Special Situation Investments

SSI tracking portfolio is up by 1.6% in February 2023. A detailed performance breakdown is provided below.

Summary of SSI activity during February 2023:

Portfolio Ideas – 3 Portfolio ideas were added and 5 were closed.
Quick Pitches – 11 new pitches were covered in our SSI weekly newsletter.

Below you will find a more detailed breakdown of tracking portfolio returns by individual names as well as elaborations on names exited during the month.

TRACKING PORTFOLIO +1.6% IN FEBRUARY AND +689% SINCE INCEPTION.

Disclaimer: These are not actual trading results. Tracking Portfolio is only an information tool to indicate the aggregate performance of special situation investments published on this website. See full disclaimer here.

The chart below depicts the returns of SSI Tracking Portfolio since the start of 2017.

PERFORMANCE SPLIT FEBRUARY 2023

The graph below details the individual MoM performance of all SSI Portfolio ideas that were active during the month of February 2023.

IDEAS CLOSED IN FEBRUARY 2023

Opera (OPRA) +77% in 1 Year
Opera was an undervalued owner and developer of a well-known web browser with the same name. When I covered the situation last year, ORPA had 70% of mcap in cash and private investments, while the operating business was trading at 4x E2022 adj. EBITDA. The company was growing wildly with revenues expanding by 50% in 2021 and 22% growth guided for 2022. OPRA was also on the cusp of material earnings inflection after management finally hinted at the normalization of bloated marketing spend. Moreover, the company had just started monetizing its private investments and returning cash to shareholders. Assuming successful margin normalization and conversion of private investments into cash, OPRA looked simply too cheap. The thesis played out exactly as expected. Soon, a sale of another private investment was announced after which the company reduced its share count by 20% and, a few months later, announced a large capital return/special dividend. Meanwhile, the business performance turned out even better than anticipated with both revenue/EBITDA exceeding the full-year guidance. Reflecting these positive developments, the share price re-rated meaningfully and the operating business valuation reached 7x forward EBITDA, which no longer seems a no-brainer to me. Moreover, with only one private investment left, the special situation angle had mostly played out, so I decided to take 77% profit in one year and close the idea.

Sisecam Resources (SIRE) +43% in 6 months
Sisecam Resources is an MLP operating one of the world’s largest natural soda ash mining and production facilities. SIRE received a non-binding offer from its parent/GP to acquire the remaining LP units at $17.90/unit. The GP owns a 75% stake in SIRE, so unitholder approval wasn’t required, however, the takeover needed the blessing of the conflicts committee. The takeover offer was clearly lowballed and multiple reasons indicated that following the special committee’s review, the bid would be materially increased. The buyout proposal came at no premium to pre-announcement prices and a 40% discount to where owners of SIRE’s GP purchased its interest in SIRE just 8 months ago before the offer. The offer also looked cheap based on SIRE’s distributable cashflows, which have been boosted by strong tailwinds in the soda ash industry. The special committee consisted of 3 independent directors, two of which came from reputable backgrounds and were likely to fight for a higher bid. Everything played out exactly as expected and the offer was raised to $25/unit, with 2 quarterly dividends on top, each worth $0.5/unit. The idea generated 43% in 6 months – yet another successful MLP buyout arbitrage, counting 4 of these on SSI already.

Magnachip Semiconductors (MX) -61% In 2 years
Display chip producer Magnachip Semiconductors was getting sold to a Chinese PE buyer at $29/share. The price was convincing and shareholder approval seemed likely. The main risk was regulatory approvals, especially from Korea, while US and Chinese consents seemed likely at the time. Downside seemed protected by a large cash pile (40% of mcap) and no debt, while the presence of multiple other interested parties in the bidding process gave some reassurance as well. It turned out that despite MX having only 1% of revenue in the US, CFIUS still blocked the merger. Looking back, this was the right time to move from this idea. However, given the substantial cash position and cheap valuation, I’ve kept the position open expecting either a large capital return or further interested buyers. The rumors of new bidders started appearing and hooked me to wait for the renewed sale process, which never panned out. In the meantime, the semiconductor industry stumbled into major issues, which heavily impacted MX’s operational performance cutting revenue in half. Management’s promises of recovery kept getting adjourned and the last drop in the bucket was recent quarterly results where management hinted at a looming large cash burn in 2023 before the potential recovery begins. The idea was closed with a 61% loss in 2 years.

Nam Tai Properties (NTPIF) -82% in 1.5 Years
This was a very speculative bet on a jockey – IsZo Capital – which had just won its activist campaign and managed to oust the board of Chinese real estate developer NTP. IsZo had 60% of its fund invested in Nam Tai, and kept buying stock in the open market. The situation became interesting when following the Chinese RE market turmoil, NTP price dropped 60% in a few weeks. The stock traded at 50%+ discount to its SoTP value and a similar discount to where IsZo had been buying shares a few weeks before that. It seemed that with the new management in place, once the turmoil passes, the NTP share price could be facing a significant rebound potential. However, it quickly became clear that the real thing to fear here was different than expected. It appeared, that the new management was unable to get control of NTP as previously ousted entrenched and shady directors were unwilling to transfer the company’s chops. Meanwhile, NTP’s bank accounts got frozen and the company faced looming debt maturities. Over one year forwards, any attempts to retrieve the chops have been unsuccessful so far, whereas time is running out as NTP’s is facing serious liquidity concerns with the bank accounts still frozen. The risk of bankruptcy became very real and I’ve finally decided to close the idea. This saga has been very educational in terms of just how risky and difficult investing in China/Chinese assets is, especially when there are some shady players with bad track records involved. Expensive lesson learned.

Atento (ATTO) -91% In 1 Year
Atento was a highly levered BPO call-center services provider that seemed to be in play for a full company sale. Rumors appeared that ATTO had hired Goldman to explore a sale. The timing seemed just right given that ATTO was controlled by 3 ex-noteholders (not natural shareholders), all of which had their non-sale provisions expiring in a couple of months. The company looked cheap against peers and was in the process of a successful turnaround process. But then, ATTO got hit by a string of issues, including a cyberattack and massive inflation in Latin America, which due to high leverage decimated the stock price. The sale thesis got delayed, yet the company still seemed cheap and management’s/activist’s guidance gave hope of a rebound. Recent filings unveiled that business recovery will take longer than anticipated. Meanwhile, the wait will likely be dilutive and very expensive for the equity holders as indicated by last month’s financing terms. Closing of this idea was long overdue and looking back, I should’ve exited when the original thesis shifted in mid’22.

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