Monday, March 14, 2011


Lemarne is one of the newer positions in the fund I co-manage. Besides being a potentially attractive idea for readers, they also have a corporate philosophy that I think may be of interest to value investors.

Lemarne Corporation Limited (ASX:LMC) engages in the manufacture and sale of electronics and electrical components. The company also offers electronic sub-assemblies, which are primarily used in the power tool, telecommunications, automotive, and security industries. It has operations in Australia, Asia, Europe, and North America. The company is based in Melbourne, Australia.

The Philosophy & Objectives section on their site and in their annual report may sound similar to those familiar with Berkshire Hathaway:

While our Company is a corporate body, our management philosophy emphasises partnership: a partnership between customers, employees and shareholders.

Most directors are major shareholders.

Our long-term financial goal is to maximise growth in intrinsic business value per ordinary share. We do not measure the economic significance or performance of Lemarne by sales or by size but rather by per-share-performance.

Our preference is to reach this goal by owning the majority share in businesses that generate cash and earn above-average returns on capital. We focus on the development of a limited number of niche engineering and services businesses which are, or have the potential to be, market leaders and which give the Group stability through limited diversity.

We are sensitive to our fiduciary obligations to the Company's lenders, suppliers and its many long-term shareholders, some of whom have committed significant portions of their investment portfolio to our care. Consequently, we maintain a conservative approach to funding, rejecting opportunities rather than over-leveraging our balance sheet. This policy may penalise results, but it is the only behaviour which leaves us comfortable, considering our obligations.

We endeavour to operate our businesses in a totally ethical way, complying with the best operating practices, meeting our social and environmental obligations, and being a good corporate citizen.

We are candid in our reporting, telling shareholders business facts that we believe they would want to know. We are nevertheless careful in reporting certain activities such as technical breakthroughs or potential acquisitions, where public knowledge of such might disadvantage the entity to the detriment of our shareholders.

We believe our success is dependent upon attracting and retaining first-class people. To this end, we aim to provide challenging career opportunities in a stimulating environment and are committed to a widespread scheme of profit sharing. We are also committed to assisting those personnel who are primarily responsible for our successful growth to obtain equity in the holding company.

Here’s a quick summary of earnings:

Fiscal (June 30) 2010 Earnings (AUD): $3,900,000

NTAV (December 31, 2010): $30,089,000

Shares: 8,607,000

NTAV/Share: $3.50

Sales were up about 21% in Malaysian ringgit terms in the July-December 2010 period compared with the same period in 2009. However, due to a strong Australian Dollar and an increase in input costs, the company’s reported net profits during this period were about the same as the previous year and the company expects fiscal year 2011 profits to be about the same as 2010. The company has a current market cap of about $34.34 million, cash and short-term investments of about $16.44 million, no debt, and a current enterprise value of about $17.91 million.

If we assume fiscal 2011 numbers don’t quite meet their 2010 numbers as they expect (due to currency changes, commodity inflation, or something else), maybe the company will report about $3,500,000 in net income for the fiscal 2011 year. The company recently completed the expansion of its Penang-based manufacturing facility by nearly 20% to 120,000 square feet, so there could be some potential future upside from this increased capacity.

Given the numbers above, Lemarne is trading at about 1.14x tangible book value, about 10x fiscal 2011 earnings, or about 6-7x if you assume everything over a few million bucks is excess cash. The current business earns pretty good returns on capital. If the business is worth about 10-15x plus excess capital, then intrinsic value per share could be somewhere between $5.60 and $8.50 per share, versus a current price of $3.99.

They appear to understand capital allocation and want to either buy someone or merge with someone. Management has also just stated that they are currently “exploring various strategic opportunities to reposition Lemarne and enhance the ongoing return to its shareholders” and that they “continue to evaluate all possible opportunities available to the Group and are working to a timeline of formalizing a strategy that maximizes value for shareholders prior to the end of the financial year.” So maybe something will happen sooner rather than later, especially with the 3 main directors (who brought in the current CEO in 2006) owning a bunch of stock and ranging in age from 71-73 (the CEO/Managing Director is 66). If they aren’t able to find a suitable acquisition or someone to acquire them, they may continue to just return cash to shareholders though either special dividends or a reinstatement of a more ordinary dividend.

Disclosure: I am a portfolio manager at Chanticleer Advisors and the fund Chanticleer manages owns shares in Lemarne Corporation Limited. It may in the future buy or sell shares and it is under no obligation to update its activities. This is not a recommendation to buy or sell a security. Please do your own research before making an investment decision.