Monday, September 24, 2012

Mon 24 Sept - JJB, STAF, MBH, FIF, TAST

Good morning. JJB has finally bowed to the inevitable, and gone bust, shares suspended as worthless. It's certainly been an extraordinary process, with the group clinging on for literally years, multiple fund-raising & 2 CVAs, all to no avail. Very traumatic for staff & suppliers, but surely nobody is surprised? A pre-pack Admin, with sale of the profitable shops & closure of the others, is now only days away.

My favourite recruitment company, Staffline (STAF) has announced another bolt-on acquisition today, of an agency focused on drivers. No financial details are given, so one assumes it must be small. This is a good business model - as such agencies are cheap to buy, and usually earnings enhancing. Moreover, much of the purchase price is paid from the acquiree's own profits, through earn-outs.

Results from Michelmersh Brick Holdings (MBH) are pretty underwheming, and they also warn on full year profit, indicating only breakeven. The shares are only down 5%, perhaps reflecting two things - firstly that MBH's Balance Sheet is underpinned by 15 acres of surplus freehold land pending disposal at above book value. Secondly, that management make an intriguing comment saying that they can survive the current downturn, but "will thrive when conditions improve". However in the meantime they have a helluva lot of debt on their books, so think I'll pass on this one.

Lighthouse Group (LGT) is below my £10m mkt cap cut-off point, at £7m mkt cap (5.38p/share) but interests me because of the battle by shareholders (led by ShareSoc) to fight off proposals from management to de-List. Shareholders won, and the Chairman resigned, as he should.

Interim results from LGT are a bit softer than last year, with EBITDA falling 23% to £740k, so roughly double that to £1.5m for the year - not bad for a £7m mkt cap. The balance sheet is apparently strong, with £10.6m in net cash. Although it should be noted that the cash is not really surplus as such, since current assets of £18.5m (including the cash, obviously) is only in balance with total liabilities of £18.1m, which includes £7.1m in provisions. Therefore the cash is essentially spoken-for, and this is reinforced by the fact that they have passed the interim dividend. So people running away with the idea that this is a cash-rich company need to look at the figures again more realistically. It's also a heavily regulated area, which puts me off - creates too much uncertainty, with a Govt that is thrashing around looking for direction - who knows what hare-brained ideas they (or the EU) will come up with next, adding more layers of cost & complexity?

Results from cake maker Finsbury Food Group (FIF) aren't bad, considering the weak economic situation & ever-present competitive pressures, combined with cut-throat tactics to screw their suppliers from the supermarkets. The mkt cap is only £18m (at 34p/share), and they managed adjusted diluted EPS of 7.8p, so a PER of only 4.4. But you know what's coming next, yes they have tons of debt, £33.9m actually, or 63p/share. I note that over a quarter of their profit is eaten up (!) by just the interest payments. That makes it too high risk for me, and not particularly cheap actually once you work out the EV is £52m.

Me-too pizza/pasta restaurants, "Wildwood" are owned & run by Tasty plc (TAST). It's one to keep an eye on, as although the mkt cap of £31m is a pretty rich valuation (putting them on 20 times this year's forecast profit, and 15 times next), retail roll-out shares always look expensive early on. However, the point is that once you have a format which is profitable (as indeed Tasty have), then it's a straightforward roll-out - i.e. you carry on opening more & more shops until you peak at something like 500 sites, which is about as many as the UK can comfortably carry.

My only reservation is, how many more pizza/pasta chains serving near-identical product, can the UK support? There's Pizza Express, Strada, Prezzo, Pizza Hut, and many more. Not to mention thousands of independents.

Also, I know from personal experience, that retail roll-outs are far from straightforward, and things go wrong at some point. It's relatively easy to run a chain of up to about 30 shops/restaurants with minimal Head Office staff, but once you get up to about 50, you need a significant infratructure of area managers, HR & training, accounts/admin, internal audit, etc. So Tasty still have a lot of work to do, and it will be quite a few years before they reach a significant size, but I shall watch with interest from the sidelines. 

However, I wouldn't be surprised to be kicking myself for not having bought these shares in a few years time, when they are a national chain.

OK, that's it for now. Have a good day!


  1. Is "Wildwood" Tasty's only brand or is it one of a stable of brands?

    Anyway, you got me thinking, are you aware of what Phil Fisher says in the "When to Buy" chapter of Common Stocks and Uncommon Profits? If this were a growth share, how far along PF's description do you think Wildwood/Tasty is?

  2. Hi Jeffrey,
    Tasty also has a small number of "dim t" Asian-style restaurants. I note that Sam & Adam Kaye are serial restaurant operators, having been involved with Prezzo, Ask, and Zizzi. So they know their onions (literally!).

    To answer your question, I'm not familiar with Fisher's writings, care to enlighten us?!
    Cheers, Paul.

  3. In the "When to Buy" chapter, he discusses first the prevailing wisdom of the time, which tried to anticipate stock market crashes and avoided buying shares if one seemed to be on the horizon. He said instead, for his kind of share, when a company is rolling out a new product line or technology etc. (one that will change the company's fortune). First, for years, nothing happens (because of research or product development that doesn't bring in any profits at all), then there might be a pilot plant, then there will be their first commercial plant (by which time the share price will have risen in anticipation), then there will inevitably be teething problems but the market is always surprised (and the share price collapses), and this would be the time to buy. Then the teething problems are fixed, the new product, if it turns out to be a success, the company "makes it" and is a hold for many years.
    A restaurant chain isn't exactly the same, but will have analagous events: perhaps a few "pilot" stores, then a roll-out, then teething problems, and success... or perhaps maybe not?

    Since the first post, I've gone and found Maynard's article/writeup. Perhaps "dim t" went to "pilot" stage, then management thought they would try something different and went for Wildwood instead? Fisher says that a good management should always try out new things, and some will inevitably turn out to be failures.

    I'm in the middle of reading Fisher's book right now, so I'm just trying to fit what I've read into the context of a real case (if it fits).

    1. Hi Jeffrey,
      Thanks for that. I also like buying growth companies after they have disappointed & seen a big drop in the share price - as almost all growth companies either take longer to commercialise a new product/service than anticipated, and there are always hiccups along the way. As long as the Bal Sheet is strong enough for them to survive, then it's a buying opp.

      Tasty look interesting, in that they are managing to make a reasonable (almost 10%) operating profit margin already, which tells me that they have a good format which can be scaled up. They can then make buying efficiencies as they expand through bulk purchasing of ingredients, etc.

      My reservation is that they've already done about 4 Placings, which dilutes the upside. Although this is a great time to be expanding, as there are terrific deals available from landlords on good sites at affordable rents, and with long rent-free periods or reverse premiums (to pay for the fit-out).

      Also I'd like to visit one of their restaurants to see what the product is like. Their online menu is virtually a copy of Prezzo/Pizza Express, very dull - same old same old. If it was a bit more differentiated from so many competitors I could get excited, but it isn't.

      Cheers, Paul.