It's easy for investors to buy really attractive, popular companies. Sometimes this strategy pays off, sometimes it doesn't, but almost all of the time you are required to pay a premium for beauty.
That's not the case with ugly ideas.
Here are three of the ugliest companies I've come across in the past year, that nevertheless have some potential:
Cash Converters International Ltd (ASX: CCV)
Cash Converters has been beaten down as a result of class actions against it, a regulatory inquiry, and proposed legislative changes that would impact the way it operates its core lending business. With Net Tangible Assets of $0.22 cents at 30 June (likely to be lower now), a healthy cash balance, and a decent core business, there is a definite value opportunity here.
However, the impacts of the class actions and proposed changes to Small Amount Credit Contract laws (which could take effect no sooner than 2018) are largely unquantifiable, making this approach risky. Investors need to be able to evaluate the value of the company's earnings against the possible impacts, and this will be quite difficult with Cash Converters.
Tower Limited (Australia) (ASX: TWR)
Tower Insurance has fallen due to the ongoing saga of the 2011 Canterbury quakes in NZ as well as the company's previously poor operating performance. Yet Tower has Net Tangible Assets of approximately $0.96 per share as of 30 September 2016, meaning investors are getting the insurance business virtually for free. Those assets are real assets too, cash and investments – although they will dwindle somewhat due to the recent Kaikoura earthquake.
Tower has announced that it will raise capital and spin-off its Canterbury quake liabilities into a separate company, which should help the market recognise the value in Tower. It earned $20 million in underlying profit after tax this year. The core insurance business is also showing signs of improvement.
MMA Offshore Ltd (ASX: MRM)
MMA is an oil and gas supply vessel operator. Companies in this sector are currently being squashed out of existence, and MMA is no exception. The company's debt is in a distressed state, and it is being forced to repay $75 million per annum to its bankers. While it has enough cash for its initial repayments, further repayments will require asset sales or substantially higher earnings, neither of which are forthcoming. With $1.70 in Net Tangible Assets compared to a share price of $0.30, MMA looks cheap, and indeed has significant upside on the table when the vessel supply market improves. It is hostage to conditions outside of its control however, and currently too risky.
