Until now I've been looking at the longer-term prospects for Taylor Wimpey, but I think it's worth looking at what its balance sheet, cash flow and income might look like over the next few years. The main point is to see whether a rights issue is likely to be needed, but it's also an exercise in testing my predictive powers - I'll come back to this post when TW publish their interim and annual reports.
Base point - end-2007
Inventory: £6bn
Receivables: £400m
Cash: £130m
Current Payables: £1540m
Non-current payables: £400m
Debenture loans: £820m
Bank loans: £700m
Retirement benefit obligation: £200m
There are various other assorted items that are small enough to ignore for my purposes. At the moment TW has assets of £6.54bn and liabilities of £3.66bn, according to my numbers. That's close enough for my purposes.
TW's average house price is about £200k. Their gross margins are about 15%, so £30k of that. About £50k is the land. So construction costs are about £120k per house. £2bn of construction suggests that they have the equivalent of about 15k houses (e.g. 5k complete houses and 20k half built). They sell about 20k in a year, so this is about 9 months supply.
Mid-2008
Over the whole of 2007, TW had revenue of £4.7bn. Their latest trading statement (in April) stated that their order book was down 26% by value, so lets assume a further worsening and say that total sales were down 35% over the 6 months. That suggests about £1500m in positive cash flow, or 7,500 houses.
Assume a 25% decline in receivables, which will represent a positive cash flow of £100m.
Assuming they are building at 50% of the previous rate, that suggests they will have added 5k houses, but sold 7.5k, so a decline in the inventory from 15k to 12.5k. They will pay £600m in construction. They have operating expenses of £150m, and interest costs of about £90m.
Assume no land spend. Assume no more share buybacks.
The dividend will cost them £110m after tax, so about £160m before tax.
That's a net positive cash flow of £600m, generated by using land faster than they are replacing it and a reduction in inventory.
Net debt in April was reported as £1.9m. Assuming no new debentures, that suggests bank loans up to £1.2bn. Perhaps fewer land creditors, if they are depleting their land bank? Assuming this comes down to about £1bn by mid-2008, I estimate their balance sheet as looking like this:
Inventory: £5.4bn
Receivables: £300m
Cash: £200m
Current Payables: £600m
Non-current payables: £300m
Debenture loans: £800m
Bank loans: £1bn
Retirement benefit obligation: £200m
Assets of £5.9bn, liabilities of £2.9bn
End-2008
Let's assume conditions continue to deteriorate. Volume continues to decline, average sale prices are down from £200k to £160k (20% decline). There has been a freeze on new development, and the inventory is being further depleted. TW have laid off a third of their staff but redundancy payments mean that the benefits have not been seen yet.
TW sell only 2,500 houses, for revenue of only £400m. Receivables decline a further £100m for total positive cash flow of £500m.
The interim dividend is paid in stock.
The inventory remains static at 12,500 houses, due to completing existing developments. £300m is spent on development. £100m on interest payments, operating expenses are £150m.
There are various write-offs on the value of land and developments in progress, to the tune of £1bn.
Balance sheet:
Inventory: £4.3bn
Receivables: £200m
Cash: £100m
Current Payables: £700m
Non-current payables: £0m
Debenture loans: £800m
Bank loans: £1bn
Retirement benefit obligation: £200m
Assets of £4.6bn, liabilities of £2.7bn
Mid-2009
Volumes are starting to pick up in the UK, but prices are still low. North America is beginning to recover.
Average sale price is now £150k. 5,000 sales for revenue of £750m.
TW begin developing at a reduced rate. They spend £300m on 2,500 houses. £100m on interest payments and a now-reduced £100m on operating expenses.
TW resume a modest and very selective land-buying program. The final dividend is not paid. Land spend is £150m for 5000 plots, ensuring their land bank remains neutral in size.
Total positive cash flow of £150m.
Balance sheet:
Inventory: £4bn
Receivables: £200m
Cash: £100m
Current Payables: £400m
Debenture loans: £750m
Bank loans: £1.1bn
Retirement benefit obligation: £0m
Assets of £4.3bn, liabilities of £2.25bn.
End-2009
Continuation of the earlier part of the year. Market appears to have bottomed in the UK, and there is a slight improvement in sales prices to £160k.
5000 sales for £800m revenue. Construction costs are squeezed somewhat, and construction spend is £500m for 5000 houses, keeping the inventory neutral at 10,000. £200m on interest payments and operating costs.
Land continues to decline in value. TW buys 5000 plots for £100m.
Due to decline in land values, TW writes down the value of its land bank by a further £500m. But: gross margins are now up to 25%.
Balance sheet:
Inventory: £3.4bn
Receivables: £200m
Cash: £100m
Current Payables: £600m
Debenture loans: £720m
Bank loans: £800m
Assets of £3.7bn, liabilities of £2.15bn.
Mid-2010
Volumes are returning to normal across the board. Land values are bouncing back, reducing gross margin to 20%. Average sale price is £170k.
TW sell 8000 houses for £1.4bn, clearing £280m gross profit. Interest payments and operating costs are £180m.
Due to the recovering market, TW's balance sheet is no longer an issue. Pre-tax profit is £100m.
End-2010
Volumes are pretty much back to normal. TW sell 10,000 houses for £1.7bn. Margin remains at 20%. Gross profit is £340m. Costs are £180m. Pre-tax profit is £160m.
TW start building their land bank, which will drive future growth.
End-2011
TW sell 25,000 houses during the year for revenue of £4.5bn. Gross margins have declined to 15%. Costs over the year are £325m. Pre-tax profit is £350m.
End-2012
TW sell 30,000 houses during the year for revenue of £6bn. Margins remain at 15%. Gross profit is £900m. Costs are £400m. Pre-tax profit is £500m.
Saturday, 31 May 2008
Friday, 30 May 2008
Taylor Wimpey - add
Per my post yesterday, TW is cheap at 85p.
I've added to my holdings at 85.5p, which reduces my average purchase price to 103p, or a smidge under 100p if you take the dividend into account. TW is now my third largest holding at 10.6%.
I've added to my holdings at 85.5p, which reduces my average purchase price to 103p, or a smidge under 100p if you take the dividend into account. TW is now my third largest holding at 10.6%.
Thursday, 29 May 2008
Bye bye EDD, hello more ZRX
My resolution to stop buying more Zirax lasted 17 days and another 1.5p drop in the share price. Ah well. I didn't put it any new cash this time - instead I sold out of EDD for a modest 12% profit after fees and taxes.
I've also committed to taking up my RBS rights. I can't see the share price falling below 200p tomorrow, so there's no advantage to delaying further.
Zirax is starting to catch up RBS as my biggest holding...
RBS: 23.8%
ZRX: 16.3%
Details
EDD - Education Development International - 29/5/08 - 42.65p - SOLD - 4.3% of portfolio.
ZRX - Zirax - 29/5/08 - 9.35p - BUY - 4.3% of portfolio.
Average holding time
Now that I've made a sale, my average holding period is no longer infinite. I've therefore added an extra output to my python script: average holding period based on actual sales, and average holding period assuming I sold out entirely today.
My values so far: 1780 days and 74 days. The first of those is the meaningful one in terms of minimising churn. Just under 5 years is perfectly reasonable. I believe I've read somewhere that investment funds average less than 1 year. Warren Buffett probably has something like 1000 years, which I doubt I will get close to.
Taylor Wimpey
I expect to add to my TW holding at some point in the next few days, as funds become available. 85p is really getting silly. Forget about house prices for a moment: the UK's rate of housebuilding is unsustainably low. Over the medium term, the UK needs several hundred thousand new houses per year, and there are only a handful of builders. Provided TW survive, as I think they should, they will take a share of that business. If the margins aren't there, the builders will not bother building, and therefore they will be there.
Land of leather
I took a look at Land of Leather today. It is trading on a fantastically low price. I'm starting to think that even if it only has a 20% chance of survival, it might be worth a punt. Perhaps I'm crazy.
It's on a P/E ratio of less than 1 and has a yield of 65%. Nice.
It had about £16m in the bank at the end of January and has a market cap of £10m. But obviously there are many many problems with it... In particular: high fixed costs, very negative working capital (fantastic when growing, not so good in a downturn).
I'll continue to watch. I think it's probably going bankrupt.
I've also committed to taking up my RBS rights. I can't see the share price falling below 200p tomorrow, so there's no advantage to delaying further.
Zirax is starting to catch up RBS as my biggest holding...
RBS: 23.8%
ZRX: 16.3%
Details
EDD - Education Development International - 29/5/08 - 42.65p - SOLD - 4.3% of portfolio.
ZRX - Zirax - 29/5/08 - 9.35p - BUY - 4.3% of portfolio.
Average holding time
Now that I've made a sale, my average holding period is no longer infinite. I've therefore added an extra output to my python script: average holding period based on actual sales, and average holding period assuming I sold out entirely today.
My values so far: 1780 days and 74 days. The first of those is the meaningful one in terms of minimising churn. Just under 5 years is perfectly reasonable. I believe I've read somewhere that investment funds average less than 1 year. Warren Buffett probably has something like 1000 years, which I doubt I will get close to.
Taylor Wimpey
I expect to add to my TW holding at some point in the next few days, as funds become available. 85p is really getting silly. Forget about house prices for a moment: the UK's rate of housebuilding is unsustainably low. Over the medium term, the UK needs several hundred thousand new houses per year, and there are only a handful of builders. Provided TW survive, as I think they should, they will take a share of that business. If the margins aren't there, the builders will not bother building, and therefore they will be there.
Land of leather
I took a look at Land of Leather today. It is trading on a fantastically low price. I'm starting to think that even if it only has a 20% chance of survival, it might be worth a punt. Perhaps I'm crazy.
It's on a P/E ratio of less than 1 and has a yield of 65%. Nice.
It had about £16m in the bank at the end of January and has a market cap of £10m. But obviously there are many many problems with it... In particular: high fixed costs, very negative working capital (fantastic when growing, not so good in a downturn).
I'll continue to watch. I think it's probably going bankrupt.
Tuesday, 27 May 2008
Taylor Wimpey
Taylor Wimpey continues its downward plunge, from my purchase price of 130p down to a low of 90.5p today (recovering to close at 95.75p). Given my expectations of a house price plunge, followed by a UK recession, you might think that this share will continue to tank. But at what point should you buy? Sooner or later the value argument just becomes irresistable - but can that happen before the house price plunge has even occurred? Will TW plumb the depths of 50p, 20p, 10p?
This is my attempt to do an in-depth analysis of TW and identify where fair value occurs. Previously I have set a fair price of 215p on the share, based on expected earnings of £230m and a fair P/E ratio of 10. I still think that is not unreasonable, but due to its debt there is significant downside - perhaps that will outweigh any possible upside?
Worst case
Lets address the worst case first. This assumes that TW goes bankrupt, or is forced to sell itself to a Sovereign Wealth Fund, or similar catastrophic outcome. In that case, I will assume it will be valued at whatever its assets will achieve on the open market (which is not NAV).
Let's assume £200m for the brand. Well below what it's recorded as under Goodwill and Other Intangile Assets, but what can you expect? Brand loyalty to a housebuilder?
Sundry other non-current assets: £295m. Call it £250 since some of these may fall along with TW's value. That makes £450m for Non-Current Assets.
Current Assets: £538 for the simple stuff. £6018m inventory, split £119m I don't understand, £3879 land and £2020 development and construction costs. The land will be recorded at less than fair value - but let's assume a 50% drop on top of that down to £1440m. Development and construction costs you would hope that they could achieve most of... but let's take 80% for safety, to make £1616m. That's £3594 for Current Assets.
Assets = £4044m. Lets round that down to £4bn for simplicity's sake.
Now on to liabilities. These are easy - assume they all apply: £3964bn. Let's round up for simplicitly's sake, and we discover that in the worst-case Taylor Wimpey is worth precisely £0.
Best case
I'm not going to go too mad here, but let's assume the UK housing crash and/or recession don't happen. Prices stabilise at current levels, volume returns to normal. The US and Spain return to normality. Canada and Gibraltar remain robust.
Last year pre-interest, pre-exceptionals was £476m. Slap on some synergies, something for the recovery of the US and Spanish markets, and assume pre-tax, pre-interest earnings of £700m.
Interest payments of 6.5% on debt of £1.5bn (assuming they are not paying interest on payables) makes £100m. They actually paid £122m last year, so that's not realistic, especially since they took on more debt mid-year. Let's assume £150m finance costs, so £550m pre-tax.
Tax at 30% makes £385m post-tax.
Valuing on earnings... I still don't fancy a P/E ratio better than 10, so £3850m market cap. That's about 335p.
Middle case
Now for the tough part :-)
I'm going to make a whole series of assumptions.
This is my attempt to do an in-depth analysis of TW and identify where fair value occurs. Previously I have set a fair price of 215p on the share, based on expected earnings of £230m and a fair P/E ratio of 10. I still think that is not unreasonable, but due to its debt there is significant downside - perhaps that will outweigh any possible upside?
Worst case
Lets address the worst case first. This assumes that TW goes bankrupt, or is forced to sell itself to a Sovereign Wealth Fund, or similar catastrophic outcome. In that case, I will assume it will be valued at whatever its assets will achieve on the open market (which is not NAV).
Let's assume £200m for the brand. Well below what it's recorded as under Goodwill and Other Intangile Assets, but what can you expect? Brand loyalty to a housebuilder?
Sundry other non-current assets: £295m. Call it £250 since some of these may fall along with TW's value. That makes £450m for Non-Current Assets.
Current Assets: £538 for the simple stuff. £6018m inventory, split £119m I don't understand, £3879 land and £2020 development and construction costs. The land will be recorded at less than fair value - but let's assume a 50% drop on top of that down to £1440m. Development and construction costs you would hope that they could achieve most of... but let's take 80% for safety, to make £1616m. That's £3594 for Current Assets.
Assets = £4044m. Lets round that down to £4bn for simplicity's sake.
Now on to liabilities. These are easy - assume they all apply: £3964bn. Let's round up for simplicitly's sake, and we discover that in the worst-case Taylor Wimpey is worth precisely £0.
Best case
I'm not going to go too mad here, but let's assume the UK housing crash and/or recession don't happen. Prices stabilise at current levels, volume returns to normal. The US and Spain return to normality. Canada and Gibraltar remain robust.
Last year pre-interest, pre-exceptionals was £476m. Slap on some synergies, something for the recovery of the US and Spanish markets, and assume pre-tax, pre-interest earnings of £700m.
Interest payments of 6.5% on debt of £1.5bn (assuming they are not paying interest on payables) makes £100m. They actually paid £122m last year, so that's not realistic, especially since they took on more debt mid-year. Let's assume £150m finance costs, so £550m pre-tax.
Tax at 30% makes £385m post-tax.
Valuing on earnings... I still don't fancy a P/E ratio better than 10, so £3850m market cap. That's about 335p.
Middle case
Now for the tough part :-)
I'm going to make a whole series of assumptions.
- House price decline of 25% over 3 years.
- Volume well down on normal levels, averaging 60% of normal over 3 years.
- Taylor Wimpey cuts costs (they've already announced a 30% cut in staff numbers).
- Synergies are not fully achieved due to cut-back in build activity.
So, currently, on an average house price of about £200k, land costs are £50k, construction costs are £125k, and TW operating profits are £25k. In a tough market average house prices are £150k, land costs are £20k, construction costs are £110k, TW operating profits are £10k.
Current volume is about 22,000 houses per year, so assume a fall to 13,000. That means TW operating profit of £130m. Doesn't cover interest payments, but not too far off. TW depletes land banks to cover interest payments and achieve positive cashflow, paying off debt (cancelling the dividend).
But then: the market picks up. Prices are still subdued, but volumes begin to recover. TW is leaner and meaner. Volume is back to 20,000. Margins improve, so TW is now making £15k per house. Operating profit is back to £300m, which is £180m after interest payments (some debt has been paid back), and £125m after tax.
At a fair P/E ratio of 10, that means fair value is £1.25bn, or a share price of 120p (pretty much where I bought after the dividend was taken into account).
Conclusion
Dividing the future into 5 equally likely quintiles seems a fair way to calculate fair value. So here goes:
- Worst case. 0p.
- Rights issue. Middle cast diluted by 50% =60p.
- Middle case. 120p.
- Not as bad as feared. Earnings of £230m. 215p.
- Best case. 335p.
So that puts fair value as the average of those 5, which is 146p. This is significantly below my previously assessed fair value of 215p, and I am well aware that I'm probably being influenced by the current share price and indeed by the drop since I bought originally.
Comparing to the deciles that I based my previous valuation on, the difference is very much to the downside. Taylor Wimpey's leverage means that a wipeout is a very real possibility. My previous valuation gave it a likelihood of <5%,>
Having said all that, I think today's analysis is very much on the pessimistic side. Who knows whether the correct approach is more or less negative? Time will tell.
In the meantime I think I will happily purchase more at up to 100p (a 30% discount to my 146p valuation).
Thursday, 22 May 2008
Portfolio review
I'm getting to the point where I'm starting to run out of spare cash - and that's likely to remain the case for the next 6 months or so. So for the first time I might want to sell some shares in order to free up funds - with due caution about the costs of trading too often.
So, I think it's time for a portfolio review. For each of my shares I will do the exercise of working out the fair price, and comparing to the current price. Some shares I will want to invest more heavily in, and others I may wish to sell off.
RBS. Fair price (post-rights) 330p, representing a historical P/E ratio of 8 and a future P/E ratio of 10 on lower expected EPS of 33p per share (last year 41p). Anticipated dividend of 15p per share, representing a yield of 4.5%. Current price: 245p - a discount of 26%.
ZRX. Fair price 17.5p: a historical P/E ratio of 16, a future P/E ratio of 10 (based on anticipated EPS of 1.9p in 2009). Current price: 10.6p - a discount of 40%.
GNK. Fair price 800p: a P/E ratio of 11. Current price 533p a discount of 33%.
MXM. Fair price 230p: a historical P/E ratio of 12. Current price 135p for a discount of 42%.
TW. Fair price 215p: a future P/E ratio of 10 based on my expected earnings of £230m after the housing crash. Current price: 101p a discount of 53%.
QDG. Fair price 350p: a historical P/E ratio of 16 (on underlying earnings) and a future P/E ratio of 12. Current price 152p a discount of 57%.
EDD. Fair price 45p: a historical P/E ratio of 15 (assuming tax were paid at 30%), and a future P/E ratio of 11.5. Current price 42.5p a discount of 6%.
BDI. Fair price 170p: a historical P/E ratio of 12, and forward P/E ratio (in 2009) of 10. Current price: 138p - a discount of 19%.
High dividend trackers. Still reasonable dividend yield of 4-5%.
IAPD 1792p. IDVY 2395p.
Pure trackers: no idea of fair price.
IEER 2506p. LTAM 1582p. IFFF 2310p.
Summary
All of my shares remain undervalued. Prime candidate to be sold is EDD, but since it forms only a small part of my portfolio and the dealing charges are significant on such small transactions, I think I will continue to hold.
Prime candidates in which to invest further are Taylor Wimpey and Quadnetics. Taylor Wimpey will almost certainly win out since it can be held in an ISA.
The average discount across all my investments is just under 30%.
I hold a disproportionate amount of my funds in RBS, but at a discount of 26% I will continue to hold. I have RBS in two accounts: if it recovers to 297p (a discount of 10%) I will sell at least one of the lots if not both, assuming there are still bargains in the likes of QDG and TW.
So, I think it's time for a portfolio review. For each of my shares I will do the exercise of working out the fair price, and comparing to the current price. Some shares I will want to invest more heavily in, and others I may wish to sell off.
RBS. Fair price (post-rights) 330p, representing a historical P/E ratio of 8 and a future P/E ratio of 10 on lower expected EPS of 33p per share (last year 41p). Anticipated dividend of 15p per share, representing a yield of 4.5%. Current price: 245p - a discount of 26%.
ZRX. Fair price 17.5p: a historical P/E ratio of 16, a future P/E ratio of 10 (based on anticipated EPS of 1.9p in 2009). Current price: 10.6p - a discount of 40%.
GNK. Fair price 800p: a P/E ratio of 11. Current price 533p a discount of 33%.
MXM. Fair price 230p: a historical P/E ratio of 12. Current price 135p for a discount of 42%.
TW. Fair price 215p: a future P/E ratio of 10 based on my expected earnings of £230m after the housing crash. Current price: 101p a discount of 53%.
QDG. Fair price 350p: a historical P/E ratio of 16 (on underlying earnings) and a future P/E ratio of 12. Current price 152p a discount of 57%.
EDD. Fair price 45p: a historical P/E ratio of 15 (assuming tax were paid at 30%), and a future P/E ratio of 11.5. Current price 42.5p a discount of 6%.
BDI. Fair price 170p: a historical P/E ratio of 12, and forward P/E ratio (in 2009) of 10. Current price: 138p - a discount of 19%.
High dividend trackers. Still reasonable dividend yield of 4-5%.
IAPD 1792p. IDVY 2395p.
Pure trackers: no idea of fair price.
IEER 2506p. LTAM 1582p. IFFF 2310p.
Summary
All of my shares remain undervalued. Prime candidate to be sold is EDD, but since it forms only a small part of my portfolio and the dealing charges are significant on such small transactions, I think I will continue to hold.
Prime candidates in which to invest further are Taylor Wimpey and Quadnetics. Taylor Wimpey will almost certainly win out since it can be held in an ISA.
The average discount across all my investments is just under 30%.
I hold a disproportionate amount of my funds in RBS, but at a discount of 26% I will continue to hold. I have RBS in two accounts: if it recovers to 297p (a discount of 10%) I will sell at least one of the lots if not both, assuming there are still bargains in the likes of QDG and TW.
Monday, 19 May 2008
Quadnetics - Buy
Per my update the other day, I've just bought some Quadnetics.
QDG - Quadnetics Group - 19/5/08 - 149p - 7.5% of portfolio at purchase price
It may take some time to see a return from these, since I don't expect full-year results to be particularly good. I can wait.
QDG - Quadnetics Group - 19/5/08 - 149p - 7.5% of portfolio at purchase price
It may take some time to see a return from these, since I don't expect full-year results to be particularly good. I can wait.
Saturday, 17 May 2008
Leisure and Gaming
Another company that I think I may take a small position in: Leisure and Gaming. Its main business is as an Italian bookmakers. I've previously considered William Hill or Ladbrokes, but the price hasn't been attractive enough... LNG is cheap, and hopefully they are about to become quite profitable.
The last two quarters they've made a gross profit of EUR2.1m and EUR1.8m. Admin costs are about EUR1.3m per quarter, so I reckon that's a pre-tax profit of EUR1.3m in 6 months. Let's extrapolate over a year: EUR2.6m is about £2m. They've got so many losses they won't be paying tax for a while, but for the sake of argument assume 30%, giving a net profit of £1.4m.
Their market cap is £6m at 7p. A reasonable P/E ratio for a small illiquid accident-prone bookie like this is, I reckon, 8. £1.4m by 8 is £11.2m. So fair value is 13p. They are definitely cheap.
The last two quarters they've made a gross profit of EUR2.1m and EUR1.8m. Admin costs are about EUR1.3m per quarter, so I reckon that's a pre-tax profit of EUR1.3m in 6 months. Let's extrapolate over a year: EUR2.6m is about £2m. They've got so many losses they won't be paying tax for a while, but for the sake of argument assume 30%, giving a net profit of £1.4m.
Their market cap is £6m at 7p. A reasonable P/E ratio for a small illiquid accident-prone bookie like this is, I reckon, 8. £1.4m by 8 is £11.2m. So fair value is 13p. They are definitely cheap.
Quadnetics
I think I will invest in Quadnetics. It's another AIM company and my non-ISA cash is running a bit low, so I'll need to think carefully about whether to fund it from cash or sell some other shares.
Quadnetics
Quadnetics sell and support digital security systems. There are two parts to the business:
Quadnetics
Quadnetics sell and support digital security systems. There are two parts to the business:
- Quadrant Security Group are the service side.
- Synectics provide the software, systems and products.
Turnover
2005: £27m
2006: £50m
2007: £67m
2008 (e): £80m
Profit (underlying, pre-tax)
2005: £2.7m (margin = 10%)
2006: £3.6m (margin = 7%)
2007: £5.3m (margin = 8%)
Dividends
2005: 4p
2006: 5p
2007: 6p
Balance sheet
Strong, no debt. Should have about £7m of cash at year end.
Segments
Services account for £46m of turnover; Products and software £20m. Margins are slightly higher on the products and software.
Most of the sales are currently in the UK, but their North American operation is growing, and they have various toeholds elsewhere.
Prospects
Over the medium to long term, excellent. There are various short term issues that will lead to disappointing profits in 2008, but I see no reason for these to continue longer than that.
They expect turnover of £80m in 2008. Lets assume £90m in 2009, which doesn't seem unreasonable given their growth to date. Margins seem to hover around 7-10%, so let's assume 8%. That suggests pre-tax profit of £7.2m, so £5m after tax.
This company is in a reasonably recession-proof industry, it is consistently profitable, suveillance is clearly a growth industry benefiting from the some significant technical developments. It has had some problems and it seems to have a very heavy management structure, so I'm not going to give it a crazy target P/E, but a fairly modest 12. That suggests a value for the company of £60m.
At a share price of 149p it is currently valued at £25m. In my opinion that's a crazy discount, and I see no reason for it not to move up to 350p for a gain of 140%. And if the market continues to be crazy I have the dividends to comfort me in the meantime.
Monday, 12 May 2008
Must. Stop. Buying. Zirax.
Zirax
So over the weekend I decided that it was silly to sit on the sidelines while Zirax was selling at 12p a share, when I think it will be between 50% and 100% higher in 2 years, with really very little risk. I was hoping I could get some at 11p, but decided if it shot up I'd kick myself for missing out.
Logged on at 8:15am, got a quote for 11.475p. Bargain - I'd been happy to pay 12. Increased the size of my holding by 56% (50% by purchase price).
I noticed Yahoo quoting a bid/ask spread of 10/11 at about 10am, so logged onto my sharedealing account again to take a look. Got a quote for 10.83p, and bought my final tranch of shares. I'm now entirely happy with the number I hold, and won't be buying more unless there is another significant drop (say, to 9p).
Zirax is now 14.6% of my portfolio, my second-biggest holding after RBS:
RBS.L 22.8%
ZRX.L: 14.6%
IAPD.L: 8.9%
IDVY.L: 8.8%
GNK.L: 8.2%
TW.L: 7.5%
MXM.L: 7.1%
LTAM.L: 4.9%
EDD.L: 4.6%
IEER.L: 4.6%
IFFF.L: 4.3%
BDI.L: 3.7%
It's the inaugural meeting of my investment club on Monday 19th. I plan to present on Zirax - it will be interesting to get some other opinions.
Metal Tech
This is an extension to my rambling post the other day about Metal Tech. I'm writing it as I read the annual report.
Revenue up 15%.
Net loss of £375k - £3.8m writedown of Uzmetal, £1.25m writeoff of accidental Calcium Molybdate inventory. R&D up to £1m.
Cash down to £3m (from £8m)
£26m shareholder equity (not counting £1.5m minority interests)
Operating profit down from £8.5m to £6.2m.
"Minority interest" seems to be taking £600k even though the company made a loss. I think that suggests Metal-Tech owns > 50% of a subsidiary, and has fully integrated their income onto their books, but has to pay a percentage of the profit out the other shareholders. All a bit confusing. Why that's on the balance sheet as only £1.5m I don't know...
Woah, no wonder the accounts are confusing... I'm just reading the variety of subsidiaries and joint ventures that Metal-Tech is involved in. It might all be completely legitimate, but it's too confusing for me to understand, and therefore I'd be worried about investing.
So let's have a stab at how much profit it can make... add back in the £5m on writedowns, a bit more for the Mongolia plant coming fully on-stream, let's say £6m profit. "Minority interests" might take £1m of that, so the shareholder would get £5m. On a market cap of £25m, that's a P/E ratio of 5. So it's cheap at least... but I'm not sure that compensates for how accident-prone it is.
So over the weekend I decided that it was silly to sit on the sidelines while Zirax was selling at 12p a share, when I think it will be between 50% and 100% higher in 2 years, with really very little risk. I was hoping I could get some at 11p, but decided if it shot up I'd kick myself for missing out.
Logged on at 8:15am, got a quote for 11.475p. Bargain - I'd been happy to pay 12. Increased the size of my holding by 56% (50% by purchase price).
I noticed Yahoo quoting a bid/ask spread of 10/11 at about 10am, so logged onto my sharedealing account again to take a look. Got a quote for 10.83p, and bought my final tranch of shares. I'm now entirely happy with the number I hold, and won't be buying more unless there is another significant drop (say, to 9p).
Zirax is now 14.6% of my portfolio, my second-biggest holding after RBS:
RBS.L 22.8%
ZRX.L: 14.6%
IAPD.L: 8.9%
IDVY.L: 8.8%
GNK.L: 8.2%
TW.L: 7.5%
MXM.L: 7.1%
LTAM.L: 4.9%
EDD.L: 4.6%
IEER.L: 4.6%
IFFF.L: 4.3%
BDI.L: 3.7%
It's the inaugural meeting of my investment club on Monday 19th. I plan to present on Zirax - it will be interesting to get some other opinions.
Metal Tech
This is an extension to my rambling post the other day about Metal Tech. I'm writing it as I read the annual report.
Revenue up 15%.
Net loss of £375k - £3.8m writedown of Uzmetal, £1.25m writeoff of accidental Calcium Molybdate inventory. R&D up to £1m.
Cash down to £3m (from £8m)
£26m shareholder equity (not counting £1.5m minority interests)
Operating profit down from £8.5m to £6.2m.
"Minority interest" seems to be taking £600k even though the company made a loss. I think that suggests Metal-Tech owns > 50% of a subsidiary, and has fully integrated their income onto their books, but has to pay a percentage of the profit out the other shareholders. All a bit confusing. Why that's on the balance sheet as only £1.5m I don't know...
Woah, no wonder the accounts are confusing... I'm just reading the variety of subsidiaries and joint ventures that Metal-Tech is involved in. It might all be completely legitimate, but it's too confusing for me to understand, and therefore I'd be worried about investing.
So let's have a stab at how much profit it can make... add back in the £5m on writedowns, a bit more for the Mongolia plant coming fully on-stream, let's say £6m profit. "Minority interests" might take £1m of that, so the shareholder would get £5m. On a market cap of £25m, that's a P/E ratio of 5. So it's cheap at least... but I'm not sure that compensates for how accident-prone it is.
Saturday, 10 May 2008
Metal Tech
I was having a look at some chemical companies other than Zirax, to see what I could see. Metal Tech looks very distressed - could there be a bargain there?
Here are a few notes in advance of this year's annual report (due Monday).
Market cap £25m at 65p
2006 full year
Revenue £60m
Profit £7m
Shareholder equity £28m
2007 interims
Half way through the year equity was up to £33m.
Everything was going well.
2007 full year
Results are not yet out, but trading updates are full of negative noises:
The weak US dollar could continue for some time (and could get worse).
The Uzbekistan problems will obviously lead to writeoffs and lower profits.
The Mongolia problem is hopefully just a short term blip.
The real question though: what will they cock-up next?
Here are a few notes in advance of this year's annual report (due Monday).
Market cap £25m at 65p
2006 full year
Revenue £60m
Profit £7m
Shareholder equity £28m
2007 interims
Half way through the year equity was up to £33m.
Everything was going well.
2007 full year
Results are not yet out, but trading updates are full of negative noises:
- "The Company expects to meet market expectations in respect of revenues but to fall significantly short of profit expectations".
- The fall of the US dollar has hurt them - revenue is in dollars, costs aren't.
- Its Uzbekistan operations has gone bankrupt. Cost of writing this off and associated legal costs: about £4m.
- It has accidentally created some Calcium Molybdenum in Mongolia, which needs reprocessing. Total value at risk: £6m.
The annual results should be out on Monday 12th May. I will have a look - it sounds interesting! This company appears to be quite accident-prone, but if they're a bargain, they're a bargain...
FutureThe weak US dollar could continue for some time (and could get worse).
The Uzbekistan problems will obviously lead to writeoffs and lower profits.
The Mongolia problem is hopefully just a short term blip.
The real question though: what will they cock-up next?
Wednesday, 7 May 2008
Right sector, right time, wrong pub?
Greene King
I know it's only a bit of fun, looking at short term share prices, but I'm amused to note a 15% increase on the Greene King share price since I bought. 520p up to 600p (seemed to drop to 590p in the auction at the end of the trading day). So did I buy the right company at the right time?
No. Greene King underperformed all the other pub chains. Enterprise Inns was up 30%, Marston's and Punch were up significantly further than Greene King. So right sector, right time, wrong company. Maybe next time...
Enterprise Inns was up on news that it may become eligible to turn itself / part of itself into a REIT. Frankly I don't care. I didn't buy Greene King shares in the hope that it would reorganise itself, just in the hope that it would continue being a good pub company. I fully expect the irrational market to mark it back down to 500-520p over the next month or two.
Brilliant headline
My favourite headline of the year:
http://sharecast.com/cgi-bin/sharecast/story.cgi?story_id=2087171
"Consumers gloomiest since records began". Wow, that must be a long time. "...since the Nationwide began collecting data in May 2004..." Nice.
Gratuitous misquote
While we're at it, my favourite misquote of the year:
"Chairman Tony Howland-Rose was quoted as referring to major shareholder Jinchuan as ‘a right bunch of cookies'. The quote should have been 'a bright bunch of cookies'. The Australian apologises for the error."
I know it's only a bit of fun, looking at short term share prices, but I'm amused to note a 15% increase on the Greene King share price since I bought. 520p up to 600p (seemed to drop to 590p in the auction at the end of the trading day). So did I buy the right company at the right time?
No. Greene King underperformed all the other pub chains. Enterprise Inns was up 30%, Marston's and Punch were up significantly further than Greene King. So right sector, right time, wrong company. Maybe next time...
Enterprise Inns was up on news that it may become eligible to turn itself / part of itself into a REIT. Frankly I don't care. I didn't buy Greene King shares in the hope that it would reorganise itself, just in the hope that it would continue being a good pub company. I fully expect the irrational market to mark it back down to 500-520p over the next month or two.
Brilliant headline
My favourite headline of the year:
http://sharecast.com/cgi-bin/sharecast/story.cgi?story_id=2087171
"Consumers gloomiest since records began". Wow, that must be a long time. "...since the Nationwide began collecting data in May 2004..." Nice.
Gratuitous misquote
While we're at it, my favourite misquote of the year:
"Chairman Tony Howland-Rose was quoted as referring to major shareholder Jinchuan as ‘a right bunch of cookies'. The quote should have been 'a bright bunch of cookies'. The Australian apologises for the error."
Tuesday, 6 May 2008
Sunday, 4 May 2008
Greene King
I'm considering buying some shares in Greene King. This post is my attempt to convince myself that it's a good buy.
Financials - 2006/2007 - pre-exceptionals
Revenue £917.5m
Operating profit £218.1m
Profit before tax £139.8m
Net profit £97.8m
Net tangible assets £208.3m, but this is not based on current land values. By October this was down to £97.5m due to buybacks and acquisitions.
Breaking things down by segment:
Pub company
Revenue £546.0m
Costs £435.3m
Profit £110.7m
Pub partners
Revenue £164.0m
Costs £89.3m
Profit £74.7m
Brewing
Revenue £91.1m (£126.8m inc. internal revenue)
Costs £68.1m
Profit £23.0m
Belhaven
Revenue £116.4m (£118.0m)
Costs £93.1m
Profit £23.3m
Central
Finance costs £88.4m
Tax £37.3m
Short term forecast
Could be problematic. A serious downturn in the UK is going to hit beer sales somewhat, but will more seriously affect dining, which Greene King is increasingly exposed to. It's heavily indebted, so the question is: can it survive a sharp recession?
Let's assume a 20% fall in brewing sales, and assume that 2/3 of the brewing costs are fixed. I'm not sure what proportion of Belhaven's profits are brewing-related - suspect not a lot, so lets focus on the main brewing segment. A 20% fall in revenue and a 6.7% fall in costs means a profit of £9.3m.
Let's assume a 40% drop off in pub revenue, on the basis that much of this is food-related. Again, let's assume 2/3 of costs are fixed. That's a £50.2m loss on the pub company.
Applying that to Belhaven: that makes an £11m loss.
Pub partners, let's assume a 20% fall in rent, and a 10% fall in costs. That's a profit of £50.8m.
So overall, in what I think is a pretty disastrous scenario, the company could make an operating loss of £1.1m. Finance costs are about £82m, so that makes a total loss of £83.1m. They have £98.5m cash on hand, so a one-year performance like that wouldn't cripple them. Obviously we'll assume they cut the dividend to zero, and cease capex.
Let's assume things start to pick up gradually:
Beer sales recover to 15% down on current levels. Brewing profit = £12.7m.
Pub revenue recovers to 25% down. Pub company loses £1.9m. Belhaven makes £1.9m.
Pub partners rent remains 20% down, since tenant landlords will still be suffering. They make £50.8m.
So that makes £63.5m operating profit. Still about £20m short of their finance costs. However, if the slow times are continuing for a number of years, fixed costs can probably be reduced by making staff redundant. Chances are that can make up the shortfall, and so during a slow recovery they can just about break even.
So a sharp recession could be very painful, but Greene King should survive. We can therefore value the company on its long-term prospects.
Long term forecast
Long term Greene King can grow through increasing its market share and acquisitions. EPS can increase through buybacks. I think the pub business is probably static over the long run.
As we've seen, Greene King should be able to cope during a recession, and should perform fairly strongly during the good times. At a P/E ratio of 11, it can have a dividend yield of 3% and still reinvest two thirds of its profits in growing the business.
Fair valuation
I see no reason not to take current profits as the norm, so applying a P/E ratio of 11 to £97.8m profit, I put a value on Greene King of £1075.8m, or in other words a share price of exactly 800p (not fixed - honest).
Current share price is 521.5p, so a discount of 35% on what I consider fair value.
Conclusion
I should put my money where my mouth is and buy. I suspect we will see further falls in the share price, but this would be an opportunity to buy more.
Financials - 2006/2007 - pre-exceptionals
Revenue £917.5m
Operating profit £218.1m
Profit before tax £139.8m
Net profit £97.8m
Net tangible assets £208.3m, but this is not based on current land values. By October this was down to £97.5m due to buybacks and acquisitions.
Breaking things down by segment:
Pub company
Revenue £546.0m
Costs £435.3m
Profit £110.7m
Pub partners
Revenue £164.0m
Costs £89.3m
Profit £74.7m
Brewing
Revenue £91.1m (£126.8m inc. internal revenue)
Costs £68.1m
Profit £23.0m
Belhaven
Revenue £116.4m (£118.0m)
Costs £93.1m
Profit £23.3m
Central
Finance costs £88.4m
Tax £37.3m
Short term forecast
Could be problematic. A serious downturn in the UK is going to hit beer sales somewhat, but will more seriously affect dining, which Greene King is increasingly exposed to. It's heavily indebted, so the question is: can it survive a sharp recession?
Let's assume a 20% fall in brewing sales, and assume that 2/3 of the brewing costs are fixed. I'm not sure what proportion of Belhaven's profits are brewing-related - suspect not a lot, so lets focus on the main brewing segment. A 20% fall in revenue and a 6.7% fall in costs means a profit of £9.3m.
Let's assume a 40% drop off in pub revenue, on the basis that much of this is food-related. Again, let's assume 2/3 of costs are fixed. That's a £50.2m loss on the pub company.
Applying that to Belhaven: that makes an £11m loss.
Pub partners, let's assume a 20% fall in rent, and a 10% fall in costs. That's a profit of £50.8m.
So overall, in what I think is a pretty disastrous scenario, the company could make an operating loss of £1.1m. Finance costs are about £82m, so that makes a total loss of £83.1m. They have £98.5m cash on hand, so a one-year performance like that wouldn't cripple them. Obviously we'll assume they cut the dividend to zero, and cease capex.
Let's assume things start to pick up gradually:
Beer sales recover to 15% down on current levels. Brewing profit = £12.7m.
Pub revenue recovers to 25% down. Pub company loses £1.9m. Belhaven makes £1.9m.
Pub partners rent remains 20% down, since tenant landlords will still be suffering. They make £50.8m.
So that makes £63.5m operating profit. Still about £20m short of their finance costs. However, if the slow times are continuing for a number of years, fixed costs can probably be reduced by making staff redundant. Chances are that can make up the shortfall, and so during a slow recovery they can just about break even.
So a sharp recession could be very painful, but Greene King should survive. We can therefore value the company on its long-term prospects.
Long term forecast
Long term Greene King can grow through increasing its market share and acquisitions. EPS can increase through buybacks. I think the pub business is probably static over the long run.
As we've seen, Greene King should be able to cope during a recession, and should perform fairly strongly during the good times. At a P/E ratio of 11, it can have a dividend yield of 3% and still reinvest two thirds of its profits in growing the business.
Fair valuation
I see no reason not to take current profits as the norm, so applying a P/E ratio of 11 to £97.8m profit, I put a value on Greene King of £1075.8m, or in other words a share price of exactly 800p (not fixed - honest).
Current share price is 521.5p, so a discount of 35% on what I consider fair value.
Conclusion
I should put my money where my mouth is and buy. I suspect we will see further falls in the share price, but this would be an opportunity to buy more.
Subscribe to:
Posts (Atom)