End of the Rogue Analyst
I have decided, with regret, to close this site because I’ve realised I just don’t have enough time to produce quality research. Many thanks for reading.
Haynes Publishing interims (HYNS)
Weakness in the dollar and US consumption mean flat results
Haynes Publishing (HYNS), which produces the eponymous do-it-yourself car maintenance manuals, came out with interim results today. Pre-exceptional net profit was down from £2.053m to £1.854m for the six-month period.
The main culprits are weak US revenues, down by 3 per cent in local currency terms, and the weak dollar, which meant that US revenues fell by 10 per cent when translated into sterling. That, along with an unusually high tax charge, accounts for most of the fall in profits.
There were some positives. Core UK trading was reasonable, and shutting down the French operation has had an immediate effect on net operating cashflows, which were strong at £3.44m.
The slight cut in the interim dividend, from 5.5p to 5p, is perverse given the £4.5m of net cash on the balance sheet. It can be read in two ways, neither of them good. One is that Haynes is severely worried about the economic outlook and wants to hoard cash. The other is that it plans to splash out on an acquisition.
Short-term, it is hard to get excited. The slight improvement in the dollar/sterling exchange rate should help the second half, but the outlook for consumer spending on both sides of the Atlantic looks poor. With EPS unlikely to exceed 25p for the full year, I won’t be surprised if the shares drift down into the 200-250p range.
Long-term, I am still attracted by the strong competitive position, and potential to make the balance sheet more efficient. Tangible assets of 147p per share and a 5.5 per cent dividend yield should support the shares.
I’ve sold a few shares in Haynes today to reduce my exposure to the US consumer. I still think Haynes is solid in the long-term so I’m inclined to hold the rest.
Disclosure: I own shares in Haynes Publishing
Sharemark Auctions Jan 25th
Dairy Farmers of Britain looks set for record highs
There are monthly auctions for a range of stocks on Sharemark tomorrow, notably the Dairy Farmers of Britain loan stocks, Countrywide Farmers, and the weekly auction for Share plc.
There has been an unusual level of bidding in all of the Dairy Farmers stocks and they look likely to hit record highs. The 2012 stock is indicated at 80p, the 2016 at 70.5p and the new 2017 stock at 85p.
I can only speculate as to why. One possibility is the chance of an indirect buyback by the company; another is just that a few more investors have discovered the stocks.
I consider DFOB a good, but not a great investment at these levels, and don’t intend to bid. I’d remind anyone who is considering it that, aside from the usual questions about financial merit, these stocks are small, illiquid and hard to sell again once you have bought them.
I also don’t understand why the 2017 stock is bid higher than the 2016 when it has a lower yield-to-maturity. Grounds for caution, I think.
Good news, though, not least for farmers who belong to the DFOB co-operative.
Disclosure: I own shares in Dairy Farmers of Britain Loan Stock 2012, 2015 & 2016.
Fun & games in the markets
This - with a bit of luck - is when the value style pays off
I apologise for the lack of updates recently - particularly given the liveliness of the markets - but I’ve had a lot of other things going on.
I don’t have anything useful to say about the overall market. My general view remains that equities are highly valued - on cyclically adjusted price-earnings or Tobin’s Q - and don’t price in a slowdown. I wouldn’t be surprised if they go substantially lower over the next year or two.
I don’t plan to do much. I invest long-term and will live with the market’s ups and downs. In general, however, I try to maintain a low market beta.
I hope everybody’s portfolio is bearing up. I’ve taken some pain on large caps such as Old Mutual and BT, but smallcap value positions such as Haynes and CML have barely been affected so far. I may review Haynes given its exposure to the US consumer.
After Harry Potter (BMY)
What is publisher Bloomsbury going to do in 2009?
For the last decade, investment in Bloomsbury has been a game of ‘Guess when the next Harry Potter book will be published’. But after FY2007, which will have the HP7 sales, Bloomsbury is going to have to find a new wonder franchise.
Two telling numbers are the 2005 profit before tax of £20m (when there was a Harry Potter book) and the 2006 PBT of £5.2m (when there was not).
Book publishing generates cash, but requires a surprising amount of capital, and rarely delivers high returns. Bloomsbury seems to be well-managed, but in a hit-based industry with little overall growth, there is just as much chance of disaster as of finding a new boy wizard.
Yesterday’s statement said that FY2007 trading has been strong. But the consensus forecast for 2008 is about 10p per share, which puts the shares on around 16x earnings, while price-to-tangible-book is about 1.65x. The balance sheet is cash heavy but there is as much chance of wasteful acquisitions as there is of a return to shareholders.
The joker is JK Rowling deciding to write Harry Potter 8, but with a consumer downturn apparently on the way, Bloomsbury looks to expensive for me.
Preference shares in 2007
A horrible year - but might 2008 be worse still?
I noticed this broker list of UK preference share performance in 2007. The first number is the fall in the offer price between 3rd Jan 2007 and 14th Jan 2008; the second number is the yield at today’s offer price.
Abbey National 10 3/8% pref -13.3% 7.03%
Aviva 8.75% pref -13.4% 6.90%
General Accident 8.875% pref -14.6% 7.03%
HBOS 9.25% -17.2% 7.16%
HBOS 9.75% -17.1% 7.16%
Investec Floating Rate pref -10.9% 8.25%
National Westminster 9% pref -17.7% 7.12%
Britannia Building Soc 13% PIBS -18.1% 7.18%
Coventry Building Soc 12.125% PIBS -13.4% 7.00%
Halifax 9.375% sub. bonds -19.1% 7.02%
West Bromwich 6.15% PIBS -11% 6.97%
The first thing to note is that if UK inflation really equals the Bank of England’s 2 per cent target over the long run then these prefs offer a 5 per cent real return. That is quite attractive.
The second thing to note is that they are all issued by financials. I’m not too worried about any of these companies going bust. But I do think it is almost certain that, in the wake of Northern Rock, there will be legislation that makes bank subordinated debt far more risky.
I’m quite interested in these prefs on a five-year investment horizon, but I think I’ll wait and see what happens when bank insolvency legislation is passed.
Paragon rights issue (PAG)
About as deeply discounted as it is possible to get
Paragon has announced a 25 for 1 rights issue at a discount of 90 per cent. For every £1 share you own in Paragon you get to buy 25 new ones at a price of 10p.
This outcome was pretty much inevitable given the continuing credit squeeze and I’d expect shareholders to support it. There is residual value in the company and this should allow Paragon to extract it.
It’s also interesting to note another rights issue, this one from Intermediate Capital Group (ICP), which was also quite predictable given the shutdown in the credit markets. I wonder who’s next? My guess is London Scottish Bank (LSB).
What I don’t understand about Paragon is how UBS can earn a (presumably massive) fee to underwrite an offer at such a large discount. There’s almost no chance that the shares will fall 90 per cent (leaving them stuck holding the issue) so what risk are they actually taking?
New companies and goodwill
One reason not to invest in start-ups
Yesterday I used the example of a Japanese restaurant to try and show how the goodwill value of a new business builds over time.
“Imagine that I open a restaurant. I start with zero goodwill. But over time people pass the restaurant and remember where it is - that is goodwill. It may get included in guidebooks - that is goodwill. It will build up a base of repeat diners - that is goodwill. And they may recommend it to friends - that is also goodwill.”
“It gets even more complicated. Say I have a Japanese restaurant in a town of 50,000 people. It can only support one Japanese restaurant. Therefore, just by opening the restaurant, I will discourage another entrepreneur from doing the same. I’ve acquired a local monopoly that will make my restaurant more profitable - in asset terms, that is goodwill.”
I think this is one reason why so many business plans are over-optimistic: they think in terms of an established operation that has built up goodwill. A new restaurant will take time - often a long time - to build up custom.
For me, this is a roundabout way of saying that I don’t like startups. On the other hand, I think there can be attractive buying opportunities when startup companies disappoint their investors, often just as they are getting properly established.
What is goodwill?
The stuff that makes a company worth more than the sum of its parts
I wrote yesterday (and not very clearly, reading again) about how the problem with an asset-based valuation of a company is goodwill. Accurate valuation of the tangible assets can be tricky, but it’s possible. It’s the difference between the book value and the market or acquisition value - what the goodwill of the business should be - that is so hard to analyse.
I always puzzle about what this stuff called goodwill is. You might break it down like this:
(1) Tangible assets undervalued on the balance sheet - e.g. land or investments held at historic cost. Not really goodwill.
(2) Intangible assets, definable and created by investment, but not measured on the balance sheet. Examples include brands, as a result of advertising, intellectual property rights, software etc
(3) Contracts. For example, if I agree to buy 1m barrels of oil at $50, and the price rises to $100, that contract has a positive value. More generally, all the contractual relationships of a company have a value, which fluctuates according to market conditions. A contract could give rise to negative goodwill, if I have an obligation to sell lower than my cost of production.
(4) None of the above. This is the really interesting category. Imagine that I open a restaurant. I start with zero goodwill. But over time people pass the restaurant and remember where it is - that is goodwill. It may get included in guidebooks - that is goodwill. It will build up a base of repeat diners - that is goodwill. And they may recommend it to friends - that is also goodwill.
It gets even more complicated. Say I have a Japanese restaurant in a town of 50,000 people. It can only support one Japanese restaurant. Therefore, just by opening the restaurant, I will discourage another entrepreneur from doing the same. I’ve acquired a local monopoly that will make my restaurant more profitable - in asset terms, that is goodwill.
It gives rise to a number of fascinating questions and propositions:
- Will goodwill keep rising automatically over time as more people get to know my restaurant? I.e. is an old business always worth more than a new business?
- If someone else opens a new restaurant next door, their goodwill will go up, and mine will go down. If I have goodwill does that always mean negative goodwill for somebody else?
- How is it possible to maximise the goodwill in a business?
- And, most important for a financial analyst, is there any way to value it?
Why worry about goodwill?
The mysterious stuff that underlies most of the stockmarket’s value
OK, so the accounting definition is simple enough: goodwill is the difference between the acquisition price for a company (or its market value) and the value of its assets.
But the question that often bothers me is what this weird, intangible stuff called goodwill actually is? How do you value it? Does it depreciate over time? And if I have more of it does that mean that someone else has less? I’m going to ramble about the subject (ignoring a lot of very good academic research) this week.
This is the problem I want to address. The standard way to value of a company is to estimate the discounted present value of its future cashflows i.e. the value in today’s money of all the cash that the company will pay out in the future.
The trouble with this approach is that future cashflows have no anchor. The only way to estimate them is to assume that profits grow at some rate over time - which is what investment bank analysts usually do - but this is a pretty poor guide to reality. CFROI analysis tries to get around this by relating future cashflows to capital invested.
Another way to look at it is that the discounted present value of a company’s cashflows should also be equal to the present value of its assets, if those assets are correctly defined: a company’s cashflows are simply the return on its assets. If it were possible to value a company’s assets correctly, it should be an attractive way to value the whole company.
The problem is that so much of what a company is worth is goodwill - the stuff that is not captured on the balance sheet - and is therefore hard to measure.
keep looking »I’ll write a bit more tomorrow about what that stuff might be. In the meantime, if you can recommend good links or research on the subject, it’d be much appreciated.
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This website is about my investments and opinions on shares. It does not constitute advice and you should not rely on any material in this website to make, or refrain from making, any decision or take, or refrain from taking, any action. Where I have positions in a share I mention I will disclose them. Rogue Analyst is not authorised under the Financial Services and Markets Act 2000.
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