GNK, IAPD, IDY

Roughly doubled my investments in GNK, IAPD and IDVY on Friday. They're now each about 12% of my portfolio at present prices, slightly ahead of ZRX.

Maxima Preliminaries

Maxima's preliminary full year results are out:
http://www.maxima.co.uk/pdfs/maxima/Prelims%20Statement%20Final.pdf

There's been a big increase in profit, but share dilution has left EPS down on last year (19p down to 15p). Adding back in amortization leaves EPS flat on about 25p.

At the current share price I'm hoping Maxima won't issue many more shares to finance acquisitions. Debt was only 1.2 x EBITDA at year end, but a post-balance-sheet acquisition of DXI pushes that up to more like 2 times. I think that still leaves scope for about £10m of extra borrowing - and combined with next year's earnings would hopefully leave room for about £18m worth of acquisitions this year without further dilution.

2008-2009
So... predictions for 2008-2009. Nothing like sticking your neck out.

I'm going to assume about £10m of EBITDA from the business excluding DXI. That's flat on last year.

DXI's EBITDA last year was £1.25m. I'll assume no integration benefits in the first year. I have no idea what DXI's growth prospects are, but I'll assume it remains flat. So that's a contribution of £1.25m to the bottom line.

I'll assume Maxima make a further 3 acquisitions at £6m each, with a similar price / EBITDA multiple to that of DXI. Let's assume the first acquisition contributes 6 month's worth of EBITDA to the bottom line, but the others happen too late in the year. That's an extra £500k.

So for the financial year 2008-2009 I have:
- EBITDA £11.75m.
- Number of shares still 25m.
- Amortization will probably be about £5m.
- Interest payments will be about £1.5m.
- Tax at 30% on £5.25m is about £1.5m.
- Post-tax earnings of £3.75m.

That suggests:
- EPS of 15p. Flat year-on-year. Disappointing.
- Putting back amortization, 35p per-share. An increase of 40%. Tasty.

2009-2010
The EPS number really depends on whether Maxima's acquisitions continue to increase in scale as the company grows. If so, amortization will continue to eat up a large part of the profits. However adding back amortization really does give a more accurate picture, and I could see this hitting 50p.

Value
I think the amortization will continue to cloud the picture for Maxima, but a record of strongly increasing cash flow, and a strong performance throughout a recession could leave Maxima deserving a multiple of, say, 12 on (EPS+amortization). In 2010 that could be 600p, for a 300% gain on my purchase price.

Conclusion
Maxima are definitely on my "buy" list when I have a few more pennies to spare. Probably in November.

Buffett

I've just got back from holiday. At the airport on the way back I picked up Buffett: The Making of An American Capitalist by Roger Lowenstein. I thought it was a great book - I devoured it in about 48 hours.

I was familiar with bits and pieces of Warren Buffett's life, but it was really interesting to read a properly researched, in-depth biography.

On the investment side, the things that stood out were:

• Being greedy when others are fearful, and fearful when others are greedy. This is a famous quote, but I'd always thought that being "fearful" for Buffett meant not investing (rather than actively selling). In fact, periodically, when the market is irrationally exuberant, Buffett has sold almost all Berkshire's stocks, with the exceptions of a few core holdings. That jars slightly with his ideal holding period of "forever" - I had no idea he had moved almost entirely into municipal bonds in the mid-80s.
• His key departure from Graham, in assigning value to intangibles such as brand. This still follows the spirit of Graham, i.e. buying something for less than it is worth, with a decent margin of safety, but goes a step beyond in recognising value in something other than tangible assets.
• His focus on good management, but the recognition that a well-managed company in a crap industry is still not a good investment.
• Free cash flow is crucial. Berkshire Hathaway (i.e. the original textile company) wasn't in a great industry, but had plenty of cash, and had decent free cash flow. That funded everything else. Investing that cash back in the textiles business would have left the company worthless. Berkshire is able to buy entire companies now, and take all their free cash flow for their own. For someone just buying shares, they need to look at companies that produce exceptional free cash flow, and, crucially, companies that decide judiciously whether that should pay for dividends, buybacks, acquisitions or internal investment.
• The influence of Charlie Munger in persuading Buffett to invest in great companies at a fair price, rather than focusing exclusively on extreme good value.