In the October 2016 edition of Hidden Value Stocks, Joseph Koster from Boyles Asset Management discussed the firm's investment process, and shared a thesis for Thrace Plastics (ATHEX:PLAT).
Koster has a rich experience, ranging from being a co-portfolio manager in Chanticleer Advisors, where he worked between 2007 and 2013. After a stint at Boyles Asset that lasted between 2013 and 2018, he moved to Sorfis Investment.
Boyles Asset Management Investment Approach
Koster started off by defining the boundaries of the Boyles investment approach. They are heavily influenced by the Carles Munger philosophy of value investing with “acquiring more than you are paying for. You must value the business in order to value the stock.”
He likes this definition of value investing because the usual one focuses on buying stocks that are trading on either low price-to-book value, or low price-to-earnings multiples. However, the primary goal of value investing is buying for less than they are worth. Often that includes an undeservingly low multiple, but also can include a higher multiple of the book value of current earnings.
In many cases, he in his career had low multiples that deserved to be low because the business is in a very good environment and only over-earning can make it go forward. In other situations, the industry could be at risk of becoming more competitive in the future.
It is essential to determine not only the type of business, but its future growth and reinvestment prospects and check all the important parameters going below the surface.
Factors That Pull Them Toward Investing
One of the first things Boyle Asset is looking for is owner-operators who own a solid chunk of stocks when compared to what they earn through salary. Their special preference is for owner-operators who either founded the company or acquired their ownership in the open market. The company emphasizes three reasons for this approach.
The first is that through investing their capital into stocks one can see how the management is handling their money.
Secondly, this type of operation also shows how the management is treating their shareholders. There are numerous cases where management does not see shareholders as owners, but rather work on transferring their unjust ownership to themself by applying excessive share grants.
The third reason behind this preference is the chance to analyze how management through gaining ownership is a loss aversion.
Portfolio Construction
The company prefers to keep its portfolio concentrated, maintaining close to Munger's philosophy that “almost all really good investment records will involve relatively small diversification”.
Using the Kelly formula was a great approach to defining position sizing. It is not highly precise because the probabilities and payoffs of investing in individual businesses are highly uncertain. However, it can help when thinking about the attractiveness of the opportunity, and how many positions you want to keep in your portfolio.
An example of the usage of the Kelly formula can be looked at this way: if in more than 50% of investments you make 50% more than when you are in the wrong, according to Kelly’s formula your portfolio should be divided into 6 positions with 16.67% in size.
Since it is fairly difficult to fight against the odds, a portfolio made of 6 to 12 positions is ideal. It also adds a layer of protection for the misses in predictions and odds.
Constructing a concentrated portfolio is challenging and should focus on high-quality businesses that are in the growing stage. The biggest threat to the portfolio that is coming from larger positions is the wrongly estimated downside risk.
If you invest in a growing company, even if you make a mistake on the downside risk, you could be wrong in the shorter term, but gain capital with the growth of the business. If you decide to invest in cheaper businesses without a substantial competitive advantage, you should be looking at a portfolio with 15 to 30 positions.
Thrace Plastic Investment Pitch
Thrace Plastics is a company with two core operations - technical fabrics and packaging solutions. While the former is focused on the production of a variety of plastic fabrics, the latter is involved in the production of containers, bags, and cups. The wide array of products can find use in both consumer goods end market and industrial users.
The factors that drew the company towards Thrace Plastic are its valuation, strong insider ownership, and potential for attractive share repurchase.
The stock was illiquid, based in Greece, and the company sold off almost everything it owned in the country. However, the rest of the market failed to see the investment made by Thrace that would result in gains in the next couple of years.
Thrace Plastic has been in the process of streamlining the business for some time, refocusing its production towards higher-value-added products that come with higher margins. In 2015 they invested about $32 million in capital expenditures and the investment came to full effect during 2016.
In 2017 it was supposed to gain full effect. The company in 2015 had about $75 million of net property, and these fresh investments should provide the edge over the next three years.
Potential Worth
The fund bought the majority of stocks at a 50%-60% real book value and at 5x-6x of estimated after-tax gains. The company is cheap both industry-wise and when compared to other Greek companies.
What fuels the optimism is that the management believes that the shares are cheap, since they have been repurchasing them. While it is difficult to predict how Mr. Market will value the stocks, the fund believes that the value will be higher than its book value which is currently at $2.50 per share.
The drivers of optimism are investments in the company, and the operational changes coming from within the company. If everything plays out like they are expecting the share worth should double in value in the next couple of years.
Potential Risks
With major investments always comes the risk of them not making their cut and no real economic value gets created. But, due to the good track record of the company, and several factors nicely lining in, the chances for that are minimal.
The other problem comes with the Greek market itself. If it stays on the bad side for longer the shares won’t get any reasonable multiples any time soon. The company also wants to get listed on another exchange so it can be priced fairer, but that story is on the long stick.
Revisiting Thrace Plastic
Since the original investment was made in October 2016, eight years is more than a long enough period to analyze the prediction about the movement of the stock.
At the time of the pitch, the book value of the stock was at $2.50 and the company was betting that it could double in the next two years. In that time frame, the share value remained in a similar region, and it didn’t gain momentum since the second half of 2020.
So four years after the pitch things started moving, and the price indeed doubled. It managed to reach triple the value between mid-2021 and the beginning of 2022. Since then the stock lost some of its value, but it is usually holding strong above 4 euros per share.
From the latest annual financial report, the company is reporting a drop in overall turnover (-12.4%), and gross profit (-8.5%), while earnings before taxes endured a heavy blow (-33.5%). EBITDA numbers are also not assuring (-8.8%), while earnings per share are worrisome (-30.9%).
However, the management is highly optimistic, since in May 2023 they made a decision to continue with the buy-back plan. The first half of 2024 did show some positives, with an increase in turnover when compared to the first half of 2023 (+3.5%), and a slight rise in gross profit (+1.7%).
While the company currently may be experiencing a drop in value, it is still present in all the markets where they already made a breakthrough. The stock price did increase as Boyles Asset predicted, but it needed a bit more time. For now, the stock is stable and potentially is a good hold option.
