I’ve finally got Google chart setup with defaults I like, below is an example featuring Penrice Soda Holdings (PSH.AX).

I posted about Penrice falling into my strike zone on the 8th, that’s the middle highlighted bar. On the 7th shares were allocated and the stags started to sell. I wrote the following on the 9th, but decided not to post it as I see too many posts on message boards worrying about small gyrations in share prices.

Penrice Stags selling their additional shares

Is a likely explanation of the current share price.
The additional shares were scaled back due to strong demand. A high percentage of those buying the additional shares would have been doing so to turn a quick profit, hence the selling as soon as the shares hit their accounts. From Penrice’s 2009 AR there are 3754 shareholders. Say 20% of retail investors asked for additional shares and 90% of large investors did likewise. That would result in 13M additional shares requested, i.e. smart investors picking up the money other investors left lying on the ground.

All five directors took up their full entitlement, but none took up additional shares. Which was jolly decent of them to leave the spoils to others.

Below is my favourite Big Charts view. I like to check for value traps, shares that look cheap, but due to falling earnings or many other reasons they are not a bargain and the share price continues to fall.

There is a very obvious long term trend in Penrice’s share price, that’s what happens when you’re initially priced for growth and then earnings fall. Why have Penrice not been able to capitalise on their monopoly local producer status? Have earnings bottomed or will they continue to fall? Total earnings will be up in 2010, but eps will drop due to the share offer.

Why I Bought

• Penrice is in my 5-10 P/E strike zone. Viable companies sporting those P/Es have higher average returns than any other group. Buying in that range increases my probability of success.
• High probability of earnings rising and ratio expansion. The simple combination which propels the low P/E’s out performance.
• Return on capital has lots of room to increase from 2009s low level of 9% . Orica for example returns mid to high teens.
• Boring, easily understood business. I consulted to chemical companies like Kemcor and Orica and numerous mining companies, so Penrice is in my wheelhouse. The fundamental story and performance make sense and management’s responses appear likely to bear fruits. This isn’t high tech, chemicals are already a commodity and the demand is strong.
• Good shot at 10% after tax dividend within 2-3 years and a possible capital double over the same time frame. [That's the target valuation, not the conservative valuation.]

In summary Penrice Soda is a low risk, high probability single. If Pabrai hadn’t of fallen from grace, we’d probably be calling that a Dhandho.

Risks

• Currency. Though the AUD is now so far above the long term median that it will revert at some point. Penrice have detailed the risk and I think I posted that.
• Double dip recession. Demand falls, price falls, earnings fall. Though as management are planning on further expansion to sodium bicarb plant and said the following in the 2009 AR they should weather a recession in late 2010 or 2011. Especially now that debt has been reduced.

“Our Chemicals business, which supplies robust and growing markets in Australia and in 28 export countries, lifted earnings by 29%, due largely to increased sales into Asian export markets of 18% and productivity improvements at the Osborne operations. The expansion of the sodium bicarbonate plant was successfully completed on budget and on time, with strong demand in overseas food and pharmaceutical markets taking up expansion volumes. The Company will continue to look at further expansion of the sodium bicarbonate plant, leveraging continued increasing demand in Asian markets.”

In my first post I said I thought I’d read the Soda Ash plant was old. I may have been mistaken as according to the 2009 AR, “The upgrade of our soda ash plant was completed with 100% plant utilisation continuing. The improved plant productivity has helped offset raw material cost pressures and, due to weaker demand from glass and minerals processing sectors, we will delay further investigation of the expansion of the soda ash plant until we are well clear of the impacts of the global financial crisis.”

Disclosure: Long Penrice PSH.AX

Related posts:

1. Penrice Soda Holdings Limited (PSH.AX) Page 1
2. Penrice Soda Showing Strength on a Down Day
3. Learning from Disappointments – Penrice Soda
4. Quick Notes
5. A Few Quick Thoughts
6. A few quick comments