Fri 24 Aug - SGO, AGA, AVCT

Good morning, glad it's Friday as these 7am starts really don't agree with me! Some good news though, I've got my proper laptop back, so can now use £ signs again before numbers, phew!

It's striking again this morning just how many resource sector RNSs there are. Of course I don't cover that sector on this Blog. But I do wonder, with the massive proliferation of resource stocks on the market, if it's a sign of a bubble? Certainly when the Chinese construction bubble bursts, then demand for resources is bound to contract sharply, so maybe that could be the trigger? That said, if you know what you're doing in that sector, it's very lucrative. Or has been so far anyway.

Although its market cap is only £3.2m, SocialGO (SGO) has come up with an innovative plan to avoid insolvency. They have done a marketing deal with a company the CEO also happens to own, which will now pay a fee of £50k per month to cover all SGO's overheads, whilst getting 60% of all turnover above £50k p.m. in return. Clever deal, which looks more of a face-saving exercise. However, it does mean SGO is now far less likely to go bust, although shareholders are having to give away 60% of the upside in order to secure the company's future. Interesting to see whether the market will react positively or negatively. I suspect it will be seen positively at this valuation.

I held some shares in AGA Rangemaster (AGA), the posh cookers company, a while back, until I did more research into the scale of their pension deficit - which is horrendous, so I sold. The results this morning on a trading level are a bit soft, but the outlook for the full year sounds positive, with growth expected.

However, this pales into insignificance when you look at the pension fund deficit, which in common with all final salary schemes, has seen liabilities rise sharply due to a fall in the discount rate (driven by corporate bond yields, which in turn have been forced down by QE).

This is not helped by the appalling mess that accounting for pension funds has become - so that a series of wildly different, and contradictory figures are published by most companies for their pension funds - the accounting deficit is completely different to the actuarial deficit, the numbers swing up & down unpredictably & subject to subjective decisions (like what discount & expected return rates to use), etc. It's a total mess.
NARS has even published misleading accounts which show a substantial pension surplus, even though there's a £26m deficit! (see my earlier article detailing that problem, which I forwarded to the FRC for investigation).
Some companies quote deficits before tax, others quote them after tax, there is no logic or consistency to pension fund disclosures as they stand.

The problem with AGA's pension fund is that it's vast (£760m assets, and a £6.8m surplus in 2011 turned into a £42m deficit in 2012). Moreover, the triennial deficit at 31 Dec 2011 is now expected to be higher than the previous £161m deficit in 2008! See what I mean about the figures being contradictory!

This is massively material, since the company is only likely to make a profit of £7m this year, and has a market cap of £46m, figures which are dwarfed by the pension scheme.

I tend to focus on the overpayments agreed with the pension trustees, to get an inkling of the real situation. In the case of AGA, the pension fund will have stripped out most of AGA's net cash, £16m this year alone, then there is a breathing space until 2015, when £4m is due. Overpayments then recommence at £10m p.a. from 2016-2021, and a lump sum of £30m in 2020.

These are pretty scary numbers, and in my opinion make AGA completely uninvestable. The whole business now exists purely to service the pension fund, and there is no prospect of a dividend for the foreseeable future (which in any case would need pension fund approval).

The only hope for shareholders is that the performance of the business recovers so well that it makes more than enough profit to service the pension deficit, and/or that interest rates rise sufficiently to eliminate the deficit through a higher discount rate. But do I want to bet on that happening? No! These shares should be much, much lower than the current price, and I think when people realise the extent of the pension deficit problems, AGA shares could go down significantly in price. I'd only be tempted to have a punt at about a quarter of the current price. So you have been warned!

Avacta Group (AVCT) puts out a positive-sounding trading update, with detail about how sales are up (although they are coming from a low base). The £23m market cap says that trading is in line with expectations, but since the consensus is for another loss this year, I can't get excited about this. It's the sort of share where you need to have done deep research on the products, markets, and management. If they are potential blockbusters, then great. If not, then why pay up-front for profits that haven't happened yet?

More problems with Morningstar (the service I use for my data), seriously thinking of not renewing my Premium subs - it's painfully slow to respond - 5-15 seconds, sometimes longer, every time you input a ticker. On a fast computer. Absolute crap. Hemscott was brilliant, and they ruined it when they acquired it & moved us over to this junk. Can anyone recommend a good alternative site with reliable data? (especially broker forecasts & 5 years+ historic data). My Morningstar subscription expires in 2 weeks, and there's no way I'm paying out £150 or whatever it is to renew, when the service is this poor.

OK that's it, markets opening in 2 mins, FTSE 100 expected to be down 15. Have a terrific day & weekend!