Thursday, November 29, 2012

Thu 29 Nov - DXNS, API, LTHM

It was good to get a dose of Warren Buffett on CNBC yesterday, he's still firing on all cylinders, and full of common sense as usual. He's ignoring the fiscal cliff in the US, as he just said that it's irrelevant to long-term investors. I absolutely agree, to a certain extent the same is true of the Eurozone crisis - these are issues that have to be fixed, and will be fixed, one way or another.

I rarely watch CNBC these days, as the discussion is so trivial - endless commentators lining up to talk about whether today is a "risk-on, or risk-off day!", which to a longer term investor like me is just meaningless background noise.

It's not a small cap, but I had a quick look at results from Dixons Retail (DXNS). It looks wildly over-priced to me, at almost £1bn mkt cap. Stripping out intangibles from their Balance Sheet gives net tangible assets to over negative £500m! Since most of their fixed assets are worthless too, then knock those off, and you've got a Bal Sheet knocking on the door of £1bn in the red!

The P&L doesn't look too great either - huge turnover, but negligible profits. It does generate pretty good operating cashflow though, but how long for? Electrical retail is surely one of the worst possible areas to be in, since the homogenous product is ideal for sale on the internet. I can't see how Dixons will survive in the long run with massive High Street overheads against leaner internet competitors, although the demise of Comet will undoubtedly have been behind the strong share price performance recently.

Home Retail Group is vastly better value in this sector I think, with its astonishingly strong Balance Sheet, and wider diversity of product offering.

API Group (API) is an interesting situation - a nice business, on a low valuation, that has been formally up for sale for quite some time now. Part of me thinks that if it were likely to be sold, it would have happened by now, but perhaps their pension deficit (not huge, at £7.2m) has complicated things?

They state today that "a number of indicative offers have been received", but no indication on price.

I like the look of their interims this morning, for 6m to 30 Sep. Operating profits are up 33% to £5m on turnover slightly up to £58.8m. So a solid profit margin there of just under 10%, which indicates reasonable pricing power, something I tend to look for in investments.

Basic EPS is up a very strong 39% to 5.0p.
They do state that H2 will be softer, so I'm guessing that 8.9p broker consensus looks about right. So the shares seem good value at about 70p.

I'm tempted to buy some, but might sit on my hands and wait to see if the bid process falls through. If it does, then could be a chance to buy at a usefully lower price. But then I would miss any bid if one does happen. Difficult choice!
When in doubt, do nothing is my instinct, so I'll probably sit on the sidelines for now, and watch with interest.

There's a very thorough Equity Development commissioned research note on API here.

James Latham (LTHM) interims to 30 Sep look OK - flat against last year. Not got time to go though in detail, but the PER of 9 looks about right given that they have a pension deficit, it's a low margin business, and the outlook statement sounds pretty nervous. Forecast divi yield of 3.8% looks reasonably attractive too, and I seem to recall they have property assets too?

Right that's all I found of interest today, back tomorrow!

Regards, Paul Scott.


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