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.
Saturday, 17 May 2008
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.
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