For those of you who didn’t have time to read the Glaucus research report on Blue Sky. We have had a look at it. While I wasn’t swept away with the quality or detail of the research it has had a marked impact on the share price as you can see from the chart below. We never held any shares in Blue Sky for our funds as its not the type of business that we would generally own. Though it did make me think can I pick up a bargain while the share price is depressed. It is in the strategic timing of buying and strategic timing of selling where the greatest returns can often be made. We like to think that we are adept at looking though the noise.
Glaucas is not a white night saving the Australian investing public. They very clearly state in their report on Blue Sky that they “stand to realize significant gains in the event that the price of such instrument declines”. They achieved their objective!
So does the current share price create opportunity? If there is a real business, what is it worth and when does it become cheap?
There is a fundamental business with Blue Sky. It does have cash flows although that would appear to be deteriorating looking at the last annual report, (see below) and it has made some great investments along with some no so great investments.
There are real assets on the balance sheet. This however is where the problems start to arise when working out what the value of the business is.
We had heard rumours about the accounting treatment of some of the BlueSky portfolio for some time but as we didn’t own the stock we didn’t bother to look much further into the rumours.
Management can influence the value of assets on the balance sheet. We were extremely concerned by this type of activity with Henry Morgan Limited and we spoke to several of our clients who we thought might have had some exposure to HML.
Quality of management
Every time we talk about how we invest we talk about quality of management. It’s a hard thing to talk about because it encompasses so many different factors from a wide range of areas. One of those areas that we focus on is the financials of the company. There are some elements of the company’s accounts that management can influence. Things like provisions, one-off costs and amortisation and depreciation. The other is the carrying values of assets on the balance sheet.
Management at Blue Sky have taken an aggressive approach to revaluing assets. I always feel its better to be conservative and keep the value of assets as low as possible, avoid paying tax on the revalued asset and keep that money earning a return. That is how we treat the unlisted assets that we buy. It means that as a manager you don’t get paid a fee in the short term but does it really matter? You will get paid at some stage.
We didn't really get much past this fact when looking at the value of the business. If you have questions over the financial statements and carrying values of the assets on the balance sheet why would you invest? So that is where we left it.
The Glaucas report is designed to make noise and as much as possible. The report is littered with sensational headlines and colourful language. You also need to remember that Glaucas is not out being a good corporate citizen aiming to save the general investing public. They are a fund that shorts stocks to make money from buying them back at lower prices. Even if what they say isn’t true, mud sticks and if you throw enough of it some will stick.
Both Glaucas reports have some truths in them so in this case the noise becomes fact and it warrants giving this one a miss to find a real business with a conservative balance sheet that is undervalued.
We wont be rushing in to buy shares in Blue Sky and that’s not on valuation metrics, but on a subjective assessment of management.