Friday, August 31, 2012

Fri 31 Aug - RDW, IFP, CTR, TNI, TRK, RTN, DSN

Good morning. Got computer problems again, so am having to use my backup laptop, the one which doesn't have any pound sign key, and a sticky "c" key, and which is as good at getting going in the morning as me (i.e. not very). All figures are therefore in GBP unless otherwise stated. Soldiering on ...

Interesting to see a couple of RNSs re a possible cash bid for Redrow (RDW) at 152p. Strangely though, that's effectively a nil premium to yesterday's closing price of 151p. Either a lot of insider dealing has been going on, or the bidder has been hoovering up stock in the market before bidding (is that legal? Not sure. Perhaps anyone who knows for certain could comment at end of this piece).

Interestingly, 2 of the 3 potential bidders (Bridgmere & Tosca) own together 54% of Redrow already, so this just goes to show that investing in any company with a large, dominant shareholder, is very risky - there's always the risk that they will try to push through a takeover on adverse terms, or otherwise line their own pockets at the expense of other shareholders.

I rarely invest in companies where any shareholder or management own more than about 25%, as it then becomes too high risk for this reason. Certainly where one shareholder has over 50%, you're just a sitting duck as a minority shareholder, totally reliant on their goodwill.

With UK house prices so precariously high, I'm surprised at the strength in the sector. But there was a commentator on CNBC yesterday who was saying that with more reasonably-priced land now filtering through to completions, margins in the sector are improving.

My view is that the Coalition have really missed a trick with house-building. Due to uncontrolled mass immigration under NuLab we now have a chronic surplus of people (which has caused a shortage of housing), and the price to buy or rent is now out of reach for most ordinary people in the South of England. Therefore more are renting at exorbitant rates (funded by Housing Benefit) for often unsuitably cramped housing. Just look at how private landlords are subdividing already small properties into even smaller "open plan" [i.e. shove the kitchen in the lounge, and hope the tenant won't care] or "studio" flats - i.e. a cubby hole with a loo.

It's a terrible situation which combined with ever lower real wages (due again to uncontrolled immigration from Eastern Europe eradicating upward pressure on wages for entry level jobs), and a generation of English kids who would rather be at Uni studying media studies, or on Benefits, now means the next generation are seeing living standards below those of the previous generation, and little hope. They are infantalised as adults, being forced to live at home with parents sometimes into their 30s, and needing the Bank of Mum & Dad to provide the large deposit now necessary to buy property. Plus the final salary pension scheme is a luxury their parents receive, but they won't. It's all wrong! So as long as this continues, expect more riots, and an increasingly divided & unhappy society. I'm no socialist (far from it), but even I can see things are going badly wrong, with society completely polarising into the haves & the have nots. That never ends well. We should be giving the next generation a viable future, with hope & aspirations. Instead we're doing the opposite.

What we clearly need is a massive programme of new Council House building, to give young people affordable accommodation and an incentive to work. Leaving the EU, closing the borders, and assimilating the people we've got (instead of encouraging them to form totally separate communities) would also be a good idea. While the Govt is borrowing at less than 2%, surely this is a golden opportunity to borrow cheaply to finance a long-term infrastructure boom, rather than borrowing to finance the day-to-day overspending of a  bloated & inefficient public sector.

Why do we elect these intellectual pygmies into office (or power as they now call it). What happened to public service? David Cameron & Nick Clegg wouldn't even make the shortlist for a CEO position at a mid cap, due to lack of experience and wisdom. Yet they are allowed to run the country, purely because they present well in front of a camera. Pathetic! You get the Govt you deserve I'm afraid. So it's difficult to see things getting better any time soon with these clowns in power. And the alternative is possibly even worse - Miliband & the bunch of fools who got us into this mess in the first place.

If we'd had people with vision in office, then by now we would have a construction boom going on, with 2m new affordable Council Houses & Flats being built to house our over-sized population, which would have pulled GDP growth up to 2-3% by now. Sure it might take the top off house prices, but seeing as Council Housing is for rent, not for sale, I don't think that would be a major negative. We got through negative equity in the early 90s alright, and it flushed out the system very well in the long run. Trouble is today, nobody wants to take any pain, so policy is all about smoothing over the necessary adjustments, which just extends the pain over a longer period.

IFG Group (IFP) looks potentially interesting. The 148m mkt cap is now sitting on 50m net cash, of which 30m is to be used for share buybacks. The continuing business (which runs SIPPs) must surely be under pressure from low cost providers like Hargreave Lansdown?

Charles Taylor (CTR) interims are flat on an adjusted basis with EPS of 9.6p and interim divi of 3.25p. Assuming no seasonality, then that puts them on a PER of about 10. Although net debt is quite high, at about half the mkt cap, so it doesn't look cheap when you adjust for that.

Blast, am running out of time, market about to open flat. If I hadn't done that rant about Council Houses & my laptop was working better, there would be more time to look at some other results. Think I'll carry on & publish a bit later today, as there's nothing time sensitive here.

I see that Trinity Mirror (TNI) announced that Simon Fox (CEO of HMV) is joining as their new CEO. On the plus side, he certainly has plenty of experience in dealing with a declining sector at HMV. In my opinion he very skilfully steered HMV through a pretty disastrous situation, in particular keeping banks & suppliers onside (with a very clever deal to involve suppliers in the equity of HMV through granting them Warrants in return for improved terms & continuing credit).

On the negative side, he didn't really come up with anything much on the digital side at HMV (although whether there was any possibility of doing anything there is a key question - the answer is probably not).
The worry must also be that he'll blow the cashflow at TNI on poor acquisitions. What we need instead is some really inspired initiatives within TNI to drive up sales & margins by combining digital & print.

If he gets some excitement going about the future potential of TNI, then that could trigger a massive re-rating. Remember that the shares are on a current year PER of only 1.5! And the pension fund deficit is roughly equal to freehold property, so is effectively covered. Meanwhile, net debt is being repaid so fast that it will be cleared completely by 2014! Yet still every article published about TNI refers to it being deeply in debt, in trouble, etc. It's utterly bizarre the way the more that untruths are repeated, the more they become the accepted norm, with only me & one or two other private commentators actually screaming, "you're wrong!", and demonstrating why with the figures.

Anyway, we'll clean up on TNI shares in my view, if the new CEO comes up with a strategy that is credible & excites the market. We're already up over 50% from the recent low, so bring it on!

Torotrak (TRK) has been promising jam tomorrow for almost 15 years now, despite which the optimists are still in control, valuing it at £59m despite tiny turnover & perpetual losses. The long-standing CEO has resigned to pursue some Govt initiative. Of course there's the usual flannel about how he's leaving Torotrak at such an exciting time, etc etc. I suppose it becomes second nature to come out with stuff like that after you've spent so much of your career doing it, but in my view actions speak louder than words.

I'm impressed by strong interims from £650m mkt cap The Restaurant Group (RTN). Despite a difficult economy, they're reporting positive LFL sales growth, strong margins 10.8% operating margin (over 10% operating margin is the litmus test, in my view for a retailer or food/drink), and a positive-sounding outlook (although they don't comment on market expectations).

It reinforces my long-held view that good businesses do well, even in economic downturns, by giving customers what they want at a reasonable price, and by gaining market share from weaker competitors. RTN seems just such a company. It looks to have manageable net debt, although I do notice that their trade creditors figure looks rather stretched. So I suspect they are partly financing the business by paying suppliers on extended terms, or it would appear so anyway from the large deficit on net current assets. Given the profitability, it's not a problem, but the underlying net debt position looks to me somewhat artificially suppressed in this way.

On a current year forecast PER of 12.4 and with a 3.9% forecast divi yield, I think this looks like a quality growth company at a reasonable price, which in my opinion would be ideal for a long-term portfolio like a SIPP.

Densitron (DSN) is below my usual £10m mkt cap cut-off point, but it's one that I vaguely recall owning shares in years ago, and have a feeling I might have met management at some point? Hence why I glanced at their results this morning.

The £6m mkt cap (at 9p/share) makes information display systems. Their results this morning are disappointing, with costs of opening an Indian office taking them down to about breakeven. However, interesting to note that the outlook is positive, saying they "remain hopeful of achieving the market expectation for 2012", due to strong orders.

If so, that would put it on a PER of about 5, and with a divi yield of about 8%. Not bad. Also they mention a 1.25 acre strip of land at Blackheath, which they are seeking planning permission for. That must be worth a material amount for a £6m mkt cap company. So could be an interesting special situation, for someone prepared to do the detailed research?

OK that's it for now. Have a lovely weekend all!


  1. Excellent rant about housing and the next generation. Couldn't agree more with you there. As the father of 2 young boys, I share many of the worries you have highlighted.

  2. trouble is govt hands are tied due to excessive political correctness - if they spend money on council house building someone else will complain that they are not getting the cash. Govt is still short termist, despite claims otherwise. No balls to make a long term decision.

  3. Agree with your comments on Trinity Mirror. (See Alex DeGroote, the Panmure analyst certainly is bullish on this stock.

    Have made money on Densitron in the past but the land you mentioned has been going through the planning process for a few years....will look into it again.

    Thanks for this great blog.

  4. I agree uki220. It makes me so mad to think that the Govt is paying out many £billions in Housing Benefit so that people on low incomes can live in over-priced, usually poor quality private rental flats. Surely it would be better to instead invest that money in building decent, affordable Council Housing (and then give people the right to buy after they have been a tenant for say 10 years)?

    But in the meantime the population continues rising rapidly. I am in favour of SOME immigration, because we need to replace the people who leave, and I also firmly believe that a certain amount of immigration adds diversity. But it's a numbers game, and at the moment having a constant massive inflow of people is just unsustainable. All public services are stretched to breaking point. I would like to see a balanced policy on immigration, based on a one in, one out quota. Then at least we can get on top of all these issues.