Posted by: donmihaihai | September 1, 2007

Postscript of my 4 yrs plus relationship with Food Junction.

Food Junction was purchased in 2003, during SARS period as Food Junction was one of those companies being hit both in operation and share price. Fast forward till Aug 2007, selling at the current price, resulting an annualise return of 14% using 4.5 yrs as holding period.

An annualise return of 14% fall short of my target 15% but it is not bad either. About half of that return comes from the initial surged after SARS was over while the other half comes from dividends payout from Food Junction. With Hindsight, investing during crisis work, especially when the company core business is still intact. With a stable business, paying out 60 to 80% of the cashflow pre AP buying up 30% stake in FJ and paying about 100% post AP acquisition of the 30% stake, it seem impossible to sell it. Especially so when the dividend alone yield just over 10% per annual from my cost. Even with no growth, FJ can maintain this kind of payment for many years. With that it is not hard to see FJ trading at a range of 70 to 80 cents. At that price range, it is closer to it intrinsic value. The only reason is that there are better candidate elsewhere.

But are there any mistakes in my part since my purchase of FJ? I think there were two.

1st was putting too high a valuation to FJ by using historical results. The conclusion that FJ has a high competitive advantage also increased the initial valuation levels too. FJ is a good cash generator and the business model can be sustainable but there is a different between a company which is a good cash generator to company with competitive advantage. Since FJ is the former, which in this case, the pricing power or rather whether FJ can get a good location with low rental depend not on FJ but their landlord. It took me years to recognise it.

2nd mistake was that after recognising and given a lower valuation for FJ, I did not take the opportunities to sell FJ when it was trading at a higher valuation and with opportunities of buying into securities producing better return. The word is opportunities as there are many times in the past 2 yrs or so for me to do it but I did not take any action until now. The comfort of receiving dividends that yield about 9% or more made me wait. Waiting for FJ to trade at a fair or even richer valuation to justify the selling.

That action seems to be correct. But something is very wrong there as the selling of a particular security does not depend on the security itself but also depend whether there are better option around. If there are another stock that can provide a better rate of return than FJ than the action of switching must be taken. One must not take comfort of the high dividends payout. Easy say than be done.

The selling was the hardest I experienced. No, I did not fall in love with FJ but I was not 100% certain that I can buy the other securities at the price with sufficient margin of safety as that price will determine 4 days later by Mr Market. If Mr Market moves the price away from my favour, selling FJ becomes a wrong move. Next, despite the other security is more attractive than FJ, it is not trading a rock bottom valuation in which I will call it is a non brainer.

So this relationship with FJ come to an end after >4 yrs with many lessons learnt. Looking forward with the new relationship. 


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