QAV America 007 – Tariffs, Towers, and the Telco Gamble in Africa

[00:00:00]
Cameron: Welcome back to QAV America. This is episode seven. We’re recording this on the 27th of May. My name is Cameron Riley. With me is Tony Kynaston. How are you? Tk?
TK: Very well. Thank you, cam, as the rain. Comes in
Cameron: Raining in
TK: at Cape Shank.
Cameron: who’s
TK: It’s moved, actually. It’s moved on now. It’s very Scottish down here at the moment.
Cameron: Speaking of which, I have a, a Scottish aunt who’s coming to a, or is in Australia actually at the moment, but she’s coming to Brisbane at the end of this week, who I’ve never met before. One of my dad’s sisters, she’s coming to spend a week with us and Brissy. That’ll be nice.
TK: Oh, nice. Yeah.
Cameron: Um.
TK: you all the low down on your dad.
Cameron: Yeah, looking forward to
TK: Yeah.
Cameron: I think she was quite young when he left Scotland, so I don’t think she actually knew him very well at all. So I think ’cause they had like 12 kids in the family and I think, [00:01:00] uh, she’s one of the younger ones and he was the third eldest. So, and he left when he was like 18 or 19 and came to Australia.
So then, yeah, last time they saw him until he went
TK: That’s a.
Cameron: Not a year or so, but a year or two before he died.
TK: That’s a sliding doors moment. You could have wound up anywhere in the world, couldn’t you, but till your father chose Australia.
Cameron: Well, no, my mother was here, so if he’d gone somewhere else, I wouldn’t be, wouldn’t be me. It’d be someone else.
TK: Yeah, true.
Cameron: Anywho,
TK: I.
Cameron: uh, let’s, uh, talk about our US portfolio, Tony. It was down a little bit in the last seven days, down 1.3%, and the benchmark was up. Quite a bit, 9.85%, uh, according to But then when I looked at the charts, that doesn’t make much sense ’cause the
TK: Yeah, it sounds like a lot.
Cameron: down for the week.
me just open up again and see if wrote that down [00:02:00] incorrectly
in the last week. So that’s say May 19th. Yeah. Okay. Now it’s given me a completely, yeah, it’s, uh, it says it was down 1.93%. Okay.
TK: go.
Cameron: There you
TK: We need, we need some, uh, some television hold music while you check things
Cameron: yeah, yeah.
TK: a little, little bit of Herb Albert and a Tijuana Brass or something in the background.
Cameron: I just,
I just, edited out of the show. It’s all right. No one knows
TK: Oh, okay. I’m referring to something which hasn’t happened.
Cameron: Yeah, actually. Okay, so looking at this now, it says we’re down 3.7% for the last seven days, and the s and p 500 was down 2.6% for the last seven days, so we were down a little bit more, but not by that much. So that sounds a lot more reasonable anyway
TK: Yeah,
Cameron: the numbers I got earlier.
TK: sounds with my, uh, mental picture of what’s happened in the US in the last week
Cameron: [00:03:00] Yeah.
TK: stock market. Hmm.
Cameron: But, uh, this Australian Financial year, which is from the 1st of July through to today, our portfolio is up about 25% versus the s and p up about a little bit less than 6%. So. We’re still doing quite a bit better than the benchmark, even though we’ve
TK: Mm-hmm.
Cameron: way since Trump started doing his tariff business.
We’re still comparatively doing quite well and can’t complain.
TK: Yeah, we don’t complain ’cause nobody listens.
Cameron: Speaking of Trump’s tariffs, we talked about this on our Australian show, but he
TK: I.
Cameron: started talking more about throwing tariffs around, uh, willy-nilly this week, 50% to the EU, 25% on apples iPhones, if they’re not made in America. [00:04:00] Uh, you know, and we talked about on the Australian show how it’s mostly, I think just misdirection.
It’s just, uh, maybe a negotiating tactic, but I don’t think so really. I think it’s just misdirection while they’re pushing through the one big beautiful bridge bill uh, trying to rush that through and get a lot of. Project 2025 projects push through while people aren’t paying attention. That’s my take on it, but I know you think it might be an a genuine negotiating tactic.
TK: Oh, I think it’s probably both Cam. It’s uh, it’s getting people to call Trump and start dealing. Um, the only leverage he’s had, he has is to impose a big tariff and then pull it back. I guess if they start to deal. And like training a dog, isn’t it? It’s like, um. beating will stop when you come to heal. Uh, yeah, it is also, uh, because nothing, I don think there’s been any renegotiations of tariffs or much renegotiations of tariffs [00:05:00] yet. It may happen, as you say, there’s been a big bill passed in the, uh.
Cameron: House.
TK: Alex, thank you. I was trying to think of the right term in the American Congress, um, and taken to the Senate, so we’ll see what happens with the big, beautiful bridge Bill. It’s a lovely bridge.
Cameron: a lovely bridge. It’s a beautiful bridge and it’s gonna be
TK: Okay.
Cameron: Don’t gimme those negative waves. Uh, but I just wanna point out for, for new listeners, American listeners, our approach to all of this sort of macroeconomic turbulence that’s going on as we see each say each week in our show is basically to ignore it.
We pay much attention to the noise, which is a Warren Buffet and Charlie Munger rule. Ignore the noise. We just focus on the businesses, looking for businesses that we wanna invest in. know, we spend our time looking for businesses that are generating a lot of cash for good history of generating cash seeing if we can buy them at what we think is a [00:06:00] discount to their intrinsic valuation.
speaking of businesses, I’m gonna talk about one today. I’m gonna do a pulled pork on a company called IHS. one of the things that I love about. Dipping our toes in the American market, as I’ve said over recent episodes, is this. Lots of businesses that we don’t get to see in Australia. Lots of different businesses with different business models in different markets, and I find it really interesting to learn about these businesses and, and what they’re doing and how well they’re doing.
IHS is one of those, ticker is our IHS. It’s IHS Holding is the name of the company. on the New York Stock Exchange. This isn’t your typical sort of Wall Street, darling. It’s a telecom tower powerhouse that focuses on emerging markets, and when you drill into it, there’s a lot of high stakes, big risks, big rewards as well.
[00:07:00] But there’s a lot of stuff going on here. So what does IHS holding do? They’re literally the nuts and bolts of the telecommunication sector in Nigeria, primarily, company’s headquarters are in London, but they are the world’s third largest independent owner and operator of telecom towers. Believe it or not, they have 39,000 sites.
And their focus is predominantly on emerging markets. So Nigeria is about two thirds of their revenue, but there’s also Sub-Saharan and Africa, Latin America, and the Middle East. So of course every time you make a phone call, every time you use a mobile, that signal travels via a tower. IHS own the towers and lease them out to telecommunications companies.
So they, they, they focus on the critical infrastructure. Telecoms [00:08:00] companies, apparently, I didn’t know this, don’t run their own mobile tower infrastructure. Often like IHS. That own them and operate them, and then they lease them out with long-term leases, obviously, to mobile network operators, long-term contracts, and in IH S’s case 95% of their revenue are long-term contracts.
And Nigeria, as I said, is a massive part of their business. About 60% of their revenue, and I don’t know if you know this, but Nigeria has had a little bit of political instability and economic instability in recent years, so that’s all part of. So IH S’S challenges, which I’ll get into. But before I do that, bit of background on the company.
was founded in 2001 in Lagos by a guy called Sam Darwish, who was a telecom [00:09:00] engineer, born in Beirut the Lebanese civil War. Ended up starting his career with MCI Beirut. Then he ended up as the deputy managing director of a company called Moaf Phone, which was Nigeria’s first GSM operator in 1998.
Then when the Nigerian government decided to privatize their telecoms in 2001, he set up IHS, he has been running it for the last 24 years. He’s still the CEO and chairman of the company. So we do like founder run businesses, and this is one of those, or those we’ll see later. He doesn’t actually own a huge amount of stock in it, but it is a founder led business floated on the New York Stock Exchange in 2021, it was the largest IPO.
Of a firm of Amer, of African, sorry, heritage on the New York [00:10:00] Stock Exchange. They’ve come a long way since then. They’ve, as I said, they’ve got operations in Peru, in Wai, well, they did have, but they’ve been pruning those back in the last couple of years because of problems with the Nigerian economy.
Again, I knew nothing about this hadn’t been paying attention, but, uh, there was a big shock to the Naira. N-A-I-R-A, the Nigerian dollar, the Nigerian currency in 2023. Did you hear about this, Tony?
TK: I did not cam no.
Cameron: Well, um, one Naira is divided into a hundred Cobo Tony. want you to pay attention ’cause I’ll be you on this later. February, 2023, there was a major, uh, devaluation of the [00:11:00] Naira, eh, President Bola Tinubu basically floated the dollar, uh, floated the Naira. The Central Bank had been propping it up for.
And basically the officially US dollar was worth 460 but it was limited as to who could access those buying official dollar sources. But you could buy them on the black market for seven or 800 Naira. So there was a lot of black market currency trading on. It was a bit of a joke. And when they basically floated it, everyone rushed in, grabbed it, and the price shot up.
The official price of the Nora shot up from, of the dollar shot up from 469 to over 700 in a single day and kept sliding. And this [00:12:00] had a massive impact IHS, but also on the Nigerian economy. Nigeria earns dollars mostly by selling. Oil hadn’t been pumping much, so the freezer was already half empty ’cause they’ve had a little bit of political trouble over there.
And everyone wanted dollars to buy stuff from abroad, so the cost of everything shot up. Uh, everything that they import, flower fuel, school, books, prices and shops jumped up. Inflation hit 30% January, 2024, which was the worst in nearly 30 years. And companies that. Borrowed US dollars, obviously had a big problem, and IHS was one of those.
They ended up with huge foreign exchange losses. As a result of this, they had been borrowing huge amounts of money of the US to fund their expansion of mobile phone towers across different [00:13:00] geographies they were operating in. And when, when this all happened in 2023, it. Created huge problems for IHS and they, uh, uh, took a bunch of losses.
But before I get onto that, just letting you know that the Central Bank in Nigeria yanked interest rates up to 27% to try and make the Naira more attractive. So for those of us here in Australia or the United States that have thought, we’ve had high interest rates for the last couple of years since COVID.
Take a moment to think about, uh, our friends in Nigeria at the moment. May 20, 25, $1 hovers around 650 to 750 Naira. So roughly four times the old pretend rate of what it was back when they were. Um. [00:14:00] Uh, keeping it, uh, unsustainable low, but the free fall seems to have stopped, uh, mostly because money is super, super expensive to borrow and the government has promised not to fiddle with the rate again.
when it created 70% of 2023 IHS ended up reporting a US $1 billion foreign exchange loss. Which was a, a big issue for them. And they earn about 60% of their revenue in Nigeria, as I said, mostly in Naira, but it reports everything in US dollars. So when the NAIRA crashed, a hundred million NAIRA in Nigerian revenue became worth way less when translated to USD.
Even if their Nigerian towers were still earning the same rents local currency, you report the top [00:15:00] line in USD. It didn’t look anywhere near as impressive. And as I said, they borrowed billions in US dollars. So now all of a sudden their payments in US dollars are gonna be way more expensive and it’s gonna be a big hit to the bottom line.
So they took, uh, they took a lot of hits a couple of years ago, and they’ve done a lot of restructuring since then. But the flip side to that is they have a lot of long-term contracts. the business is still it’s still doing well on one metric. If you just look at its, you look at its pure cash flow in Nigerian dollars, it’s doing okay, but it took this big hit in foreign exchange, the cost of, you know, foreign exchange, uh, translations.
by the way, it has a market cap of about $1.9 billion [00:16:00] and has an average daily trading volume of around 600,000 shares. So it’s pretty liquid. So despite. some of the challenges, they’ve got some compelling strengths. According to Stockopedia, IHS is a stock rank of 99, which is very, very high. Their quality rank is also a solid 72 on Stockopedia. Which is again, pretty high. Their F score is seven, is pretty solid.
Looks at their financial stability and operational efficiency. Their price to operating cash flow is about 2.61, which is quite low. Um, you know, we often say that this is a that if you were getting paid outta their cash flow, it’d take about two and a half years for [00:17:00] the company’s operations to generate enough cash to cover the share price.
So that’s, that’s pretty low risk. The share price, however, is below its book value. that’s because the book value is currently negative 2024, it was, uh, negative 1.36. It was positive up until the foreign exchange crisis in 2023. But the last, uh, year or two, it has been negative. It does have a positive recent upturn, positive market at sentiment.
It’s got a recent upturn. It’s recently gone above its buy list, uh, sorry. It’s recently gone above its buy line and it’s above its second byline after coming back a lot in the last, uh, couple of years, but there’s a lot of industry tailwinds over there. Data traffic in Africa is growing at a compound annual growth of about 30%,
TK: True.
Cameron: Nigeria.
So the, you know, if you [00:18:00] think about these developing countries, a lot of people to get mobile phones. There’s a, there’s a big need for data. A lot of internet being delivered over cellular networks. They’re now a lot of people running their own businesses over cellular phones and mobile internet.
So. uh, a, a booming market that these guys are a significant player in. They’re the number one player in Nigeria. They have about 45% market share, and as I said, they’ve been strategically selling off assets in other geographies in order to fix up their balance sheet. They have a $50 million share buyback program in place.
About 12 million of that has been executed, and the CEO Sam Darwish himself bought $3 million worth of shares on the open market in August, 2024. [00:19:00] Always a good sign when you see the CEO. Uh, picking up stock like that, but I wanna talk about the weaknesses and risks, uh, which go beyond the foreign exchange thing that I mentioned has a negative PE ratio.
Uh, the earnings per share 2024 were negative 4.90. The Altman Z score is a negative two. The measure of bankruptcy. Obviously, uh, you know, we, we don’t really pay a lot of attention to that, but, you know, we do wanna note that when a company is in financial distress that it’s a risk. But as you’ve said recent shows, we have triggers in place if, uh.
Something goes wrong with a company to get out of it. They’ve racked up a couple of years of net losses, uh, in the last couple of years, mostly due to foreign exchange translation losses, lot of depreciation and [00:20:00] amortization, and then the interest expense from all of that debt. their cashflow is strong and it had been growing quite well up until 2023, 2018.
They did 462 million. By 2022, it was up to 907 million, so it doubled in that four year period, but then it came back when the crisis happened in 20 23, 20 24, it was down to 729 million, but really, really good. Very strong business before the financial. Uh, crisis kicked in with the exchange rate. The company doesn’t pay a dividend, so it has no yield.
The share price is, as I said before, below book. It’s all so above our, both of our intrinsic value calculation, so I couldn’t score it on that. the internal, [00:21:00] the external landscape is where things get particularly dicey. The Naira I mentioned has been a big issue for it and. Diesel that’s impacted a lot of underlying issues there as well.
Like diesel prices are up, uh, their power operating expenses are up lot of their underlying. Costs are up, but some of these are being covered by pass through clauses to the people they lease these things out to. So doesn’t all directly hit their bottom line. But there’s trickle through effects, I guess, with the carriers and their ability to then cover all of these that you can.
You can have a 10 year contract in place, but if the carrier starts to have financial issues, uh, and they can’t pay their bills, then that can come back and bite you on the ass. But the other one is regional power instability. I, you know, we’ve seen a bit of this in our Australian show with some [00:22:00] mining companies.
I can’t remember, was it MIUs resources we had, uh, six months ago where the CEO was, uh.
TK: Uh, don’t think it was Elia. It might Uh hmm. Might have been West African Resources
Cameron: That
TK: operates in, in the area. Yeah. So there’s sovereign risk.
Cameron: Might have been region resources, one of those, but we, we had a, I think it was a gold mining company that was operating in
TK: Hmm.
Cameron: and their CEO got held, detained
TK: For discussions,
Cameron: for discussions about how much tax
TK: royalties.
Cameron: Yeah. And it sort of doubled and then he, uh, was released and decided to retire back to London.
TK: Hmm
Cameron: We couldn’t really blame him, you know, there’s, there’s a lot of regional power instability in that area, and there’s called the, the Sahel region. Uh, includes the South as the [00:23:00] Sahara across the West and Central Africa. It’s Mali, Burkina Faso, Niger, Chad Sudan, parts of Nigeria, Cameroon, Morana, and Senegal.
It’s, uh, very poor area, very politically un stable, riddled with ethnic and religious tensions, and there have been six coups in the last four years in that region. Plus a bunch of failed attempts tenses transitions everywhere. You have groups like Boko Haram, ISIS, Al-Qaeda running around in that area.
And of course, you know, this comes with. Issues. Just the general health of the economy with issues about how much, uh, taxes are you paying? Mr. CEO come in and we’d like to throw a banquet in, your Honor. Why don’t you come to our offices and see how it goes?
TK: The ISIS [00:24:00] banquet.
Cameron: Yeah. There are
TK: Hmm.
Cameron: other issues as well though, like obviously security risks to infrastructure.
Towers can get attacked. can have a jihadist group that decides to
TK: Mm-hmm.
Cameron: trouble. They don’t want people talking on the phone so they can blow up your towers. Workers can’t get access to sites because there’s violence in the area. Maintenance can be disrupted. Energy supply gets cut off. IHS, as I said, have 39,000 towers across Africa, and a lot of those are near these hotspots in the Sahel region.
And then you have regime change that comes with contract risk. New military regimes can wanna renegotiate, uh uh, uh, let’s put it nicely, revoke terms. Yeah. You have to assume that even if there’s regime change, the new regime wants the economy to be bustling. They want [00:25:00] people to have access to mobile telephones, and they want them to have access to the internet.
Usually they may have fundamentalist reasons why they. Don’t want people to have access to it. But generally, I imagine if you become the government of a new country, you want money to be flowing in. You need, you need the economy to be churning to a certain extent, but a state owned telcos too could, a lot of them are state owned.
Telcos can suddenly stop paying you if there’s a, a junta that decides that they just don’t wanna. Pay the bills. So there’s a lot of those issues in this, this region, capital flight out of these countries when people get nervous about junta or regime risks. so there are a lot of risks associated with the business, basically.
then internally, they also have some issues. Their largest tenant. Company called MTN, who also [00:26:00] holds 26% of the stock of the company, but is limited to 20% of the voting rights. There’s a dual class share structure in place, there’s been a lot of agitation. I. Between MTN and the company lawsuit threats, of proxy fights.
Uh, MTN walking away from lease renewals, um, or threatening to, there’s been a lot of board churn as a result of that. the company’s got a lot of issues. I just wanna flag that. But drilling down into their financials a little bit, share price, when I looked at it, was at $5 38. The revenue, uh, over the last five years has to grow from 1.2 billion to 2.1 billion, uh, in 2023.
However, as I said it, it dropped a little bit in the last couple of years, [00:27:00] despite this, if you look at the compound annual growth from 2020 to 2024, it’s still 5%. Even with the. Issues coming outta 2023, but it’s losing money, as I said before. Some of that’s got to do with the foreign exchange issues, and it did swing back into a profit in Q4 2024, that was I.
Largely to do with a brief rally in the Naira. I think the, the underlying curr, the underlying currency, free cash flow is still negative. Um, and the, but the company does have a lot of cash. got 500 million in unrestricted cash and a $400 million revolving. Credit facility, which is currently not drawn upon, so it’s got access to funds if it needs it.
[00:28:00] But as I said, you know, very low price to operating cash flow, which we score it well for. from the analysts is actually fairly positive. Despite all of those risks that I’ve mentioned, Um, out of seven analysts covering the stock, six are giving it a buy and one is giving it a hold. So even though it’s had a rough couple of years and there’s a lot of regional issues, seems to be fairly positive prospects, and as I said before, you know, Stockopedia own rankings for it are pretty high, so it has.
A opportunity in a growth industry, telecom infrastructure in these emerging markets. The CEO owns about 3.8% of the stock. The COO owns another percent, but. That’s not 10% that we like to see before we score it on an owner founder, though I tend not to score US companies, because it’s hard to [00:29:00] get those numbers outta Stockopedia, but I did drill down into it.
We wouldn’t score it anyway. It’s a lot of volatility with the foreign exchange, a lot of volatility with the market, but fundamentally, think it’s a really interesting business that has been doing really, really well up until some of these recent issues. It’s high risk, but also potentially pretty high reward.
I think the management has been doing a good job at not only growing the business before the foreign exchange crisis, but at. Uh, you know, doing this strategic review, offloading non-core assets to try and cover some of their foreign exchange issues, to fix their balance sheet problems. And as I said before, if it.
Goes hairy. We have our cell triggers in place to get us out. I see lots of upside for it, but um, this is not financial advice. Do your own due diligence. We don’t own it. [00:30:00] It’s not in our portfolio, but it’s on the buy list that I did a week or two ago I thought it was, uh, an interesting company to take a look at.
So that is IHS. Tony, what do you think?
TK: Very interesting Cam. Thank you. You raised a lot of issues. Um, that, so if anyone wants to buy the stock, they can research, but, um, it reminded me of a couple of years ago, Telstra, the big telco, biggest telco in Australia, does own its po, it’s towers as well. It’s poles and wise, as they call it, was restructured so that they could spin off the. part of the business, the infrastructure part of the business, and it was hungrily by super funds and pension funds because that kind of business is attractive to them because it’s, it’s sometimes called a bond proxy. So it’s basically, you know, you, you borrow money, you build a tower, you have a [00:31:00] contract, there’s a margin, and it just keeps. Rinsing and repeating really, and paying you a sort of steady income stream for that investment, which is what a lot of, um, super funds like, or pension funds like, because it’s, um, it’s generally a assured income. Um, that spinoff didn’t happen, by the way, but it’s still in Telstra. Um, but that’s be my experience with this kind of business.
So what we’re seeing in IHS is that kind of bond proxy. it’s also got growth because it’s, it’s based in the third world and the, the bricks, if you wanna call them that or the third world, are, uh, evolving and becoming. You know, moving up the economic chain from third World to Second World, and then developing middle classes, et cetera, et cetera. And something I’ve known or I’ve heard about in, in these cases is that, um, I think it was particularly the case in India the, [00:32:00] they basically skipped the generation in terms of IT development. So the, you know, I’m talking to you over a laptop, but in a lot of these countries, they don’t have laptops.
They just go straight to their phone. And they use, you know, they use spreadsheets and they use, um, whatever over their phones, et cetera, to do banking and or whatever, um, where you and I would naturally do it on a laptop. So to, to say that’s happening is backing up what you are saying about the telcos growing substantially faster in the third world than they are in. The first world that, that was one of my questions. Why isn’t, why is this company on the third world and it’s because of the growth side of things? I think. So you’re getting a, a steady income stream and it’s growing, which is a dimension that you don’t get, in first world companies like Telstra. But it comes with a price, which we’ve talked about a lot on the Australian QAV show. The risk is sovereign risk. So [00:33:00] something could go wrong, the government could change, the currency could crash, the inflation could. Astronomically go up Um, the question always is then are you being adequately compensated? And it’s when we’ve talked before about Australian mining companies, like a couple we mentioned before, they generally trade on a PE ratio or a price to operating cash flow ratio, which is much lower. Oftentimes half what their Australian counterpart trades at because you’re taking on the risk of something going. Not wrong, but something, the curve ball coming out, um, of where they operate. And, uh, so the, the question is always, are you being compensated for the risk? And that’s often why companies with sovereign risk come onto the QAV checklist because know, the trading on a very low priced operating cash flow to compensate you for the risk of investing in them.
So you’re getting a company which has got [00:34:00] 30% growth. Um. And the sort of stable business model of I borrow money, I build a tower, I get a contract, I make a margin, and I do that again 39,000 times I can keep doing it for another 39,000 times you would’ve thought with the same kind of model. it’s growing at 30% and the margins are good and is, can I buy it cheap enough that it compensates me for the risk of operating in these kinds of, geopolitical areas. I. I’d have to do a deep dive to that, whether that’s a, adequate buffer, but the fact that it’s been going for 24 years. These kinds of issues aren’t new in Nigeria or in Sub-Saharan Africa or in a lot of third world countries. So the company is quite used to handling this risk. So I think that’s a tick. The fact that it’s been around for a long time, fact that they’ve been able to make it work through eight ES a year or whatever, the regime [00:35:00] changes in that area of the world and all the risks that go with that, um, suggest to me that they have found a way of. Mitigating those kinds of disruptions that, um, that what they’re selling is quite valued. Even though the regimes change, they still keep the telephone. I. Powers, uh, towers operating, for whatever reason. Uh, and, um, it’s a, it’s a reasonably robust business model. So, yeah, I quite like it. Cam, I haven’t done any sort of due diligence on it, but it’s a bond proxy with growth. It’s trading on a low price, operating cash flow to mitigate the risk.
And, um, it’s, it’s. Getting some attention again at shares are going, are getting momentum, which is something I like to see as well before we buy. Um, got a it you said before it doesn’t have an owner founder, but did you know what class of shares you were measuring? The percentage test? Because it had less than 10% of the shares, but [00:36:00] maybe they have extra voting rights and so might be the equivalent of having control of more than 10% of the company, in which case it would scare score for us.
Cameron: Yeah.
no, I didn’t drill down that deep. And interestingly in Stockopedia, when I go into major shareholders, it has nothing. I
TK: I saw that.
Cameron: I had to go looking for another source to drill down on that. But I, I didn’t go as deep as finding out what, you know, kind of power these two guys have. I mean, he is an owner, founder, he is been running it.
24 years. So, and he’s got a lot of money wrapped up in the company, uh, through those shares. So, um,
TK: He is gonna want control of some sort.
Cameron: yeah.
TK: Yeah. So I might, might, might score for us on the owner founder if we have a look at what the class of shares are on their voting rights. But in all, it’s a very interesting company and I, I think it’s worth, I. out further.
Cameron: You know, we were talking about this a week or two ago. I was [00:37:00] talking about some of these companies that when I drill into the risks that the businesses face, I’m like, oh my God, there’s like a lot of
TK: Yeah.
Cameron: on, you kind of reminded me that we have, I. Get out mechanisms in if things go horribly wrong.
So it’s, if it seems to be a relatively well run business, uh, with good track record management, know what they’re doing, they’ve been generating cash, um, I’m more inclined now that they’ll continue to do the right thing. And if they don’t, we’ll get out.
TK: And let’s put it in perspective. We’re, we’re talking about sovereign risk in Sub-Saharan Africa and Nigeria. There’s been a lot of sovereign risk going on in the US in the last few months as well,
Cameron: Good
TK: and fluctuations, uh, due to the government. So, you know, let’s, let’s not be the popcorn, the kettle black here, be honest.
Cameron: Yeah, good point. Alright, well, as I said, do your own due diligence, [00:38:00] but if you’re looking for a value investment, have a look at IHS. It’s an interesting business.
TK: Thanks, cam.
Cameron: Well, that’s QAV America for this week, Tony. Have a great week. We’ll be back next week.
TK: Thank you. Look forward to it. Happy MYSE. 

Cameron: [00:00:00] Welcome to QAV America, episode six. Tony Kynaston.

TK: I like the

Cameron: How are you?

TK: QAV America, it’s like, like a campaign ad.

Cameron: You like that?

TK: it’s morning in America. It’s, it’s QAV in America.

Cameron: Yeah, we are not in America. uh, if you are listening to this in America, hello. Welcome. Thank you for joining us.

TK: our tariffs.

Cameron: things? Yeah, we need the money. Pay our tariffs. We don’t get the money, but paid anyway. Well. Tony, um, I’m gonna do a pulled pork today, but, uh, a couple of things I wanted to cover off before we get into that. a couple of, well, we don’t need to talk about Joe Biden’s prostate cancer, although that’s something that I’m sure are talking about. One of the things that we track on QAV [00:01:00] for people that are new listeners, who I assume most of you are. One of the things that we do each week when I do my buy lists is we look at the commodity prices and we, because the number of particularly in Australia that are quite often in their buy lists, that have an uh, are tied to commodities.

They’re mining companies or their agriculture companies or

else do we have? Mostly mining and wheat

are the ones that we tend to look at

TK: coal. Yep.

Cameron: exactly. Um, So uh, one of the things that we’ve noticed in our uh, commodity

this week is that iron ore has just become a buy again. When we say it, it’s become a buy.

We track these commodities

the same way we track stocks. We put them on

a five year,

monthly chart, and then we draw three point trend lines to

determine the. Buy [00:02:00] trendline

is, and the sell trendline is, and we determine whether or not the commodities are in a buyer or a sell state from our perspective. and then if

we have a stock, say a mining company

let’s say a company that mines iron ore. If the iron ore itself, the commodity itself is in a sell state, we won’t

buy the stock regardless of what we think about where the. Companies financials are at, and whether or not it’s in a buy state. Because what we’ve learned over the years is that. the share price of these mining companies

lags, but it tends to follow the state of

the commodity, the underlying commodity. So with that in

mind, iron ore has just become a buyer again after being in a sell state for

a couple of years, more or less, I would hazard a guess.

TK: Yeah, at least a

Cameron: it’s been falling, I think. Okay. I could look it up ’cause I do track it, but I can’t be bothered right now. [00:03:00] And wheat has just become a buyer as well. Now in Australia, we have a pretty close, uh. Pretty, pretty good understanding. Let me say of which companies affects in the US market, I don’t as much so, but the way it plays out usually is if we hold stocks in our portfolios that are tied to these underlying commodities, when one of them becomes a

sell, we will sell the stock. And if we have. If we’re looking at stocks to buy on our buy list and one of them is tied

to an underlying commodity, it can determine whether or not We will or will not buy that stock. All else being equal. So just shouting that out for No, I, I didn’t come across anything in my recent US buy list that would be

affected by this.

I don’t really know who the big on iron ore or wheat players are in the us but if there is one on your buy list, [00:04:00] um, you might wanna take note

of the fact that iron ore is now a buy and

wheat is now a buy from our perspective. Anyway,

TK: Wheat wheat’s

Cameron: I.

TK: a big thing for the us. For big companies like ConAgra, I’m guessing, well, I’m not that familiar with ConAgra and big. Farm based companies like that. So that might come onto our bio list. I, I, or I don’t think a lot of that’s mined in the us. Um, but the other thing I’ll say about mining companies is they often base themselves on the Toronto Stock Exchange, which is, um, a resource based country in the same way Australia is.

So oftentimes US companies may list there because it’s a, it’s a market which is more used to valuing. Mining stocks, um, the US market, but there there’ll still be commodity stocks on the US so your point’s valid. Um, you might want to edit this next bit out cam, but, and I’m not sure if it applies to, to wheat and iron ore, but, uh, we may have to, the grass we are using a might [00:05:00] be in Australian dollars and b might relate to Australian markets.

So I don’t know if iron ore is, has a different graph if it’s sold from the US or not, is I guess what I’m saying.

Cameron: Yeah, I, I, some of the stocks that I track are us. I know I do. I look at a US gold

TK: Right.

Cameron: price. Um, I’m not sure about the others, but it’s a good point. I just asked GPT, it said there are some publicly listed iron ore mining companies in the us. I. Although it’s relatively limited, uh, compared to Australia, there’s Cleveland Cliffs, which is ticket code CLF. There’s the United States Steel Corporation, which has the ticket code x. I wonder how much Musk, uh, Elon Musk has offered him for that. I bet you he’s, uh, may he, he might take over United States Steel, which reminds me that line in the Godfather, part two, when Hyman Roth says to Michael Coone, Michael. We are bigger than US Steel, you know, I’m sure [00:06:00] Elon can say that now. And, uh, he might buy US Steel just to, just to get the, uh, share the ticket code. And it says, uh, Mesabi Trust Ticket code MSB is a royalty trust that receives income from iron ore mining operations. US Steel owns and operates the mintech and TAC mines in Minnesota, producing iron ore pellets, primarily for its own steel making operations. With some companies and US Steel is probably one of those, I suspect would, would be involved in a number of different commodities that we would probably look at. And then we tend to look at how much of their revenue is derived from each of the commodities and work out, you know, if one commodity’s in a buy state and one’s in a sell state, which is the most relevant for that company, et cetera, et cetera.

So as we go forward with the series, um, we will no doubt have specific examples that we’ll be able to dive down into. Well, one of the other things that I wanted to talk about today, [00:07:00] we just done this on our Australian show, and I’m gonna, uh, throw it in here, um, is, uh, play some clips from an interview that was recently on Tobias Carlisle’s podcast

So, I don’t know, uh, for folks out there, uh, who Dunno, Tobias Carlisle, these are. I was gonna say former Australian, still an Australian, he’s lived in America for a long time, a couple of funds, wrote a great book on value investing. He’s been on our show once or twice, is coming back on soon as I can lock him down. And he does a podcast called The Acquirers Podcast. It’s a value investing podcast. It’s really great and I was listening to it. I don’t listen to it very often, but, ’cause I don’t listen to podcasts very often. Too busy making the bloody things to listen to them. But I was listening to one recently, uh, recent episode, and he had a guy called Rich PZENA, uh, uh, is the founder and chief investment officer of PZENA Investment Management, a New York [00:08:00] based deep value investment firm with $34.9 billion in assets under management. And he got started in the early eighties. Uh, people may recall, uh, people may know of Joel Greenblatt. I’m sure we’ve talked about him from time to time.

I think I actually did reach out to him at one point, tried to get him on the show, but he is written a number of great books, uh, about investing, like the little book that beats the market and, uh, a bunch of others. Common sense, uh, the investors, something, something, something. He’s a successful value investor over there. Uh, so he and Rich went to, I think it was Wharton, together School. And in 1981 they wrote a research paper how the small investor can beat the market. It was their master’s thesis and they were trying to examine the performance of securities that were trading at or below [00:09:00] liquidation value during the period of 7 19 72 to 1978 in the us. Uh, I think they were kind of trying to update, uh, you know, the premise of Benjamin Graham and, you know, trying to do some academic analysis. Obviously, value investing wasn’t that popular back then. Um, as it is still not that popular now. Really, I don’t think. But they,

TK: isn’t it?

Cameron: yeah. Yes. Although there were, I don’t know how many tens of thousands of people at the, uh, Berkshire Hathaway, a GM the other day, but, uh, they, they wanted to, you know, put to test the theory that stocks that were trading. Below their liquid at or below their liquidation value with a low price to earnings ratio would whether or not they had outperformed the rest of the market. So they ran that, and funnily enough, they decided that it did, they did on average, [00:10:00] beat the rest of the market. So it was a, um, study that verified the basic premise that if they have a low price to earnings and they’re trading around their intrinsic value that they tend to outperform.

TK: Does that

Cameron: So

TK: and I can go to Wharton Business School with the dummy portfolio and gain some MBAs?

Cameron: you, I think, uh, me, not so much unless I get an, I get,

TK: crib.

Cameron: it’s like I, the, uh, the, the award that Markham gave me in, in ino, my, my Napoleonic award, it was for not doing any actual research about Napoleon, just talking about other people’s research about That was all I got my, uh, Napoleonic medal for talking about other people’s hard work. Uh, so anyway, I wanted to play, I’m gonna steal from this show, a couple of clips ’cause I was listening to the whole thing going, oh, I wish Tony was here.

I wish I could tell, see what Tony thinks about that. And I thought, bugger it. I’ll just steal it. With full credit to Tobias Carlisle, he’s i’ll, I’ll confess to it when he comes on the [00:11:00] show uh, to Rich Panna. Um, hopefully these guys don’t get mind. I mean, it’s out there, it’s in the public. Oh, it’s not a premium podcast or anything.

It’s freely available on their YouTube. uh, let me play this first clip and I can’t remember what this is about, but, uh, we’ll work it out as we go.

So I’ll tell you my, my story from 1999. um, we had started in our business in 96 and we had a good first couple years got to a break even and we were feeling good and then we went through this 10 straight quarters of massive under underperformance compared to the broad market, and I had a. Client who came in, sat in our conference room and she walks in the door and says to me, my grandmother’s a better investor than you are, and all you have to do is buy Cisco. [00:12:00] Everybody in the world has figured this out except for you, and you’re just stubborn. Try to go through with her, with her. And I said, you realize that Cisco is now at a half a trillion dollar valuation first company to ever achieve that mark. Um, and you’re, you’re used to double digit returns. You, you, you would be unsatisfied with anything less than 15% a year. So if you bought that whole company for $500 billion, they would have to earn $75 billion a year for you to get your 15% return. And they earn one. don’t you think there’s something wrong with that? And she just looked at me and said, you don’t get it, do you? To which I agree. I didn’t get it. You’re right. I don’t get it. Um, and, you know, that was gonna be the backbone of the internet. It was all just as exciting as, as it is today with artificial intelligence. Mm-hmm. Um, and so, was that a very [00:13:00] painful time for you, or was it like, it you just kind of recognize that, you know what, this is just craziness and I know that the world will get back to reality at some point. No, I mean, when you’re, when you’re a struggling business that just treat profitability and now you, clients are telling you you’re an idiot and they start clicking their accounts, we, we, um, weren’t sure w