Dhandho Holdings is marked on our books to its quarterly book value. Book value is a reasonable, yet conservative proxy for intrinsic value. Over the last two years, CEO Mohnish Pabrai and his expanding team have focused on increasing per share intrinsic value. Much of this value initially fails to appear on the balance sheet. It contributes to the intrinsic value of the business yet, is not included in our book value calculation. Below are three examples of declining book value paired with increasing intrinsic value of the business.

First, previous letters have shared that headquarters have been moved to Puerto Rico, enabling them to take part in Act 20 and Act 22. Establishing headquarters in Puerto Rico was achieved in a cost effective manner, but nonetheless was a capital expenditure that decreased book value.

Few places on earth offer a return on investment the way Puerto Rico does. One advantage of this move is that it provides Dhandho with an effective federal tax rate of 4% until 2035. A reduced tax rate offers enormous advantages over the next 19 years because Dhandho will keep significantly more of its future earned income. While many competing businesses pay a 35% tax rate, Dhandho has a multi-decade competitive advantage on cost. Ultimately, Dhandho will retain 50% more of pretax earnings than comparable firms at normalized tax rates. This move has greatly enhanced the intrinsic value of the business without providing a tangible adjustment to the book value calculation we use for your statements.

Second, the Dhandho team has grown extensively and now includes 26 members with offices in California, India, and Puerto Rico. Establishing offices and attracting top talent requires expenditures that reduce book value. However, the impressive corresponding operational advantages are increasing intrinsic value despite not being reflected by GAAP accounting on the balance sheet.

Finally, this last quarter, Dhandho Funds was launched under the Dhandho Holding Company umbrella. Initially, operating expenditures of this nature reduces book value. However, intrinsic value of Dhandho has increased as several outstanding businesses have commenced. Dhandho now includes two actively managed hedge funds and a low-cost exchange traded fund (JUNE). I am pleased that limited partners of PIFI now own a meaningful percentage of these financial products. Today, there is zero book value attributed to these businesses, and that will certainly change.

Marking Dhandho to its book value is a method that pleases our auditors and I find it reasonable to report conservative figures. As long-term investors, growth in the intrinsic value is our key performance indicator. Today, investors through our fund are purchasing Dhandho priced at GAAP reported net assets. Everything else is included for free. In time, public markets will reflect the true intrinsic value of this business so the gap between book and intrinsic value today presents an opportunity for the keen observer.

[us_separator] The above post has been excerpted from a recent letter of Peterson Capital Management.

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