to obsess over its massive & unjustified value gap (i.e. its NAV discount)…

Because management’s compounding value here: Tetragon’s return on equity was 9% last year & it’s averaged 12.4% pa since its 2007 IPO, it has a progressive dividend policy, it’s launched serial tender offers, and overall it’s returned a cumulative $1.2 billion (in dividends & share repurchases) to shareholders (since the IPO). [Last year’s return on equity was reflected in a +10% share price gain – which was more like a +16% return inc. dividends]. Notably, the dividend yield’s still almost 5.5%, enhanced by the opportunity to recycle it back into a cheap share price (via a DRIP). Not surprisingly, management eats their own cooking here – principals & employees now own 27% of Tetragon…which is pretty extraordinary for an investment company!

But regardless, Tetragon still sports a 37% NAV discount. Stripping out net cash, that widens to a 46% NAV discount. And topping that, if you strip out net cash & listed/liquid equities, you’re actually looking at an estimated/truly astonishing 58% NAV discount!? But again, after so long, I can’t tell you when & where this huge value gap finally gets closed/eliminated (as it deserves to be). But I can tell you management’s been working on it: They’ve commissioned investment research, made huge improvement in their IR communications, got out there & met investors in the UK/Ireland/N America, are planning a sterling TFG quote, etc.

But the TFG Asset Management unit may prove the real game-changer here – it’s grown spectacularly in the last 5 years, compounding almost 25% pa (mostly organically), with aggregate AUM tripling to $23 billion. Investor sentiment would likely improve dramatically if: i) in the wake of seeing 100+ new asset management opportunities last year, it can pull off a significant new acquisition (and/or launch a new asset class/platform*), and/or ii) it can ultimately spin itself out as a separate IPO/listing. [*More radically, a new cryptocurrency platform (for example) would add useful diversification & a dash of pixie-dust!? Less radically, spinning out Tetragon’s CLO/fixed income investments into a listed income fund might well eliminate the NAV discount for a significant % of the balance sheet]. But meanwhile, shareholders can afford to sit back, relax & enjoy the compounding…

v) VinaCapital Vietnam Opportunity Fund (VOF:LN) (4.5%):

Share Price:   GBP 357p

Market Cap:   GBP 705 Million     (USD 980 Million)

2017 Portfolio Gain:   +21%

Hang on, wasn’t Vietnam one of the world’s top-performing stock markets in 2017?! Yes, actually the VN-Index clocked a spectacular +48% return…so shareholders might be feeling hard done by here, with VOF shares racking up a mere +21% gain last year. Well, big picture, I think they should still be celebrating…

Don’t forget, I’ve always recommended VOF for its multi-asset portfolio* – which I believe is a superior approach in frontier markets – so it’s not surprising its performance trailed in a roaring bull market. [*With the virtual elimination of direct real estate, unlisted equities & P/E investments now make up about 30% of VOF’s portfolio]. Plus, last year’s sterling revival knocked back what was, in reality, a 32% return in dollar (& dong) terms. More importantly, VOF shareholders enjoyed a huge +70% windfall in 2016 – vs. an index which only gained +15% – on the back of portfolio out-performance, sterling weakness & NAV discount narrowing. Which puts VOF shareholders miles ahead of a 70% cumulative index gain in the last two years.

However, this now leaves the market on a trailing 20+ P/E, which obviously warrants some caution. That being said, it also reflects the fact that Vietnam’s enjoying a real Goldilocks economy here: GDP growth accelerated to 6.8% in 2017 (& similar growth’s expected this year) from 6.2%, but inflation actually declined significantly from 4.7% to 2.6%…while trade surpluses, FDI flows & a stable currency (for the past two & a half years now) all add to the favourable economic backdrop. Not to mention, consumer confidence hit all-time highs last year. The VOF team have also used last year’s rally, and the continued surge this year (fueled by overseas inflows) to actively recycle funds into new private equity investments (here’s their latest) & cheaper state-sponsored IPOs. Plus, VOF’s 17% NAV discount also remains pretty enticing here. All in all, Vietnam remains a compelling long-term new China’ bet for me…

OK, that’s it for now!

Again, all comments/questions about these holdings are welcome here & by email. And also keep an eye out here for my next post, which will cover my five other/remaining disclosed portfolio holdings.

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