Today, contract-mining group Buildmax will be de-listed from the JSE and it will take with it, roughly 8 years of investment lessons.
Investors / traders will be all to quick to tell you about their successes, but very few will look at the calls they got wrong and the lessons they learnt from them. Hopefully I can share some thoughts around what I learnt from Buildmax and how you can avoid some of my mistakes and make smarter investment decisions.
A long story short: I tipped Buildmax as a recovery stock about 8 years ago. My investment thoughts were pretty straight-forward:
- The share had been sold off aggressively
- The company traded well bellows its Net Asset Value (NAV)
- It was held by private equity group Brait in one of its specialist funds (Surely Brait knew what they were doing?)
Buying when the share has sold off
Hindsight is always a perfect science but I think the one lesson I could definitely take away from here: Try to stick to what you know… or at least what you think you know. Buying a share which was involved in contract coal mining at a time when renewable energy was becoming increasingly topical … probably a bit of an existential crisis for the business if I look back one it now.
The Buildmax share price tells a clear story about where the market thought the company was going… the market isn’t often wrong.
Net Asset Value (NAV)
I remember having a lot of debates with one of my analyst friends arguing that the share was trading well below its NAV and SURELY it would re-align itself.
At the time, the friend made the argument: A business can tell you what it thinks its assets are worth … that doesn’t mean that somebody will buy them for that price.
Buildmax is a perfect example of that: When it reported interim results for the 6 months ended August 2017, it’s reported NAV was 110c per share. Buildmax de-listed at just 16c.
I’m not 100% comfortable with the price that was offered to minorities but if the assets are not generating income, then the NAV becomes irrelevant fast.
Private Equity isn’t necessarily there for retail investors
When I initially invested my R10 000 into Buildmax, I regularly pointed to the R332m that Brait (http://brait.investoreports.com/actively-mining-growth-buildmax/) had invested in Buildmax.
I remember regularly writing that a normal Private Equity cycle was 5 – 7 years and even if it took this long, Brait would ensure that my investment would end up coming out green on the other side… I think it is fair to say that didn’t quite go according to plan.
Bearing in mind that Brait recently wrote down its investment in New Look by R1bn, I probably shouldn’t feel too bad that my investment of R10 000 was written down to zero. It does however make the point that investment markets are made up of buyers and sellers – to ultimately realise any investment, there has to be a buyer for whatever it you are selling. In hindsight, was there ever going to be somebody to take out the R332m (before investment return) that Brait had put in – could they find a “greater fool”?
Conclusion:
Investment markets are a great leveler and the best way to learn is by participating in them and understanding that each business is a microcosm of different markets: Buildmax had assets that it couldn’t sell at the price it had attributed to them and Brait had an asset it couldn’t sell at the price they had attached to their investment.
A measure of a business, is its ability to create value for all stakeholders on a consistent basis.
