QAV 500 Club

Cameron  00:08

Welcome back. QAV. First show of 2021 TK, episode 500, sorry, 2022, 500. How are you?

Tony  00:21

Good. It’s not our 500th episode though, is it?

Cameron  00:24

No. Series five, episode zero? I don’t know. Makes no sense. Makes about as much sense as Navexa’s reporting on our portfolio results.

Tony  00:36

Yeah, well, let’s not go there.

Cameron  00:39

Okay, we don’t have time.

Tony  00:40


Cameron  00:41

You gotta be somewhere, you got golf to play or something?

Tony  00:43

No, no, I’m getting my third jab at 3:30.

Cameron  00:46

Oh, yes. Okay, well, that’s very important. Well, I’ll just rip through some getting started stuff. I assume you had a nice Christmas and New Year, we can take that all for granted. We don’t need to… we don’t have, we don’t have time to spend talking about Christmas. Happy New Year, though, to all of our listeners.

Tony  01:03

Yeah, happy New Year.

Cameron  01:05

Apple hit the $3 trillion market cap, I read this morning. According to Aswath Damodaran who’s, I know a New York University finance professor, who’s a big value investor educator. He says they’ve created the greatest cash machine in history. So, tip of the hat to Steve Jobs and Steve Wozniak and Tim Cook and Warren Buffett and those guys for investing in it. They’ve done very well out of Apple in the last few years. Surprisingly. Three-point trend lines. Can we talk about drawing three-point trend lines, Tony? Because yet again, I feel like I don’t know what I’m doing half the time.

Tony  01:51

Okay. Sure. You got an example?

Cameron  01:54

Yes. ALK. Let’s start with ALK: Alkane Resources. Now, what’s the background behind this is in the last few weeks doing the buyer lists, as long-term listeners know these days Tony does a checklist each week, I do one, Alex does one. Then I compare all three and try and figure out, you know, what the real one is. And you and I have been disagreeing on some of these charts, and I obviously defer to you because you’re the only one who really knows what’s going on, but I’m confused yet again. So, with how you’re drawing some of these. It’s a bit like Godfather Part Three; everything-every time I think I’m out of being confused about three-point trend lines, you drag me back in. So, let’s look at Alkane. Let’s talk about the buy line for Alkane. Where are you drawing the buy line for ALK?

Tony  02:54

First of all, before we do that, I’m just going to try and look at, compare it to the Brettelator because I think, yeah, no I get the same sell line as the Brettelator. So, I’m using February 19 as L1, and then L2 I was originally using April 19, but it crosses anyway and touches November 21. So, both of those are – probably November 21 would be the L2 to use.

Cameron  03:19

Sorry, I’m using L2 as April 19, and it comes out nowhere near November 21.

Tony  03:25

Yeah, that’s what the Brettelator says too but I’m in Stock Doctor and it touches November 21, for me. So I’ve got L1, February 19, L2, April 19. And if I draw a line through those two, it’s also touching November 21, which is different to the Brettelator – the Brettelator has that line above.

Cameron  03:45

You know, sometimes it’s hard to know the line, if it’s on the point or just above the point with that L2, but I guess I can kind of wiggle it around and make it somewhere near touching November 21. But I’d have to draw the line up a lot higher. I mean, when I draw it, it looks like Brett’s, the Brettelator.

Tony  04:06

Okay. I can see what you’re saying.

Cameron  04:08

Yeah. How do you know if you’re drawing the line on the right angle or not, then?

Tony  04:12

You don’t. That’s the difficulty with Stock Doctor.

Cameron  04:15

Well, you’d have to open up the calculator, right? You’d have to test it in the calculator.

Tony  04:20

I would, the 3PTL calculator. Good point, let’s have a look.

Cameron  04:24

I will. I had to do those with a few when I was doing the checklist today, particularly some of the really like tricky ones, which I wouldn’t have put this down as but you know, some of them are trickier than others.

Tony  04:38

Looking at the sell line, we’ve got February 19 at 0.2048.

Cameron  04:45

So, then we’ve got 0.2398 on the 30th of April. Gives us a target sell price of 80 cents and it’s currently at 91 cents today. So, I think it’s, it’s still above that. I think the Brettelator’s pretty close, its a lot higher than I’d drawn the line.

Tony  05:08

Yes, so it’s still above it sell line.

Cameron  05:11

The Brettelator’s saying the sell price is 71 cents though, which is a lot different to the Calculator’s 80 cents.

Tony  05:17

80 cents, yeah. And 80 cents is looking a lot like the line I’m drawing in Stock Doctor.

Cameron  05:23

Well, 80 cents is halfway between the Brettelator and where, where it is today at 91 cents. Alright, so it’s above the sell line. How are you drawing the buy line then Tony?

Tony  05:35

Yeah, good question. Well, you never know, because five years ago, there’s more graph. But just looking at the graph currently, I’m saying the buy line would be around January 18. So, then – sorry, the sell line would have been January 18. So, then I would’ve, I’d be drawing a buy line from H1, August 17 through H2 of November 17. I’m going to get a buy around about March 19. That’s just roughly eyeballing it at the moment, which is pretty much what the Brettelator does, I think.

Cameron  06:06

It’s using H2 March 19, which is where I had it, too.

Tony  06:13

Okay, yep. Now that’s fine. I agree. Yep.

Cameron  06:16

Okay, so it’s buy if we look at it that way. But, and I asked you about this last week, you told me it was a sell, and you drew it differently.

Tony  06:28

Did I?

Cameron  06:31


Tony  06:34

I’m guessing I probably used then the highest peak and the second highest peak and it was below its buy line, would be my guess.

Cameron  06:41

Yes. I think that’s what you did.

Tony  06:43


Cameron  06:44

I’m trying to, I’m trying to pull up the email. Where the hell is… I’m having so much trouble finding my emails from you these days.

Tony  06:51

Is it really worth going through this on a podcast?

Cameron  06:55

This is what we’ve always done. We’ve always gone through them on podcast. People can play along, can’t they?

Tony  07:00

Okay. We’re not going to get through it before three o’clock.

Cameron  07:03

Oh, well, we don’t have to do any more. We can just do one then. I guess the big question I wanted to ask you though, was this thing about the buy line follows the sell line.

Tony  07:13

Yeah, right.

Cameron  07:14

Because a couple of months ago when we were talking about this on, I think it was 445, we were talking about the Commonwealth Bank. And the way I wrote the notes and I even updated the Bible about this, was that, if you bring up Commonwealth Bank in Stock Doctor, you can see that it’s got a new sell line recently in, at the end of November, it got a new L2. And so we redrew the sell line for it. Previous sell line, I think, L2 was probably February 21, and then we redrew the sell line down through November 21. And then, again, my recollection, the way that I wrote my notes afterwards and updated the Bible was that the old buy line, now that it had a new sell line, the old buy line was effective again, or revalidated as I wrote in the Bible. But when I told you that earlier, you were like, “what the hell does that even mean?” I was trying to sound fancy, Tony.

Tony  08:20


Cameron  08:20

It was effective again. So, the buy line that I’ve got is H1, April 17, H2, January 20. But the way that you’ve been doing them recently, you’re not using those old buy lined, you’re still saying the buy line follows the sell line even when it has a new sell line. Because I would say that the sell line – every time we get a sell line, it invalidates the buy line, and you need to, or what I previously thought was you, every time you do that, you need to draw a new buy line where the H2 comes after the sell point. But when we talked about CBA in December, you said “no no no no no, when you’re, when you have a new buy line then the old – a new sell line, the old buy line is good.” At least, that’s what I thought you said.

Tony  09:10


Cameron  09:11

So, I went and dug up the recording. This is from Episode 445, where we were talking about the Commonwealth Bank, and I hasten to add, I’m not doing this to be a dick. And I’m not trying to do a gotcha on Tony, I’m genuinely confused. And, and I think, you know, this is one of those things that as we go along, and we test various cases, particularly coming out of COVID and a lot of the anomalies that we’ve seen, there are things here that Tony hasn’t seen before, and he’s trying to work out what the basic guidelines are. Anyway, so this is what we said back in episode 445, which was early December: “okay, but the second part of my question is, okay, so if we draw the sell line, it looks bizarre, it goes straight up, and we sold in July. Where’s the new buy line then?

Tony  09:59

Well, you If you draw the new sell line, it’s not the, the share price is always above the sell line. So it’s the old buy price, the old buy line, which is H1, January 2020, H2, January 2021. So, it’s buy, it’s a buy in February 2021. So, it’s been just a bargain now. It’s back on the buy list. Back on the buy, baby.

Cameron  10:25

But the buy line has to follow the sell line, Tony. And we had, we had a sell, we had a sell event.

Tony  10:32

Yep, we did.

Cameron  10:33

So, doesn’t, doesn’t H2 need to come after the sell of it?

Tony  10:36

Yeah, but we’ve redrawn the sell line. So, at the time, going back in time, when we sold it back in July/August. Yeah, we couldn’t, we couldn’t draw a buy line after the sell line. So, we’re out of it. Out of the market.

Cameron  10:52


Tony  10:53

Then, now times moved on, we move L2 to October 2021, the share price is above the sell line and the old buy price is back in, back in use.

Cameron  11:04


Tony  11:05


Cameron  11:06

You can do that?

Tony  11:07


Cameron  11:08

That’s, that seems like a little bit of jiggery pokery to me, Tony.

Tony  11:12

Okay, good.

Cameron  11:15

I didn’t know you could just like rewrite history here. What are you Scott Morrison? You can’t just go ‘oh, it didn’t happen that way. I, I sent him a text message five minutes before I cancelled the deal. He should have read it. It’s not my fault if he didn’t read it.’ The sell line was the sell line, and we have to, we have to now, don’t we have to get a new H2 after the sell event?

Tony  11:37


Cameron  11:39

Okay. I’m gonna have to, I’m gonna have to think about that.

Tony  11:44


Cameron  11:47

All right. Now back to this week’s conversation: So, looking at CBA, let’s use CBA. Because this is where the problem started. What’s the buy line on CBA?

Tony  11:58

Well, I’m going back to what the original buy line was. So, I’ve got H1, January 2020, H2 January ’21.

Cameron  12:09

Well, it would have had, no, well see, it would have had a sell after that, right?

Tony  12:12


Cameron  12:13

It would have had a sell, if I’m right, around about July 21.

Tony  12:19

Yeah, and there was a sell line after that, though, as well. So, July 21, is the first time it crossed this year. So, L1, September 2020, L2, February ’21. And then it crosses in…

Cameron  12:32


Tony  12:33


Cameron  12:33

But then July itself is another trough, I think. It closed in June at 9987, closed July at 9965, then closed August 112. So, July is the trough there, I think.

Tony  12:48

Yeah, I agree.

Cameron  12:49

It’s marginal, but it’s a trough. So, that would have been another sell line. So, we’ve got this new H2 now coming in at November 21 but the buy line that you just described to me, which has H2 at January ’21. That H2 is not coming after the last sell, you’ve like negated – you’ve done a Thanos, clicked your fingers, those previous sell lines have disappeared from existence, and you’ve just said, “well, that all buy line is now revalidated, and I’m going to stick with that.” But you’re not doing that with some of these other stocks, and I don’t know why.

Tony  13:27

I don’t know why, either. I’m completely lost myself. I think we should just stop doing this and work it out. I can’t think in this much detail on my feet.

Cameron  13:39

Okay, that’s cool. I just thought, yeah, “nah nah, you’re an idiot, Cameron, and here’s how it is,” but it’s fine. Okay.

Tony  13:46

Well, no, you’re confused and now I’m confused, so.

Cameron  13:52

I confused you. Job well done. Okay, let’s move on, then.

Tony  13:57

Well, I confused you first of all.

Cameron  14:00

We’re all confused. Platinum’s a buy again, as of a couple of weeks ago. So, Zimplats is back on our buy lists. It’s marginal though, platinum, like it’s hovering around the sell line, I think, so don’t get comfortable. But, keep an eye on it. What else have I got? What’s a cleansing prospectus, Tony?

Tony  14:19

Yeah. So, whenever you issue shares, use shares, you have to issue a prospectus. Otherwise, I think the law says otherwise, the shares can’t be traded for 12 months. So, a cleansing notice is generally just used quickly for shares that are being issued for – usually in small amounts, but they can be large ones I suppose – but they’re things like there’s a different class of share that’s converting to fully paid ordinary share, or there’s new options being issued and they just coming into the money and they’re being converted to shares. So, they put out a cleansing notice, which is basically a mini prospectus and what it’s meant to do is to either update the market with any new information that’s relevant before you buy the shares, or confirm that there’s no, nothing has been undisclosed, which would be relevant to you buying the shares or converting the shares. So, it’s a fairly technical thing, it’s just, it’s just allowing a company to do something with it shares. Like, I don’t know, let the CEO exercise some options or, and then trade the shares, or if say a bank has some hybrid debt out there, which can convert the shares or allows them to convert the shares and be traded. So, it’s a technicality in the corporations law, which says that if you issue shares you have to have a prospectus, but in some cases you’re not issuing shares your maybe converting them; converting debt to be shares or converting options to be shares. And if you don’t use your prospectus, you can’t trade those shares on the market for a period of time, which I think is 12 months. So, they issue this cleansing notice, which is like a mini prospectus to get around that trap in the corporations law.

Cameron  16:00

Okay, thanks. Nothing to worry about, then?

Tony  16:02

Nothing to worry about, but they’re still worth looking at in case there is something they haven’t disclosed to the market before, which is included in the prospectus. But often, more often than not they’ll flag “nothing to see here”.

Cameron  16:13

Right. So, I came across this with IEC recently, and the cleansing prospectus was quite a sizable document. I should read the whole thing and, and pay attention?

Tony  16:25

What was it for, do you know?

Cameron  16:26

I think they were issuing new stock or something like that.

Tony  16:29

This is for a company called Intra Energy Corporations, is it? IEC?

Cameron  16:33


Tony  16:34

Okay. Surprised you own shares in it, like the ADT is about 400 bucks a day.

Cameron  16:39

I don’t, it was on the checklist.

Tony  16:41

Sorry. Gotcha. Okay.

Cameron  16:43

It turned up on the checklist, and I went looking for a qualified audit,

Tony  16:48


Cameron  16:49

And saw this and went, “What’s, what’s that all about?”

Tony  16:54

Okay, so it’s a prospectus because they are issuing new shares. They’re issuing, it’s an offer of 1000 shares and an issue price of 0.08 per share. So, that’s just a quick look at it. It looks like they’re doing a share raising, so they do need a prospectus.

Cameron  17:09

So, yeah, so what am I looking for in something like this? You said, you know, in case there’s something sneaky in it, like, I kind of know what to look for the audit, but there’s no audit in this. So, what do I, what am I looking for?

Tony  17:22

So, well, more often than not, they’ll say something like, “there’s no information which hasn’t been already declared, that’s relevant to purchasing shares.” This is, I’m surprised this is called a cleansing notice. Just looking through it now, it’s a full on, full blown prospectus. So, you need to read it through as normal.

Cameron  17:41


Tony  17:42

But the important ones are going to be risk factors, major activities and financial information, both of which just refer you to the annual report. Oh no, here you go, risk factors, additional requirements for capital, so it’s telling you why it’s raising debt, and they’re, looks like they’re acquiring a gold mine. So, yeah, that’s, you need to read through. Normally, they’ll also put out a sheet telling you a summary of all this, but that’s what you’re looking for, is the risk factors.

Cameron  18:10

Okay, that sounds like a lot of work.

Tony  18:12

Yeah. It’s actually, it’s interesting, this is, they put out a cleansing notice, and they put out a cleansing prospectus, so I’m guessing that they tried to do this with a cleansing notice and got pulled up and told to issue a proper prospectus is my guess. But I haven’t actually gone through and done any research on this.

Cameron  18:33

Yeah, it says that they had to withdraw a defective cleansing notice, or something. Cleansing just doesn’t sound good. It just sounds like “ooh, they need to be cleansed. Ooh, what’ve they been doing? It’s disgusting.” But okay. Moving right along. Congratulations to Gary who posted his Straw Man paper results on the group this week. 57.4% per annum since July 2020. 15.1% over three months, 16.5% over six months, 55.2% over 12 months. Really good results, so well done, Gary. Congratulations. Killing it – on paper anyway.

Tony  19:12

Yeah. Well done. They’re good numbers, very good numbers, especially the more recent ones.

Cameron  19:17

All right. Do you have anything you want to talk about before we get into questions this week, Tony?

Tony  19:23

Just a couple of changes to the buy list. So, I had SRV, which is Servcorp, VRS, KMD, Kathmandu, coming off the buy list this week. I had CLX, AXI just. Rio, which is a big one, Rio Tinto and TBR, Tribune Resources coming back on the buy list, and Rio is an iron ore stock. It does have a little bit of other metals, but it’s about 90% iron ore. IES, the one we just talked about is right on its buy line, so you need to watch that one if you’re thinking about buying it or holding it. And I just wanted to talk quickly about Thorn Group, which looks like it’s had its qualified audit lifted, and has a QAV score of 1.26. So, it’s come back in at the top of the buy list. And it’s always a little bit difficult to tell with qualified audits because it’s the interim results we’re looking at, but the auditors haven’t raised any concerns over, what do they call it? Material uncertainty over a going concern, which they had in the past, and I did notice just quickly reading through the interim report that they’ve sold some of their business to Credit Corp, which we spoke about once before, and they’ve been getting lots of COVID payments from the government. So, it could be one of these cases that they’re going to be helped by both of those situations, and they, they have now some more certainty about continuing operations. It’s always a bit difficult in the half year results, the interim report, because the auditors don’t do a full audit, they do more of a desktop audit where they make inquiries, but they don’t go back and reconcile things from square one. But at this stage, it looks like the qualification on the audit’s been lifted for TGA.

Cameron  21:07

I’ll just let you know that that was actually one of our stocks of the week, last week when you were on vacation. So, the stocks of the week this week, I think, are MML and FMG; they’ll be the ones I’ll be putting out in our official newsletters this week. MML which is the small cap and FMG is back resurrected, it was gone for three days. Now it’s back and better than ever, according to, I don’t know, someone, surprisingly.

Tony  21:39

Well I actually prepared to do CIA, Champion Iron today as our pulled pork, which people can refer to as last week’s stock of the week if you want.

Cameron  21:48

Oh, you’re gonna do a pulled pork. Okay?

Tony  21:50

Yeah, about four years ago, three or four years ago, they bought a mine called Bloom Lake and did a good deal on that, the prior owner had spent a lot of money upgrading it and then decided to divest it and sell it. The thing about this particular iron ore mine – and they do have a couple of others ones operating in Canada, but bloom Lake is the main game for them – it’s, it’s an iron ore producer that produces very high-quality iron ore, among the highest quality in the world, which is important from reducing emissions side of things. So, Champion Iron positions itself as, as the, I guess, the way of the future for iron ore mining. And as we know, steel production is a big carbon emitter. One way that the steel industry is reducing emissions is they’re moving across to electric arc furnaces instead of using the normal coal power blast furnace. It still does use coal, but it uses high quality coal. So, you can’t do electric arc furnaces with low quality coal, like Fortescue Metals Group produces. And so, as steel companies try and reduce their emissions, they move across to these different type of furnace, which needs a higher grade of iron ore. So, that’s the sort of value proposition for this company. They also trumpet the fact that because they’re in Canada, and a lot of the electricity in Canada is, is either hydro or nuclear, they’re also a low emission miner, as well in their own neck of the woods. So, that’s kind of their value proposition. Going through the numbers, it’s scoring well for us, average daily turnover is 8.3 million. So, it’s a large cap company. Share price that I used in this analysis is $5.44, and that’s the fourth of January, I’m recording this, that share price of 544 is less than the consensus price target for this, or valuation for this company. Its financial health is strong and steady in Stock Doctor. Again, we don’t use ROE in our checklist, but just for people who are interested its 77%, which is quite high. And what we do use is a price to operating cash flow or Pr/OpCaf, which is only 3.3 times and the PE is only 4.3. So, it’s certainly a value stock for us, even though it’s an overseas miner, and there’s currency risk, operating in Canada wouldn’t have much sovereign risk, I wouldn’t think, but not sure why the, the Pr/OpCaf is so low on this one. The price is also less than IV1 and less than half of IV2, so it scores well on both those metrics. The forecast growth in earnings per share is down slightly – down 18%. So, we get a minus one for that, because if you put the the growth over the PE it’s, it’s negative. There’s no yield, so we don’t score for that. Directors are holding 10% of the company, so we’re scoring it for that. It’s, in terms of the manually entered data, it’s the lowest PE for the last six halves, so it scores well for that. It’s increasing net equity, so it scores well for that. All in all it’s a quality score of 92% which is high and a QAV score of 0.28.

Cameron  25:01

And it’s up 3% since it was our stock of the week last week, so good on you, CIA. Good call last week, Tony. We’ve had some good calls lately; GWR is up 33% since it was our stock of the week on the 13th of December, and good old Michael Hill Jeweler is up 71% since it was our stock of the week on the 28th of September. Sadly, neither of those in my personal portfolios. Michael Hill Jeweler was for a long time, but I think I sold it at some point and it just rocketed up last week. All right, thank you, Tony. Well, we’re not doing MML and FMG as pulled porks by the way, people, because we’ve done them in the last six months, no point doing them again, they’ve just back as the stock of the week because we haven’t put them out as a stock tip since September. Alright, let’s get into some questions. This one is from Chairman Mabb. Not to be confused with Chairman Mao but Steven Mabb, the new chairman of the Australia – I was gonna say the Australian Stock Exchange – the Australian shareholders Association. That’ll be his next job. This is a common question, I’ve had this from three or four people in the last couple of weeks, but he was the firs. He said, “I was thinking about your chat about CAA and aluminium getting close to a sell. I don’t own it, so no skin in the game here, but given CAA isn’t a miner, but rather a manufacturer and seller of aluminium products, I’d have thought a declining commodity price would be a good thing and not a sell unless they have to drop their prices even more than the decline in input costs, and not sure why they would. It will be a margin/profit/cash flow booster I’d expect or am I missing something?”

Tony  26:49

Yeah, look I, originally when Steve asked the question, I went back to him and said I thought the input was bauxite,and it’s, and the aluminium was the output, but I did some more digging around since then, and I think I’m wrong. I think this company buys aluminium and then, you know, turns it into girders and frameworks that can be used in the construction industry and whatever else use aluminium for. So, I think my thesis about it being a producer of aluminium is wrong, so I’m not sure if the aluminium price is that relevant. However, I did read their annual report where they say that the aluminium price is very relevant to them for a different reason. So, they often will try and price contracts to buy their products based on movements in the, the aluminium price on the London Metals Exchange. So, they do that as a way of hedging their risk because they are purchasing aluminium, then reformatting it and then selling it on, selling it to customers. So, they do, they do face a risk for the customers who aren’t on those contracts tied to the LME price for aluminium that their import cost goes up but they can’t recover enough in the margin from the customer. That’s highlighted in the annual report as one of the risks. I’m not sure, it didn’t say how many customers were on those kinds of contracts, or what kind of percentage or how big a risk it was, but it was called out as a risk. And that was something that they, they tried to manage very closely. So, I think Steve’s right, perhaps the aluminium price is more relevant to what they pay for the product, and then what price they can get from their customers. Having said all that, I can’t explain why their share price is going up when the aluminium price is going up, so it’s possible that this, that’s just a coincidence, because they have been doing alot of restructuring in the company to lower their production costs. So, that could be more relevant to this company than the aluminium price, but I suspect what might be going on is that they can recover price increases from their customers, and that just by, it’s kind of like, by inflation, if the aluminium price goes up and they can recover that price increase from their customers, then their sales are going up. And if they have the same GP percentage, then they’re more profitable from a cash point of view. But that’s just speculation on my part. So, I’m going to have to go back and rescind what I said about watching the aluminium price for Capral. I’m not sure exactly what the impact is on Capral from that commodity.

Cameron  29:15

Okay, so just to reword all of that for my brain, the connection or correlation between aluminium prices dropping and the share price of a particular company dropping would be mostly relevant if their company was a miner of aluminium or in this case mining bauxite and selling aluminium as a raw product, because if the price of that drops then their ability to end revenue drops. But in the case of CAA, they’re buying that aluminium and turning it into tin hats, aluminium foil hats for COVID conspiracy theorists to wear and so they’re, you know, charging a massive premium for those if they, if they also block out 5G and Bill Gates’ invisible chips that he’s putting in you. Get a, get a really good price for those in the, on the Darknet. Joe Rogan – selling it to Joe Rogan’s audience, you can charge a really high premium.

Tony  30:20

Yeah, so I think Steve’s right. I think it’s my theory originally that aluminium was important is probably not the same as it is for a miner. Yeah.

Cameron  30:29

Good one. Thank you, Steve and everyone else who asked that question. Murray asks, “I’m quite interested in Nufarm which has been discussed on the podcast recently. Digging into their financials, the operating cash flow has jumped considerably this year, which seems to be mostly due to an increase in depreciation/amortisation. Notes in the financials explain that the increase mainly relates to amortisation of IP for a new product that has recently been commercialised. Given this as a one off, and the next financials will most likely show a much lower operating cash flow, should we be discounting or even dismissing this as a QAV buy? Thanks in advance, Murray.” This seems to me like the same sort of question we get a lot about one offs in people’s, in company’s financials, and if, let me guess your answer to this, you’re like, “yeah, that could be true, but doesn’t matter because they’ve got the cash and they will deploy the cash successfully, and make the business better, and they’ll buy something, or they’ll retool something, or they’ll pay down debt, or they’ll buy back stock, or they’ll use the cash to do something good for the business, if they’re good managers for the business. And therefore they, you know, the company should do well, even though it’s a one off.” Am I close?

Tony  31:45

You’re exactly spot on, and even if they don’t use the cash well then we will sell them next time, you know, we get the chance to, but that’s exactly right. We’ve had this question before with I think ASX for example, had a one off. I tend to ignore them and just go with the operating cash flow as stated, and then if I need to make an adjustment because I’m wrong later on I can, but you know, oftentimes, the operating cash flow, as you say, finds its way into management hands and they make good use of it. Just a couple of things, and I did, this is why it took so long to prepare for the show today, I was trying to pick apart Murray’s question and I’d like Murray to come back and give me some more detailed information about his concern because the first thing I have difficulty with is; depreciation and amortisation don’t go anywhere near cash flow statements. So, they’re both non-cash items, so I’m not sure how a large amortisation of a new product is going to affect cash flow, it doesn’t. If you think about the coffee shop example, you have sales coming in, you have the cost of collecting those sales, your operating expenses and take one from the other, you get to operating cash flow. If you then have to depreciate your coffee machine or your tables and chairs, or whatever, that comes on after the cash flow. And if you have other costs like tax and interest on your mortgage, you take those off as well and you get to your profit, your net profit. So, depreciation comes after the cash flow statements. So, maybe it’s just the way that question is worded, but if Murray can provide some more information I’m happy to dig further, but my understanding of it is that depreciation and amortisation shouldn’t be affecting cash flow anyway.

Cameron  33:24

They would show up in your EBITDA right?

Tony  33:28

No, that’s EBITDA is earnings before interest in tax, depreciation, amortisation, they come after EBITDA. So, they show up in net profit.

Cameron  33:37

Oh, earnings before, okay.

Tony  33:39

Yeah, in very broad layman terms it goes sales, gross profit, operating cash flow, other cash flows, so total cash flow, then you take out the non-cash items like depreciation amortisation, then you take out interest on debt and taxes and you get to gross profit, and you can even take out to get a – net profit, sorry – and you can even take out dividends after that. So, yeah, operating cash flow is right at the top before you start doing depreciation amortisation. And, you know, I know someone will come back and say, “why don’t you take depreciation and amortisation into account? They’re important parts of the business.” And that’s true, however, they’re also an area that management can fiddle with and manipulate and that’s one of the reasons for using operating cash flow at the top of all that accounting pyramid is because it’s out of there – It’s largely out of the hands of management to be able to manipulate the figures.

Cameron  34:38

And if they fiddle too much, they’ll go blind as we know, so we don’t want it, we don’t want them fiddling. Alright, and just the general rule, though, apart from all of that is what I said before. Well, one of the things I’ve heard you say many times over the last couple of years is one off things: yes, don’t get bogged down on the one off things because it’s cash and they will use the cash to make the business good, hopefully. And if they don’t, we sell it, right? But we’re assuming that they, they’re competent and they know what they’re doing. Because we, you know, if they’re not competent, and the reason we can assume that they’re possibly competent is because the checklist goes looking for competency, you know, has their equity been increasing consistently, etc., etc.? You know, is it a well-run business? If it’s not a well-run business, they’re going to fail a lot of those things that we put them through on the checklist. Moving right along, Matt: “hi, Cam, hope you’re well.” I am, thank you, Matt. Hope you are too. “I’ve got a question for TK for the new year. There are quite a few companies in the buy list that I’ve previously bought and then sold under rule 1. Examples: LAU, ABA, ASG, AMI, is there a rule to apply when considering buying these companies again? For companies to breach their sell line, I know once they come back up above their buy and sell lines, we should just buy as normal by working down from the top of the buy list. This doesn’t necessarily apply for rule 1 sells where the company may have remained above the buy and sell lines the whole time even though it was a sell for me personally. Do I continue to skip these companies and buy from further on down the list? Or do they get another chance at some point? Interested in Tony’s suggested approach? Regards, Matt.” Matt, well that was a good question. I’m not sure what the answer to that is.

Tony  36:23

Neither am I. It’s like, it’s never happened to me before. So, I don’t know what the answer to that question is. Every time I’ve had to sell something for rule 1 I’ve been able to buy something else higher on the buy list to replace it. So, I guess theoretically, it could happen. It’s never happened to me in all my years of investing. But yeah, theoretically, you know, Thorn Group’s top of the buy list at the moment. If I had to re… if I had to sell it because of rule 1 and it was still there I’m not sure what I’d do. I’d probably look at it and say it was a Josephine, because chances are, it’s dropped 10% means it’s going down – sorry, not a Josephine. It’s, what do we call them when they go down, when the current trend is down?

Cameron  37:05

Yeah, it’s a Josephine.

Tony  37:07

Yeah, I would, I would probably bypass it and buy the next thing on the buy list.

Cameron  37:12

Good one. Thank you, Tony. Thank you, Matt. How you going for time there, Tony?

Tony  37:16

I’ve got about five minutes, sorry.

Cameron  37:17

That’s alright, which question you want to tackle, Daniel?

Tony  37:21

Yeah, sure. We can do, Daniel, it’s, I think it’s pretty similar to what we’ve just talking about with Nufarm with Murray.

Cameron  37:27

Yeah, it is. And we’ve talked about this before, but let’s go over it quickly one more time. “What’s the thought process of using operating cash flow as opposed to free cash flow?” Again, it’s just harder to fiddle.

Tony  37:39

Yes, but it’s also a bit lumpy. So, free cash flow, and my understanding is free cash flow includes capital purchases. So, if we look at operating cash flow, it’s giving us a measure of how good the business is at producing income, and, and I guess profit at a high level of like, kind of close to gross profit. If you then add any capital purchases that year, free cash flow can be quite lumpy. So, I admit that we’re not getting a complete picture of the business by using operating cash flow and that free cash flow gives you a better view of the business, because all businesses will have to buy things from time to time. But you know, if you’re looking at some businesses, that cash flow can be – sorry, the free cash flow can be quite lumpy. Because like, if it’s a mine, for example, they could have been buying lots of equipment to start the mine up. And you might look at free cash flow and go “well, that’s not really good, could even be negative.” But when they do become operational, then the cash flow is really strong. So, I guess a better take on the underlying strength of the business is to look at operating cash flow. That probably wasn’t a good example, because there wouldn’t be much operating cash flow if the mine was getting started. If I take say something like a retailer, operating cash flow shows you, you know, how good the business is at generating cash from what it does. But if the retailer then went out and bought a warehouse or fitted out a warehouse, or fitted out a whole heap of new stores that year and spend lots of CapEx or onboarding a new IT system, then free cash flow is not going to give you the same sort of constant view of the business, I guess, and how good it is to generate cash. So, a lot of people use free cash flow, but I just prefer to use operating cash flow because it’s less lumpy.

Cameron  39:19

Okay. Last question, last serious question, anyway, Gary asks about Cardno, CDD: “is it a sell or is the share price an adjustment?” It’s been his number one at 423%?. That’s amazing.

Tony  39:35


Cameron  39:36

“But there was a ten to one share consolidation on the 24th of December,” he says. You and I talked about this earlier today when we were doing our checklist that that’s a weird one. The share price fell off the end of a cliff the other day, but he says it’s still up 423%. So, that’s incredible. Well, I think we decided when we did the chart earlier today that its above its sell line, but it’s a bit of, a bit of a complicated one.

Tony  40:00

Yes, I don’t think the consolidation that Gary talks about has filtered through into any of our data feeds yet, either Stock Doctor or Yahoo Finance or Google Finance, and we’re certainly getting some funny looking data in the Brettelator for it at the moment. So, I suspect that it’s, I don’t know what’s going on, perhaps because it was, happened on Christmas Eve, the various data feed operators haven’t gotten around to fixing it up. But, I suspect in the next week it will right itself and we’ll get a clearer picture. The current chart in Stock Doctor says it’s still a hold, but I can’t add much more than that until we see the consolidation flow through.

Cameron  40:35

Alright, well, congratulations again on that, Gary. And the last question, Luke wants to know what handicap you’re playing off and how it changed last year.

Tony  40:43

Yeah, well, good question. And bear in mind last year I didn’t play for five months because of COVID, so my handicap has gone out since I’ve come back playing. I’m very embarrassed to say it’s now 24. But, hopefully it’ll come down from there – was about, when I came back from Canada three years ago, it was at 19. But I just haven’t had as much of, as much time to spend on golf as I would have liked over the last few years. Actually, it was down at 17 when I came back from Canada, I think.

Cameron  41:09

I thought you’d just be hitting them off your balcony in Sydney, Tony. Wow. All right. Well, hopefully, it’s been improving while you’ve been down at Cape Schanck. Good luck with your booster today. I hope it doesn’t knock you around too badly, and thanks for your time, Tony. We’ll talk again next week. Thanks everybody.

Tony  41:30

All right. Thanks cam.

Cameron  41:37

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