Richfield International Services

On Monday I finally managed to purchase some shares in the highly illiquid Richfield International Limited (17,538 units for $0.115 each). The way in which I eventually got hold of those shares was rather serendipitous. A number of months ago I put out a buy order for RIS shares - determined to pay no more than 11 cents - but the sellers were always out of reach, usually asking for 12 or 13 cents. Eventually tiring of this stalemate, I thought to myself that if someone offers 11.5 cents I'd just take it. One day I remarked to my friend Kelvin about RIS, 'That damn seller on the other side won't budge either', which is when he laughed with amazement and told me he had just placed an order to sell at 11.5 cents. Incidentally he was thinking the same thing about the highest bidder (me), hoping that I would yield. We quickly agreed to place orders at 11.5 cents on Monday, which were executed first thing in the morning. Initially I was rather concerned to find out that he was selling while I was buying but having made a decent profit he simply wanted to reduce his weighting in RIS. At least that's what he tells me...

I suspect most readers have never heard of the $7.2 million business called Richfield International, which is probably why diligent value investors can come across these opportunities. Having suspended its loss making container ship operation, RIS provides port, shipping and chartering services for foreign-vessels. Although listed on the Australian Securities Exchange, RIS primarily operates in countries such as Singapore, Vietnam, Bangladesh, Indonesia and Thailand. The company's main subsidiary was founded in 1984 by Chak Chew Tan, who has been managing the business ever since. If he's stuck around for that long, Tan probably views RIS as his baby and is more likely to put the long-term interests of the company ahead of any short-term focus. It's also great to see that he holds 23.4 million shares, making him the largest shareholder and therefore has his interests aligned with mine. 

Recent years have been tough for the shipping industry with sustained depression in shipping freight rates while operating costs have been increasing due to higher bunker fuel costs. This has had a flow-on effect for RIS since it provides services to these shipping companies, but its financial results have been improving over the past few years. This is rather interesting as I can't identify any competitive advantages that RIS can provide in its highly competitive sector other than the long-term relationships it has established with customers over the decades its been around. Anyhow, should the shipping industry recover sometime in the future, RIS is very likely to further increase its profitability. For what its worth, in its 2013 annual report management needed to perform a goodwill impairment test and used a forecast revenue growth rate of 3% p.a which they considered 'ultra-conservative as there is an expectation of a rebound in the global shipping sector over the next four years'.

Fortunately, my investment thesis doesn't rely on conditions improving as RIS already produces earnings that can easily justify its current market price. In the financial year ended December 2013, RIS reported a net profit of $964,725 but adjusting for foreign currency gains and the discontinued container ship subsidiary, I estimate its normalised earnings were around $850,000. This puts RIS on a P/E ratio of around 8.5x, far from expensive. Margins were very high, with a gross margin in 2013 of 87.4% and a normalised NPAT margin of around 23% so any sudden increase in costs shouldn't cause RIS to start making losses. It's also a very capital light business which is generally a good thing but with negligible capital expenditure I'm slightly concerned that RIS is underinvesting in itself. However, as a service business it relies more on its people than property, plant and equipment which may excuse the low investing cash flows. As a result, the great operating cash flow of $1.7 million goes almost straight to its bank account.

This brings me to the final, and most significant reason why I invested in RIS - its cash pile. This is one of those rare instances in the share market where you find a profitable company trading below its net cash: $11.4 million vs a market capitalisation of $7.2 million. Even if RIS decided to pay off all its liabilities (primarily payables), it would have $8.4 million in cash. If you include receivables of $700,078 RIS could have up to $9.1 million in excess cash. In other words, the market is offering a situation in which a sole owner of the business could buy it for $7.2 million, pay himself at least $8.4 million in cash and be left with a business earning around $800,000 a year (adjusting for the loss of interest revenue). And with every quarterly report RIS is building up more cash: in the first quarter of 2014 operating cash flows were an excellent $461,547, bringing the cash balance to $11.9 million. Although that operating cash flow could be distorted by a reduction in working capital or other one-off factors, it's a very encouraging start to the year.

This is primarily a statistical bet for me - it is unlikely to shoot the lights out in terms of returns and may take quite some time to play out but with the large amount of cash on the balance sheet, it seems hard to envision this investment being a terrible one either. Nevertheless, there are of course a few risks to keep an eye on. The shipping industry is obviously one, blowing the cash on an overpriced acquisition or diluting shareholders unnecessarily for a large acquisition are others (Chak Chew Tan got approval from shareholders for the ability to issue an additional 10% of the shares on issue and has mentioned he's on the lookout for mergers/acquisitions). Regrettably, as good as this investment appears now I passed on it when it was around 7 or 8 cents. Ah well, better late than never.

P.S You might want to take a look at their very retro website. Rather concerning how 1990s it is, but if it's a reflection of the tight cost control at RIS, I'm all for it. After all, the $300+ billion Berkshire Hathaway isn't too different.