Friday, October 12, 2012


Good afternoon. Another quiet day for results, but that gives me a chance to have a look at a couple of companies that are new to me.

Firstly, Mission Marketing Group (TMMG) has announced an acquisition costing up to £3.2m, partly funded through a small Placing at 28p to raise £1.2m. This looks like a good deal, since it adds £0.7m annual profit to the group at little cost, so is earnings enhancing. Encouragingly, the Placing is only at a slight discount to the prevailing 30.75p mid-price (for a £22.3m mkt cap).

I quite like the look of this group, as the fwd PER is only 6, and I'm beginning to feel that this could be the right time to buy into cyclical things like marketing/advertising companies, in anticipation of an economic recovery that could be around the corner.

TMMG has historically had too much debt, but that is being brought down, although still a tad too high for comfort at £12.3m (about 2 years' profit), but facilities are available until 2015, so it doesn't look too risky. No divi though. Could be one to watch, although I'm not tempted to buy just yet.

I've used the pullback in May Gurney (MAYG) shares today to buy some more at 143.5p. See my report here for more details of a company that looks great value to me (PER<6, yield>6%, based on current year consensus broker forecasts, hardly any net debt other than ring-fenced finance leases), but as always please DYOR! No recommendations are ever made here, this is just a personal interest site where I give my honest opinions on shares, warts & all!

Things are generally feeling much more bullish for small caps at the moment - irrespective of what the main indices are doing, lots of oversold small caps are waking up & seeing serious re-ratings. I love these interludes in the market, which are great opportunities to make lots of money by banking big profits & recycling the money into other shares that have not yet moved. I've made serious money from this approach in the past, let's hope I can do it again (and hang on to the money this time!).

Of my main positions though, I'm not banking any profits on either IndigoVision (IND) or Trinity Mirror (TNI), both of which have done spectacularly well in the last few weeks.

IND still looks cheap to me, given that it will be paying 75p in divis in Nov 2012, so the net buying price after those divis is only around 450p. I reckon they are heading for 50p EPS this year (double last year), so that could be a PER of just 9 for a growth business that seems to be taking off, due to the new CEO. That's the upside case. If you think EPS will remain constant or only rise a bit, then the shares are probably fairly valued. Your money, so you decide!

I've bought more TNI recently, since it seems to have astonishing strength after each rise - where you would expect a large pullback, it instead just consolidates & then starts pushing up again. In my opinion, 100p+ may not be that far away. Yet it would STILL look cheap at 100p, since forecast EPS for this year & next year are 25p+, so that's a PER of just 4 at 100p, or 2.6 at today's price!

Perceived wisdom is that TNI is drowning in debt - everything I see published about TNI in other papers & magazines repeats this line - e.g. Shares mag was the latest to peddle garbage about TNI on page 41 of this week's issue (volume 14, issue 41), where they state;

"Despite their best efforts to make the transition from paper to digital, the heavy borrowings carried by regional newspaper publishers Trinity Mirror (TNI) and Johnston Press (JPR) leave them hamstrung."

This is complete nonsense, and just shows that the writer, Simon Keane, doesn't know what he's talking about! Or at the very least, he didn't bother to read TNI's and JPR's accounts.

If he had read their accounts, he would have discovered that JPR is indeed mired in debt it is very unlikely to ever be able to repay (indeed its cashflow barely covers the interest alone). However, he also would have discovered that TNI is repaying its debt so fast that it should achieve a net cash position some time in 2014! Bit of a difference, in fact total opposites!

Sure, TNI has a pension deficit over & above its net debt. But the latest pension deficit has reduced somewhat, and is roughly the same as the net book value of TNI's freehold property. One is a long-term asset, the other is a long-term liability, of similar size, so just what is the problem then?

I have sliced a few more profits on HOME at around 104p. Why? Because its interim figures due out on 24 Oct are finely balanced - they will be very close to breakeven (as H2 is the stronger half, with Xmas in it), and on huge turnover that could mean it could tip either way into a small profit or a small loss. A small loss might spook the market, and trigger a sell-off back to 70-80p, so on balance I'd rather take some money off the table now at 104p and have spare cash to buy back in cheaper after the interims, if it pans out like that.

Also, seeing as HOME have denied me access to the analyst meeting, and by any measure I'm an analyst, sod 'em. Hasn't exactly made me feel inclined to be supportive. Plus the shares are up 50% from recent lows, so top-slicing a profit is always sensible after such a decent move up in my opinion.

Finally, I note that Manganese Bronze Holdings (MNGS) shares have been suspended today pending an announcement. Doesn't look good, sadly. This is the maker of iconic london black cabs (with the back-breaking rear suspension, which attempts to send its passengers into orbit over every speed bump taken at more than 5mph).
The company's finances have looked desperately stretched for a year or two now, so I suspect the shares are probably now worthless.


  1. HOME.. your view on the off-balance sheet leases please. which dwarf any positives of cash + debtor book.

    1. Hi King Arthur.

      When I was a retailing FD, the only leases I worried about were the ones where we traded at a loss. The profitable shop leases are assets, not liabilites.

      Retailers shop leases should not be seen as liabilities, they are actually just future operating costs. So if you tell me that HOME has £2.5bn in rent liabilities, I would retort that they also have about £50bn in future turnover from those shops over the same period.

      Leases only become onerous if the shop concerned is loss-making. In which case you are required to make an onerous lease provision on your balance sheet.

      The lease on a profitable shop is actually an ASSET, not a liability - you can sell the lease for a substantial premium if the shop is in a desireable location, and has a reasonable rent.

      Regards, Paul.

  2. OK, thanks. The penny slowly drops.
    Is the market attitude a question of how many leases expire how soon, in the transition to the internet? the AR says [of Homebase]
    '..examine the opportunity for store closures, relocations or downsizes as part of the ongoing management of the portfolio as either leases expire or lease break clauses are due, of which there are around 65 over the next five years.'
    I notice they decided that 8m they had provisioned for gone-wrong shops could be taken back into circulation.

    1. Hi King Arthur,
      You asked,
      "Is the market attitude a question of how many leases expire how soon"

      Yes that is a very important factor. Most retail leases are 15-25 years at inception, although the trend is towards shorter leases, so perhaps 10-15 years now.

      So if you have a problem shop that is losing money because the rent is too high, then there are 2 options. Either you just continue trading until the lease expires, and absorb the losses, then hand the shop back (or negotiate with the landlord for a lower rent at lease expiry).
      Or, you try to assign the lease to another retailer. This can often be done by paying them a "reverse premium", i.e. giving a cash payment to another retailer to take the lease off your hands (this has to be authorised by the landlord too, and he will refuse if the proposed new tenant has a weak balance sheet).

      In practice, closing under-performing shops, relocating, etc, is just part of the normal operations of any retailer. They try to exit loss-making shops, and find more profitable ones, on an ongoing basis.

      What interested me about HOME, is that when I discussed this with their FD at the last AGM, he said that on average HOME is securing a 16% rent REDUCTION on lease renewals. That's pretty encouraging, as it means that loss-making shops can be turned into profitable ones (or closed) when the lease expires.

      An example of a retailer where they have problem leases that they cannot get out of, is French Connection. So they will just have to trade at a loss until leases gradually expire over the next 10 years or so.

      So expect HOME to continue reporting cost savings, as they manage the rental costs down gradually. This will partially offset competitive pressures that you mention, such as the internet.

      Regards, Paul.