Southern Cross update

I've posted an update on Southern Cross over at Shareworld.  There have been a few rumours flying around recently - the Sunday Times reported that their banks were willing to waive covenants (which is good, since I reckon they are within a whisker of breaching them), and the Sunday Telegraph thinks that Blackstone is considering a takeover bid.  That really would be news - Blackstone is the group that originally built the group and engineered the sale and leaseback that has left it with its present difficulties.

Their full year results are out on the 9th December, and I think we can probably expect some sort of update at that time.  In the meantime their shares will probably continue their rollercoaster ride.

Risk

After the recent Rok debacle I thought it might be a good time to look at the risk in my portfolio.  It may be shutting the stable door after the horse has bolted but, at the risk of stretching a metaphor too far, there are still 20 other horses in my stables and some of them are looking skittish.

I'm going to split my portfolio into a few broad areas.  From least risky upwards:

1. Safe.  No cause for concern
2. Solid.  Some concerns, but nothing major.
3. Speculative.  Known problems, but they should pull through.
4. Risky.  Acute problems - real risk of wipeout.

1.  Safe (36% of portfolio)

First into this category goes Berkshire Hathaway.  A book value of $150bn gives me a lot of confidence (even if $80bn of that is goodwill and "other").

NWBD is next on the list.  For this to suffer losses you would first have to assume that NatWest has gone bankrupt.  Then you would have to assume that its owner, RBS, would refuse to rescue it - i.e. either its losses are catastrophic, or RBS itself was bankrupt.  Given that didn't happen in 2008-2009, I'm happy that it is unlikely to happen in the future either.

LLPC follows close behind.  Although it is more exposed than NWBD (its dividends are currently suspended), it escaped the recent crisis with the loss of only 2 years' dividends - in the scheme of things that's peanuts.

Tesco makes it into this category thanks to its strong balance sheet (a fair amount of debt, but mostly long-term funding, backed with an extensive property portfolio), consistently strong profit margins, international diversification and a business that should be around for the long-run.

2.  Solid (31%)

British American Tobacco and Diageo make it into the top-end of this category.  They don't quite qualify for my top rank: BATS because worldwide tobacco use will eventually decline, and Diageo because of its heavy debt load.  Apart from those concerns, these are strong businesses with healthy profit margins, strong brands, loyal customers and international diversification.

I'm going to bundle in two of my 3 ETFs here: IDVY and IAPD.  These are both focused on high-yield shares, which I think on the whole gives you a pretty solid set of companies.  

GlaxoSmithKline looks, on the face of it, like a pretty healthy business, with massive margins, a decent balance sheet and good international diversification.  But they face reduced healthcare spending in developed countries, plus expiring patents and generic competition.

National Grid just about makes it into this category because of its reliable, regulated income stream.  My concern is that it has an enormous heap of debt, and I don't really understand the risks it could face.  

3.  Speculative (27%)

IEEM is definitely an ETF that fits better into the speculative category.  It invests primarily in large cap shares in emerging markets, and has historically been pretty volatile.

Greene King comes in at the solid end of my speculative category.  It has a lot of debt, and faces long-term headwinds in terms of fewer customers and higher taxes on alcohol sold in pubs.  But it makes a decent profit,  its debt is funded a long way out, and most of its pubs are transitioning well from "wet-led" to family-friendly pubs serving food.

BP has one big problem: the legal/political consequences of the GoM blowout.  Beyond that, it's a very solid, profitable business, with a strong balance sheet.

De La Rue is also a great business facing one problem - the loss of reputation/business from this year's quality issues.  Excluding that, it is consistently profitable, with good margins, a solid balance sheet, and is a world leader in their field.

I have a clutch of software companies that I think fall roughly here in my list: QDG, MXM and BDI.  QDG is not hugely profitable but has a solid balance sheet.  MXM has a very strong cashflow but quite a bit of debt.  BDI has a great product but is not massively profitable.

4.  Risky (6%)

Game Group comes at the more solid end of my risky category, but faces a number of issues: very low margins, a squeeze from supermarkets cherry-picking the most popular products, and online competition from the likes of Amazon and play.com.  Their balance sheet is not fantastic, so one bad Christmas could get them into rather a lot of trouble.

Carpathian is a business that will definitely be worthless in a year or so.  The only question is how much cash shareholders can extract in the meantime.  If they manage to sell their assets for the prices they expect, then shareholders should do OK - but a further deterioration in Eastern European property could rapidly see them become worthless.

Southern Cross comes right at the bottom of my list.  Tiny margins, declining occupancy, consistent unprofitability, hugely expensive rental contracts with guaranteed annual increases and reduced spending by local authorities all conspire to make this a share only for the brave.

Rok
So where would I have put Rok in my list if I'd written it a few weeks ago?  I think it would have gone in the Risky category, probably just above SCHE.  But that's why it was trading on a P/E ratio of less than 3.

Pan African Resources

Screening for some small, profitable, debt-free companies I recently came across Pan African Resources.  I've posted my thoughts on shareworld.  Since writing the article a week ago I've been dithering, and the share price is up more than 10% in the meantime.  I haven't yet decided whether to buy a few shares or hope for a better price.

Rok = Connaught

And here was I thinking Rok was a different kettle of fish to Connaught.  Turns out I was wrong.  1.2% of my portfolio disappears in a puff of smoke, and I have a new worst ever investment.

The next Warren Buffett?

Is Todd Combs the new Warren Buffett?

Bond's fishy deal

Bond International Software announced the acquisition of VCG today and the share price went up 24%.  That's a clever trick - companies usually overpay for acquisitions, and therefore their share price usually suffers when the news becomes public.

The reason seems to be that they have funded the transaction by issuing new shares at 75p each - a premium of almost 50% over the previous day's close of 53p.  But all is not as it seems.

The subscriber to all these new shares is Constellation Software, who now have an economic interest in 31% of Bond's shares.  Constellation's announcement is here.  As part of the deal Constellation have bought a large number of non-voting shares, and agreed not to buy further voting shares for 5 years - which seems a device to prevent them launching a takeover.  Why that's in the best interests of Bond's shareholders rather escapes me - if they want to make an offer, making me a profit in the process, that would seem to be rather good for me.  That's the first thing that smells bad to me - directors worrying about their own interests rather than shareholders.

The second thing is that over 50% of the money stumped up by Bond is going to (you guessed it) Constellation Software, in their guise as a holder of VCG promissory notes.  It seems that the vast majority of the VCG purchase price is going into paying off their debt, with only a small amount left for their equity.  The debt of a company like that is usually trading at a big discount to par - so I suspect the quid pro quo here is: you pay a premium for our shares, and we'll redeem your bonds at par.

Perhaps I'm too cynical, but I can't help thinking that there is more to this deal than meets the eye.

The beautiful game

I haven't researched any individual companies lately, but I do have a new article on shareworld about investing in football clubs.  In summary - I think it's a rubbish idea.

In other news: LLPC now trades higher than the offer price of 94p that I was so irritated to miss out on last year.  So I had to wait almost 12 months, but it got there in the end.  On the other hand if I'd managed to sell LLPC there was a decent chance I would have put the proceeds into NWBD - and that's returned 55% in the same timeframe.  Hmm...