Problems at Unity and adding diversification to the portfolio with companies trading at the lowest valuation in the last decade

Global Atomic, Gulf Keystone Petroleum, Rubis, Bakkafrost

Hello everyone,

• Ken Griffin recently did an interview with CNBC. It is quite interesting. here is the link.

• Exor is continuing to show why they are a great company. Their earnings have been stellar and they announced a buyback to close the discount to NAV.

• While Petrobras is still the biggest position in my portfolio, I have diversified some of the recent gains into OMV and Orlen. They are both oil companies with refining capacity and now have a historical discount to themselves similar to what Petrobras had a year ago.

• I have sold Zigexn after the big run up, but after a 26% correction it is starting to look interesting again. Their latest earnings have been exceptional.

• I have also bought 2025 Calls for BTI. Those traded at an implied volatility of 3% last week, while the average annual volatility for British American Tobacco has been much higher.

Problems at Unity

The video game engine developer Unity (Ticker U) has recently changed its pricing to be based upon downloads. This is a huge change. First it can be abused and second is that the pricing increase will not just affect new games, but old games as well. Many developers thus are fighting back and said that they will stop using Unity's engine in the future. While Unity backpedalled and said that only one install on a new device will create fees, it broke the trust that they had between them and the developers. Given that Unity had negative earnings, it was just a matter of time until they had to adjust the fees. However in the way they did it, they angered everyone in the process. The CEO John Riccitiello was the CEO of EA until 2014 and has often been associated with the fall of EA. What is more surprising (or maybe not), is that the stock is only down 5% the last 5 days and is still up 4.6% in the last month. Even more, BofA upgraded Unity a day after the news broke. It shows that the buy side has no time to play video games, because this is big news for their customers. While Unity has been a staple game engine for more than a decade now there has been more developments. Other than the game engine behemoth Unreal Engine from Epic Games (Tencent owns 40%), open source engines have made a huge leap, for example Godot which is the game engine for the successful indie game Brotato. It will be interesting to see the development of this, but I bought 2025 Puts given that they are quite cheap.

Adding diversification

Global Atomic

Those that follow me on Twitter know that I have added several positions in the last few months. The biggest one of which is Global Atomic, which is already up 50% since I bought it, but is still cheap. It has one of the best Uranium deposits in the world with a full permit. However the mispricing comes due to the political risks with the military coup in Niger. The project has continued to advance,,, but mining has been put on hold as borders from Nigeria and Benin are closed due to sanctions. The new minister said that they will follow the previous governments mining agreements. They also have a steel recycling plant which produces Zinc oxide, which will return to profitability in Q4 after production halts due to the earthquake in Turkey. At 30m EBITDA for the steel recycling company using competitors' valuations and the cash they have on hand - one pays around USD$ 120m for one of the best Uranium deposits in the world. Insiders have been buying.

Gulf Keystone Petroleum

I  missed GKP.L (Gulf Keystone Petroleum). After buying it when the news broke that Kurdistan would stop oil production, I sold it on the bounce and haven't looked at it since. It has declined, but fundamentally it is incredibly cheap. If oil production would continue, it trades at around 0.5x P/E. Risks were high though as an agreement between KRG and the Iraqi government failed. On stocks that have political influence on the price, I often found that the technicals show a bottom very well and so they did here.  I marked where I would buy it (the violet line) about a week ago. However I did not set any price alerts and thus completely missed a 20% up move in 2 days. The company is still incredibly cheap, but it shows that if I have a fundamental and technical reason to buy this, with a price in mind -  I have to set the alerts to not miss it.

Jewett-Cameron Trading Company

This is a nano cap at 16m market cap. The company has 23m in net assets comprising mostly of inventory. Since the early 2000s, the company had about 9% on Return on Assets and 12% Return on Equity per year. They hold their real estate at cost on the balance sheet, so while they probably won't sell it, there is a decent margin of safety there. They have a good earnings history with very moderate growth. The stock decline has been mostly due to the earnings compressions the last few quarters. Given that the price is now around 2015 levels while the book value has doubled, I have the fair value at around 35m market cap if earnings normalise back to historical levels (which I think they will).

Rubis SCA and Bakkafrost

A french energy service company that owns many assets like terminals, ships and energy storage. Most of their money however comes from energy distribution. There they operate in more niche markets like Africa and the Caribbean Islands having close to a monopoly. It pays a 9% dividend yield and is the cheapest it has been since 2009 from a valuation perspective and the price is at 2012 levels. Given that it trades under book value, I bought the company.

I also have bought Bakkafrost, the salmon company listed in Norway but operating in Scotland and the Faroe Islands. They have been sold down due to scaling problems and Scotland and a potential tax on Norwegian salmon farms (which would not influence Bakkafrost). It is also the cheapest it has been in a decade, and salmon prices are still high with demand growing much faster than supply.

Looking at Methanol

A commodity I find interesting is Methanol. After a huge squeeze in September 2021 the price has gone steadily down until recently. The company Methanex, which is the biggest producer of Methanol in the world doesn't look too expensive, but I have to do more research into the space. So if you have more resources on it, I would really appreciate it.