Good morning! A few large caps (e.g. RBS) and small caps that I've never heard of reporting today. Arcontech and Silanis both fall below my £10m mkt cap minimum.
Disaster-prone MBL Group (MUBL) puts out a trading update. At least bits of it are still trading, and it sounds like there could be some hope - they indicate that they have cash, don't need bank funding, and pay up-front for most product. Mkt cap now sub-£1m. Issues of trust, and Directors pay (still high despite being reduced 53%). Their original CD/DVD distribution business failed when it's main customer (a large supermarket) decided to start buying direct, so an example of a small cap that relied too heavily on one major customer.
Athelney Trust (ATY) is a peculiar, tiny investment company, just £2.3m mkt cap! I don't normally cover these, but Athelney has always impressed me for (a) being able to maintain a Listing at a very low cost, and (b) having an interesting and outspoken narrative with its results. Results today follow the usual pattern. He comments that although the macro picture is worrying, he is continually impressed with UK Listed company results, increased divis, etc. Very much my opinion too. All around us is doom & gloom, especially in the media, yet most companies reporting are doing just fine. A strange situation.
Really boring results this morning, I'm tempted to go back to bed. But, soldiering on, minnow Newmark Security (NWT) puts out fairly poor results, but mainly due to one-offs. Mkt cap only £3m, so below my £10m minimum threshold.
A fairly flat open for the FTSE 100 is forecast by the futures.
Large caps reporting results today include RBS, Rentokil, Inmarsat, and Int Cont Airline Group.
Will be interesting to see if Trinity Mirror (TNI) can make it a third consecutive day of big rises. I'm still a buyer, even after a move from 26p to 37p, because yesterday's interim results were superb - profits actually up 11%, and the outlook was strong, indicated as out-performing market consensus.
Reducing net debt by £40m to £180m in just 6 months is astonishing, and illustrates the point I've been making for a while that TNI generates so much cash that it will pay off virtually all its net debt by June 2014, less than 2 years away. It will then be in a position to pay potentially enormous dividends (EPS should still be 20p+ by then). So despite the long term decline of the sector, in my view it clearly has many years of highly profitable operation to go, hence at 37p the shares are still ludicrously cheap - a PER of about 1.3, even after a roughly 40% rise in share price this week.
I'm not worried about the pension fund deficit, as overpayments of £10m p.a. are agreed, and in any case TNI holds freehold property of equivalent value. Therefore in June 2014 what I would do, if I were there CEO, would be to pay off the pension fund in full using the property assets, then pay out 100% of EPS in dividends. That would justify a share price of 100-200p, which in my opinion is fair value.
I've been saying for a while that the market has got it completely wrong with TNI, and it looks like my view is beginning to gain traction out there as people begin to look at the facts & figures, rather than pre-judging with the glib, "newspapers are finished" mantra. No they are not (not yet anyway)! Plenty of people out there still like to buy a newspaper, and that means many years of very profitable business for TNI. Plus if they can develop a decent digital business under a new CEO that is imminent, then it could become doubly interesting.
Finally, if you haven't yet joined ShareSoc then I strongly urge you to do so (it's free for basic membership). The people running it are volunteers, genuinely passionate about shareholder rights & democracy, tackling greedy and immoral Directors (sadly far too many of those all around us), and generally supporting the interests of private investors through other activities such as lobbying Govt.
Here is their website - www.sharesoc.org
ShareSoc played a big part in defeating the De-Listing attempt by Lighthouse recently. The Directors there should be sacked, for their arrogance and incompetence in not consulting shareholders properly before instigating value-destroying attempt to De-List.
I think ShareSoc's huge success in defeating this move will send a warning sign to all Directors that De-Listing is not an easy option, and woe betide Directors who try to go down that route of shareholder value destruction.
Have a good day, and an enjoyable weekend.
Friday, August 3, 2012
Thursday, August 2, 2012
Thu 2 August 2012 - Morning Report
Morning! Apologies for yesterday's lack of morning report, I overslept.
This morning my main focus will be on Trinity Mirror (TNI) Interim results, as it's my 2nd largest position.
All I can say is, "wow!". They have delivered a superb set of results, and not only that, have given an "ahead of current expectations" outlook for the full year. It's going to be a very good day I suspect, with a large increase in share price now justified from the ridiculously low valuation here, which I've been banging on about for months (search for earlier article here giving chapter & verse).
The interims show adjusted EPS is UP from 11.8p to 14.6p, so we should be on track for EPS of c.30p for the full year. So that puts the shares on a PER of just one. Yes, one!
Turnover only dropped 4% to £356m, which combined with £20m in cost savings, allowed adjusted operating profit to rise 11% to £52.5m. And just look at that profit margin (no calculator to hand), but it's well into double figure percentages of turnover. For a sector supposedly in terminal decline, it's one helluva profitable decline!
Is it swamped with debt? Actually no. Net debt has reduced dramatically in the last 6 months, from £221m to £181m. Hopefully now the market might wake up to the reality that net debt is being rapidly repaid, which will leave TNI debt-free and able to pay potentially huge dividends from around 2 years' time. That is the big opportunity here.
The pension funds deficit is under control, having fallen from £230 to £210m in the 6 months. It's a long-term liability, with overpayments of only £10m p.a. being paid at the moment. In any case, the impact of QE on reducing bond interest rates has artificially raised all pension fund deficits, as the discount rate has fallen, leading to the present value of future liabilities rising sharply. In time that could correct itself as interest rates rise again.
Scare stories in the FT about the pension fund trustees and Pensions Regulator preparing to play hard-ball and even bankrupt TNI have turned out to be malicious nonsense. Shame on them for printing it - which halved the share price from 50p to 25p back in March 2012.
It looks as if someone in Canary Wharf was texting their family & friends (and their brokers) from the toilets yesterday, because these results show why the share price suddenly rose 17% yesterday afternoon! Based on these superb figures, and insane valuation of a PER of 1, it wouldn't surprise me to see TNI shares double in price from their current 30p, and still be cheap. My long term target is 100-200p/share, which is only a PER of around 3-6, hardly demanding!
There is no news on a new CEO yet, and dividends also remain under review, but not done yet. That is the priority, even a 1p dividend (3.5% yield - not to be sniffed at) would only cost about £2.6m, and trigger an additional £2.6m overpayment into the pension funds. That is easily affordable, and shareholders are getting cheesed off at being left out in the cold whilst other stakeholders (bond owners, pension funds) are looked after.
Moving on, £70m mkt cap promotional products company 4imprint (FOUR) has put out respectable-looking interims today. Underlying EPS is up an impressive 25% to 8.6p. Looks like they must have an H2 weighting, as full year broker consensus is for 22p this year, and 27p next year. So the shares look reasonable value at 267p (10 times next year's forecast). It has £11.4m net cash too.
I'm meeting the management today, at their 9am analyst meeting, so I'll post more about this company later. But it looks potentially interesting.
Poor results from Robert Walters (RWA), with interim profits more than halved to just £3m. Difficult to justify a £139m mkt cap on the back of these numbers.
Right, that's it folks. I'll be trying to buy more TNI at the open, but I suspect lots of other people will be too!
This morning my main focus will be on Trinity Mirror (TNI) Interim results, as it's my 2nd largest position.
All I can say is, "wow!". They have delivered a superb set of results, and not only that, have given an "ahead of current expectations" outlook for the full year. It's going to be a very good day I suspect, with a large increase in share price now justified from the ridiculously low valuation here, which I've been banging on about for months (search for earlier article here giving chapter & verse).
The interims show adjusted EPS is UP from 11.8p to 14.6p, so we should be on track for EPS of c.30p for the full year. So that puts the shares on a PER of just one. Yes, one!
Turnover only dropped 4% to £356m, which combined with £20m in cost savings, allowed adjusted operating profit to rise 11% to £52.5m. And just look at that profit margin (no calculator to hand), but it's well into double figure percentages of turnover. For a sector supposedly in terminal decline, it's one helluva profitable decline!
Is it swamped with debt? Actually no. Net debt has reduced dramatically in the last 6 months, from £221m to £181m. Hopefully now the market might wake up to the reality that net debt is being rapidly repaid, which will leave TNI debt-free and able to pay potentially huge dividends from around 2 years' time. That is the big opportunity here.
The pension funds deficit is under control, having fallen from £230 to £210m in the 6 months. It's a long-term liability, with overpayments of only £10m p.a. being paid at the moment. In any case, the impact of QE on reducing bond interest rates has artificially raised all pension fund deficits, as the discount rate has fallen, leading to the present value of future liabilities rising sharply. In time that could correct itself as interest rates rise again.
Scare stories in the FT about the pension fund trustees and Pensions Regulator preparing to play hard-ball and even bankrupt TNI have turned out to be malicious nonsense. Shame on them for printing it - which halved the share price from 50p to 25p back in March 2012.
It looks as if someone in Canary Wharf was texting their family & friends (and their brokers) from the toilets yesterday, because these results show why the share price suddenly rose 17% yesterday afternoon! Based on these superb figures, and insane valuation of a PER of 1, it wouldn't surprise me to see TNI shares double in price from their current 30p, and still be cheap. My long term target is 100-200p/share, which is only a PER of around 3-6, hardly demanding!
There is no news on a new CEO yet, and dividends also remain under review, but not done yet. That is the priority, even a 1p dividend (3.5% yield - not to be sniffed at) would only cost about £2.6m, and trigger an additional £2.6m overpayment into the pension funds. That is easily affordable, and shareholders are getting cheesed off at being left out in the cold whilst other stakeholders (bond owners, pension funds) are looked after.
Moving on, £70m mkt cap promotional products company 4imprint (FOUR) has put out respectable-looking interims today. Underlying EPS is up an impressive 25% to 8.6p. Looks like they must have an H2 weighting, as full year broker consensus is for 22p this year, and 27p next year. So the shares look reasonable value at 267p (10 times next year's forecast). It has £11.4m net cash too.
I'm meeting the management today, at their 9am analyst meeting, so I'll post more about this company later. But it looks potentially interesting.
Poor results from Robert Walters (RWA), with interim profits more than halved to just £3m. Difficult to justify a £139m mkt cap on the back of these numbers.
Right, that's it folks. I'll be trying to buy more TNI at the open, but I suspect lots of other people will be too!
Tuesday, July 31, 2012
Tues 31 July 2012 - Morning report
Good morning! Today's report focuses on my largest position (which I have held since about 2002!) which is high-end digital CCTV maker, IndigoVision (IND).
It's all systems go at Indigo, with the following highlights for this £24 mkt cap;
- Turnover £30m+ (up 5% vs last year)
- Margins also up
- Costs "well controlled"
- Operating profits expected to more than double to at least £2.6m
Now admittedly they had a poor year last year, but even so it certainly looks like the FD-turned new CEO, Marcus Kneen, is pushing things forwards.
Their year-end (31 July) trading statement usually comes out on 10 August, but is early this year - a sign of good financial reporting systems, so that's a positive.
Bear in mind also that IND has probably the strongest (relative to its size) balance sheet I can remember seeing, with no debt, last reported net cash of £7.4m and net current assets of £13.5m (and no material long term creditors).
I could certainly see this RNS opening the way for IND shares to move up from 300p to 400p in due course. Now if they get some really strong growth going, then the sky's the limit, as the excitement with IND has always been its operational gearing - 60% gross margins on a fixed cost base provides potentially explosive upside!
The company has had big disruptions in the last year, with the founder trying to take it private on the cheap, then he was forced out by the Chairman in an astonishing Board Room coup (given that the founder still owns 23% of the company that was quite a coup), then the founder came back with a PE backer with a mooted 400p bid, which was rebuffed.
The long-serving former FD became CEO, and whilst he may not be the obvious choice for that role, he certainly seems much more highly motivated are focused than his predecessor.
So once again, everything to play for at IND, could be exciting times ahead, who knows?
That doesn't really leave me any time for other companies, but I'll try to squeeze in a couple more.
Allocate Software (ALL) look pretty solid - organic revenue up 10% and total including acquisitions up 22%. Diluted EPS rose 16% to 7.4p for y/e 31 May 2012. So a PER of 10, at 75p a share, which looks good value to me. Has net cash of £4.3m too. They do seem to capitalise some costs though, so check out intangibles. But looks worthy of further research, so I'm highlighting this one in yellow.
Supplementary report to follow, want to get this published before 8am.
Monday, July 30, 2012
Mon 30 July 2012 - Morning Report
Good morning! Before I start, just want to flag up an article I wrote yesterday, about the scandalous accounting treatment used at Nationwide Accident Repair Services plc (NARS), which manages to completely hide a £26m unfunded pension scheme deficit off balance sheet, and instead display a fictitious pension scheme asset. This materially mistates the accounts, does not present a true & fair view, so I have lodged a complaint with the Financial Reporting Council, asking them to investigate. Let's see if anything happens. Whatever happened to the true & fair over-ride? This is a glaring case where that over-ride was itself over-ridden!
Right, this morning's RNSs, here is the usual quick scan, and please remember always DYOR (do your own research) in case I've missed anything important, which is always a risk with these quick reviews between 7-8am.
Pure Wafer (PUR), a £5.7m mkt cap, silicon wafer reclaim service (whatever that is) puts out a buoyant trading update - results expected to exceed current market expectations, with increased EBITDA and reduced losses. So the last 2 words of that sentence put a bit of a dampener on things! There seems to be quite a bit of debt. Too small for me, so moving on.
Computer company Globo (GBO) announces what it says is an "exciting and significant contract" for its GO!Enterprise Server, with a mobile network operator. I like Globo, as its shares are depressed due to it being based in Greece, for obvious reasons. However, it is achieving most sales & growth outside of Greece, so the fwd PER of 7, falling to 4.7 next year, seem harsh.
It's mainly a morning for results from mid & large caps, and resource stocks, none of which I cover here, so a quiet morning for me.
I'd also like to point out a company I didn't spot last week, called Goodwin (GDWN). This £96m mkt cap engineeering group put out solid results, with profits up 51% to £12.3m. Although before you get too excited, this seems to have been a bounce back from a poor previous year.
It's looks a really solid, traditional company, with plenty of Goodwins on the shareholder list. Good long term track record. Strong order book, is up 22%, although they also have some heavy capex planned, and it's a generally capital-intensive business, so may need to extend its borrowings next year (which are fine at the moment). PER is under 11, so if that growth comes through without a hitch, then it might be a bargain, but DYOR as usual.
Micro cap GETECH (GTC) might be worth a look, although the £7m mkt cap is too low for me. Trading statement today indicates that profits for y/e 31 July 2012 will exceed market expectations (which are for a £0.7m profit). The provide data & other services for oil explorers. Interestingly, this is the first company I can recall seeing where all the Directors seem to draw salaries under £100k each. They indicate "strong client interest in our products & capabilities", improved fwd visibility of earnings, and stronger cash balances. Sounds quite good if you think the growth will continue, or accelerate?
The unstoppable march of Tracsis (TRCS) continues, with an announcement of a new trial in Scandinavia for its rail management systems. This will probably take the £31m mkt cap higher, but the valuation is already too rich for me.
Personnel software company Bond International (BDI) has put out a rather rampy-looking contract win RNS. It relates to a 5-year, $4m contract in Japan. So that's about £0.5m p.a. then. How does that warrant a separat RNS, for a company with annual turnover of £37m? Not particularly impressed. My view is that companies should only RNS material contract wins, anything less just makes them look desperate.
I don't usually cover financial companies, but this morning's IMS from Brewin Dolphin (BRW) looks OK - an impressive 20% increase in recurring revenue has more than offset a fall in non-recurring revenue. However, the RNS doesn't seem to give any information at all on profits, so this IMS is fairly useless in that it doesn't provide the most important bit of information needed by investors!
The fwd PER seems reasonable though, at about 11, so might be worth a look?
That's all folks. FTSE 100 due to open in 2 minutes, with the Futures up 15, so a civilised open in the offing. Let's see what horrors the Eurozone can serve up this week? ...
Right, this morning's RNSs, here is the usual quick scan, and please remember always DYOR (do your own research) in case I've missed anything important, which is always a risk with these quick reviews between 7-8am.
Pure Wafer (PUR), a £5.7m mkt cap, silicon wafer reclaim service (whatever that is) puts out a buoyant trading update - results expected to exceed current market expectations, with increased EBITDA and reduced losses. So the last 2 words of that sentence put a bit of a dampener on things! There seems to be quite a bit of debt. Too small for me, so moving on.
Computer company Globo (GBO) announces what it says is an "exciting and significant contract" for its GO!Enterprise Server, with a mobile network operator. I like Globo, as its shares are depressed due to it being based in Greece, for obvious reasons. However, it is achieving most sales & growth outside of Greece, so the fwd PER of 7, falling to 4.7 next year, seem harsh.
It's mainly a morning for results from mid & large caps, and resource stocks, none of which I cover here, so a quiet morning for me.
I'd also like to point out a company I didn't spot last week, called Goodwin (GDWN). This £96m mkt cap engineeering group put out solid results, with profits up 51% to £12.3m. Although before you get too excited, this seems to have been a bounce back from a poor previous year.
It's looks a really solid, traditional company, with plenty of Goodwins on the shareholder list. Good long term track record. Strong order book, is up 22%, although they also have some heavy capex planned, and it's a generally capital-intensive business, so may need to extend its borrowings next year (which are fine at the moment). PER is under 11, so if that growth comes through without a hitch, then it might be a bargain, but DYOR as usual.
Micro cap GETECH (GTC) might be worth a look, although the £7m mkt cap is too low for me. Trading statement today indicates that profits for y/e 31 July 2012 will exceed market expectations (which are for a £0.7m profit). The provide data & other services for oil explorers. Interestingly, this is the first company I can recall seeing where all the Directors seem to draw salaries under £100k each. They indicate "strong client interest in our products & capabilities", improved fwd visibility of earnings, and stronger cash balances. Sounds quite good if you think the growth will continue, or accelerate?
The unstoppable march of Tracsis (TRCS) continues, with an announcement of a new trial in Scandinavia for its rail management systems. This will probably take the £31m mkt cap higher, but the valuation is already too rich for me.
Personnel software company Bond International (BDI) has put out a rather rampy-looking contract win RNS. It relates to a 5-year, $4m contract in Japan. So that's about £0.5m p.a. then. How does that warrant a separat RNS, for a company with annual turnover of £37m? Not particularly impressed. My view is that companies should only RNS material contract wins, anything less just makes them look desperate.
I don't usually cover financial companies, but this morning's IMS from Brewin Dolphin (BRW) looks OK - an impressive 20% increase in recurring revenue has more than offset a fall in non-recurring revenue. However, the RNS doesn't seem to give any information at all on profits, so this IMS is fairly useless in that it doesn't provide the most important bit of information needed by investors!
The fwd PER seems reasonable though, at about 11, so might be worth a look?
That's all folks. FTSE 100 due to open in 2 minutes, with the Futures up 15, so a civilised open in the offing. Let's see what horrors the Eurozone can serve up this week? ...
Sunday, July 29, 2012
NARS - misleading accounts re pension deficit
An interesting situation occurred last week, which I think deserves further consideration. As you know, the format here during the week is that I spend a manic hour each day between 7-8am reading as many results RNSs as I can, and then publishing a report on them here.
The key USP is that I don't just say xyz plc has delivered profits up 20%, divi up, etc. What I try to do is put it into context, and comment on whether the shares look good value or not (NB this is never financial advice, but is purely me expressing my opinion on shares). So if the share that delivers a 20% rise in profits is priced on a PER of 30, then I will point that out, and state that it's probably fully-priced, or even over-priced.
Very few other commentators do this - all too often I read reports which give the headline numbers, but don't even attempt to put that into context, making their reports meaningless.
So far so good. However, the danger of my format is that because I'm rushing to crunch the numbers in 5-10 mins per company, then I only have time to look at the headline figures, the key Outlook Statement, have a quick glance at the Net Cash/Debt (which is obviously a major factor in deciding whether or not the PER is reasonable), and then a very quick review of the P&L and Balance Sheet. I don't usually have time to look at the cashflow, or notes to the accounts, nor do anything other than a quick skim of the narrative.
So this means I will miss things from time to time. Hence the key message is always do your own research - which ideally should include downloading & reading the last Annual Report - reading the whole thing. Time-consuming yes, but it will throw up any "funnies" such as pension fund problems, different categories of share capital which you occasionally find (although very rare), issues such as litigation, etc.
Also, the other key message is that if you spot anything that you think I've overlooked, then please let me know a.s.a.p. either by email, or best of all by using the comments feature below the Blog here. I'll always check, and promptly correct anything that doesn't look right.
I commented favourably on results from Nationwide Accident Repair Services plc (NARS) last week, on the basis that they had just issued a brief in-line trading statement, which said as follows;
"Following our recent announcement on 1 June 2012, Nationwide is pleased to confirm that trading during the six months to 30 June 2012 was in line with management expectations and the cash position of the Group remains strong. "
The key USP is that I don't just say xyz plc has delivered profits up 20%, divi up, etc. What I try to do is put it into context, and comment on whether the shares look good value or not (NB this is never financial advice, but is purely me expressing my opinion on shares). So if the share that delivers a 20% rise in profits is priced on a PER of 30, then I will point that out, and state that it's probably fully-priced, or even over-priced.
Very few other commentators do this - all too often I read reports which give the headline numbers, but don't even attempt to put that into context, making their reports meaningless.
So far so good. However, the danger of my format is that because I'm rushing to crunch the numbers in 5-10 mins per company, then I only have time to look at the headline figures, the key Outlook Statement, have a quick glance at the Net Cash/Debt (which is obviously a major factor in deciding whether or not the PER is reasonable), and then a very quick review of the P&L and Balance Sheet. I don't usually have time to look at the cashflow, or notes to the accounts, nor do anything other than a quick skim of the narrative.
So this means I will miss things from time to time. Hence the key message is always do your own research - which ideally should include downloading & reading the last Annual Report - reading the whole thing. Time-consuming yes, but it will throw up any "funnies" such as pension fund problems, different categories of share capital which you occasionally find (although very rare), issues such as litigation, etc.
Also, the other key message is that if you spot anything that you think I've overlooked, then please let me know a.s.a.p. either by email, or best of all by using the comments feature below the Blog here. I'll always check, and promptly correct anything that doesn't look right.
I commented favourably on results from Nationwide Accident Repair Services plc (NARS) last week, on the basis that they had just issued a brief in-line trading statement, which said as follows;
"Following our recent announcement on 1 June 2012, Nationwide is pleased to confirm that trading during the six months to 30 June 2012 was in line with management expectations and the cash position of the Group remains strong. "
So I checked out the figures, and the shares appeared to be on a current year forecast PER of just 6.3, and to have a stinking dividend yield of almost 9%, which looks sustainable.
I quickly checked the Balance Sheet next, and was pleased to see an apparently strong Balance Sheet, with the most recent one looking like this (here is the link to the most recent accounts);
NATIONWIDE ACCIDENT REPAIR SERVICES PLC
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
At 31 December 2011
2011
|
2010
| ||
Notes
|
£'000
|
£'000
| |
Assets
| |||
Non‑current assets
| |||
Goodwill
|
6,266
|
7,768
| |
Property, plant and equipment
|
11,353
|
12,066
| |
Pension assets
|
11,391
|
9,589
| |
29,010
|
29,423
| ||
Current assets
| |||
Inventories
|
2,459
|
3,148
| |
Trade and other receivables
|
28,113
|
27,322
| |
Current tax receivable
|
692
|
-
| |
Cash and cash equivalents
|
7,995
|
7,459
| |
39,259
|
37,929
| ||
Total assets
|
68,269
|
67,352
| |
Liabilities
| |||
Non‑current liabilities
| |||
Long-term provisions
|
2,621
|
40
| |
Deferred tax liabilities
|
2,525
|
2,621
| |
5,146
|
2,661
| ||
Current Liabilities
| |||
Short-term provisions
|
1,353
|
31
| |
Trade and other payables
|
35,740
|
33,800
| |
Current tax liabilities
|
-
|
164
| |
37,093
|
33,995
| ||
Total liabilities
|
42,239
|
36,656
| |
Net assets
|
26,030
|
30,696
| |
Equity
| |||
Equity attributable to the shareholders of the parent
| |||
Share capital
|
6
|
5,400
|
5,400
|
Capital redemption reserve
|
1,209
|
1,209
| |
Share premium account
|
11,104
|
11,104
| |
Revaluation reserve
|
8
|
8
| |
Retained earnings
|
8,309
|
12,975
| |
Total equity
|
26,030
|
30,696
|
In the context of a £26m mkt cap, that looks OK to me. £26m net assets too, and even after writing off Goodwill (which I always do, as it's just a book entry to record the surplus over net assets paid for acquisitions) we still have Net Tangible Assets of £26m.
Plus there is a net cash position, and the balance sheet looks to me sensibly structured, with a £2m net current assets position, and only £5m of long-term liaibilities.
It's a mature business which generates consistent EBIT of around £6-7m p.a., so far this all looks fine.
So I went ahead & flagged up these shares as looking interesting & good value on this Blog.
Imagine my horror then when my friend Mark B kindly commented on this Blog that NARS actually has a an unfunded pension fund deficit of £26.1m which is only disclosed in Note 5 to the accounts, but not shown on the Balance Sheet at all!
In fact, worse than this, they have used what I can only describe as accounting trickery to disclose a completely false position of a pension fund asset of £11.4m on the Balance Sheet.
I see that the Balance Sheet above fails to put a "note 5" flag next to the pension fund asset. Funny that, since they do flag up notes 2,3, 4, and 6 on the face of the P&L and Balance Sheet. One might be forgiven for imagining that they are trying to bury the bad news in the notes. In fact, unless you had read note 5 to the accounts, you would be totally unaware that this company actually has an unfunded pension deficit (i.e. a liability) equal to its entire market cap, and that the £11.4m pension fund "asset" on its balance sheet is non-existent!
How on earth can this be done? And why is it legal?
There is an excellent discussion on this matter on TMF here, well worth reading in full (bear in mind that the deficit has since increased to £26m)
There is an excellent discussion on this matter on TMF here, well worth reading in full (bear in mind that the deficit has since increased to £26m)
Note 5 to the accounts explains (sort of) how they managed to spirit away a £26m liability, and falsely show it as an asset (sorry this is very long, but I've included it in its entirity, as it's important - I have highlighted in yellow the key figures);
5. PENSION AND OTHER EMPLOYEE ASSETS/OBLIGATIONS
The Company operates a funded pension scheme in the UK. The Fund has both defined benefit and defined contribution sections. Since 1 January 2002 the Fund has been closed to new members. Active members of the Fund ceased to accrue further benefits in the defined benefit section on 31 July 2006. Under the current Schedule of Contributions, contributions to the Fund for the year beginning 1 January 2012 will be £2.6m. This disclosure is in respect of the defined benefit section of the Fund only.
The Company has opted to amortise all actuarial gains and losses above the corridor (10% of the greater of assets and liabilities) over a term of 15 years (2010: 17 years).
A full actuarial valuation of the scheme was carried out as at 31 December 2011 by a qualified independent actuary. The major assumptions used by the actuary were (in nominal terms) as follows:
IAS 19
|
2011
|
2010
|
2009
|
2008
| ||
%
|
%
|
%
|
%
| |||
The major assumptions used by the actuary were (in nominal terms):
| ||||||
Discount rate
|
4.8
|
5.6
|
6.0
|
6.5
| ||
Rate of increase to pensions in payment
|
3.0
|
3.0
|
3.0
|
3.0
| ||
RPI rate of inflation
|
2.80
|
3.30
|
3.5
|
2.7
| ||
CPI rate of inflation
|
2.10
|
2.60
|
n/a
|
n/a
| ||
Assumed life expectancies on retirement at age 65 are:
| ||||||
31 Dec 2011
|
31 Dec 2010
| |||||
Current Pensioners
|
Current Pensioners
| |||||
Retiring today:
|
Males
|
21.2
|
21.1
| |||
Females
|
23.8
|
23.7
| ||||
31 Dec 2011
|
31 Dec 2010
| |||||
Future Pensioners
|
Future Pensioners
| |||||
Retiring today:
|
Males
|
20.9
|
20.8
| |||
Females
|
23.5
|
23.4
| ||||
Retiring in 20 years time:
|
Males
|
22.8
|
22.7
| |||
Females
|
25.4
|
25.3
| ||||
The assumptions used in determining the overall expected return of the scheme have been set with reference to yields available on government bonds and appropriate risk margins. The pre and post retirement mortality assumptions use the A92 and PA92 tables respectively. The 1992 series of mortality tables were published by the Continuous Mortality Investigation Bureau and are based on mortality data from life assurance companies over the years 1991 to 1994 inclusive. The "A92" tables are based on the mortality experience of life assurance policyholders. The "PA92" tables are based on the mortality experience of pension annuity policyholders.
The assets in the scheme and the expected rate of return were:
2011
|
2010
|
2009
|
2008
| |||||
Long term rate of return expected
|
Value £'000
|
Long term rate of return expected
|
Value £'000
|
Long term rate of return expected
|
Value £'000
|
Long term rate of return expected
|
Value £'000
| |
Equities
|
8.7%
|
37,563
|
8.5%
|
39,723
|
9.2%
|
33,940
|
9.6%
|
26,575
|
Bonds
|
3.9%
|
13,093
|
4.9%
|
13,220
|
5.2%
|
12,776
|
5.2%
|
9,668
|
Property
|
8.7%
|
4,704
|
8.5%
|
4,570
|
9.2%
|
4,212
|
9.6%
|
4,378
|
Other
|
2.9%
|
1,796
|
3.9%
|
1,793
|
4.2%
|
2,012
|
4.2%
|
3,047
|
Total market value of assets
|
57,156
|
59,306
|
52,940
|
43,668
| ||||
Present value of defined obligations (funded plans)
|
(83,251)
|
(73,366)
|
(73,195)
|
(60,131)
| ||||
Present value of unfunded obligations
|
(26,095)
|
(14,060)
|
(20,255)
|
(16,463)
| ||||
Unrecognised actuarial losses
|
37,486
|
23,649
|
28,904
|
24,082
| ||||
Net asset in balance sheet
|
11,391
|
9,589
|
8,649
|
7,619
| ||||
Actual return on assets in period
|
(1,967)
|
5,781
|
8,752
|
(11,783)
| ||||
Reconciliation of opening and closing balances of the present value of the defined benefit obligations
2011
|
2010
|
2009
|
2008
| |
£'000
|
£'000
|
£'000
|
£'000
| |
Benefit obligation at beginning of year
|
73,366
|
73,195
|
60,131
|
65,040
|
Interest cost
|
4,031
|
4,331
|
3,842
|
3,911
|
Contributions by scheme members
|
-
|
-
|
-
|
-
|
Actuarial (gain)/loss
|
8,637
|
(2,145)
|
11,284
|
(6,983)
|
Benefits paid
|
(2,783)
|
(2,015)
|
(2,062)
|
(1,837)
|
Balance at end of year
|
83,251
|
73,366
|
73,195
|
60,131
|
Reconciliation of opening and closing balances of the fair value of plan assets
2011
|
2010
|
2009
|
2008
| |
£'000
|
£'000
|
£'000
|
£'000
| |
Fair value of scheme assets at beginning of year
|
59,306
|
52,940
|
43,668
|
54,733
|
Expected return on scheme assets
|
4,320
|
3,940
|
3,352
|
4,236
|
Actuarial gain/(loss)
|
(6,287)
|
1,841
|
5,400
|
(16,019)
|
Contributions by employers
|
2,600
|
2,600
|
2,582
|
2,555
|
Contributions by scheme members
|
-
|
-
|
-
|
-
|
Benefits paid
|
(2,783)
|
(2,015)
|
(2,062)
|
(1,837)
|
Asset at end of year
|
57,156
|
59,306
|
52,940
|
43,668
|
The amounts recognised in the statement of comprehensive income are:
2011
|
2010
| |
£'000
|
£'000
| |
Current service cost
|
-
|
-
|
Interest on obligation
|
4,031
|
4,331
|
Expected return on assets
|
(4,320)
|
(3,940)
|
Curtailments and settlements
|
-
|
-
|
Actuarial loss recognised in year
|
1,087
|
1,270
|
798
|
1,661
| |
Charged to:
| ||
Administration expenses
|
1,087
|
1,270
|
Finance costs
|
(289)
|
391
|
798
|
1,661
|
History of scheme assets, obligations and experience adjustments
2011
|
2010
|
2009
|
2008
|
2007
| |
£'000
|
£'000
|
£'000
|
£'000
|
£'000
| |
Present value of defined benefit obligations
|
(83,251)
|
(73,366)
|
(73,195)
|
(60,131)
|
(65,040)
|
Fair value of scheme assets
|
57,156
|
59,306
|
52,940
|
43,668
|
54,733
|
Deficit in scheme
|
(26,095)
|
(14,060)
|
(20,255)
|
(16,463)
|
(10,307)
|
Experience adjustments arising on scheme liabilities
|
8,637
|
(2,145)
|
11,284
|
(6,983)
|
(8,042)
|
Experience item as a % of scheme liabilities
|
10%
|
(3%)
|
15%
|
(12%)
|
(12%)
|
Experience adjustments arising on scheme assets
|
(6,287)
|
1,841
|
5,400
|
(16,019)
|
(207)
|
Experience item as a % of scheme assets
|
(11%)
|
3%
|
10%
|
(37%)
|
0%
|
Apologies if the formatting plays up from here, something has gone funny - blasted technology! But the bottom line is this. There is no way in the world that NARS balance sheet can possibly be described as giving a True & Fair view - which is the over-riding requirement of all audited accounts. Instead, in my view, a £26m liability has been hidden off Balance Sheet, and a fictitious £11.4m asset has been created and disclosed on the balance sheet.
This may have been done in accordance with accounting standards, but it presents such an obviously untrue & unfair picture of the company's assets and liabilities that I regard these accounts as false. Hence I will be writing to the company's auditors, Grant Thornton UK LLP, for their comments as to why they signed off a set of accounts which clearly do NOT present a true & fair view at all, but which conceal a massive liability.
And it is a liability, since the cashflow shows that the company is making £2.6m p.a. overpayments into the pension fund to correct this deficit.
Apparently this accounting treatment will be rightly outlawed from accounting periods beginning after 1 Jan 2013, but in my view it presents such a misleading view of the balance sheet that it should be withdrawn now, and the accounts restated.
Including a note to the accounts which discloses a £26m pension deficit, whilst not disclosing it at all on the balance sheet, is not acceptable to me. The balance sheet cannot possibly be considered to give a true & fair view, therefore the accounts are misleading in my view. Otherwise any other liability could just be hidden off balance sheet, and disclosed in a note only. That would be ridiculous, so why is it acceptable for a pension deficit. It isn't, and this seems to me an example of where accounting standards have gone badly wrong, and where the true & fair over-ride should have been invoked to disclose this massive liability on the balance sheet itself.
Including a note to the accounts which discloses a £26m pension deficit, whilst not disclosing it at all on the balance sheet, is not acceptable to me. The balance sheet cannot possibly be considered to give a true & fair view, therefore the accounts are misleading in my view. Otherwise any other liability could just be hidden off balance sheet, and disclosed in a note only. That would be ridiculous, so why is it acceptable for a pension deficit. It isn't, and this seems to me an example of where accounting standards have gone badly wrong, and where the true & fair over-ride should have been invoked to disclose this massive liability on the balance sheet itself.
Thanks again to Mark for pointing out this issue, I am most grateful.
So golden rule - always do your own research!
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