Tuesday, January 15, 2013


A little late today, as I had a late night at one of Dave Stredder's monthly "Mello" investment evenings in Beckenham (there is also a quarterly "Mello Central" in London). Of course I remained completely sober all evening for my DryAthlon, and many thanks to the kind gentleman who handed me an £80 CAF cheque for Cancer Research last night, it made my day!

We were given a results presentation from software company Sanderson (SND). I liked the straight-talking management, and the company seems to me a nice steadily profitable, if unexciting company. Some growth prospects, but nothing much to get excited about. The price looks about right on a PER of 11.

Also, I would say that you have to be careful about cash balances with software companies - as in this case, and many others, the cash is actually up-front payments by customers for services that have not yet been provided. The clue is to look for "deferred income" in the creditors section of the balance sheet, then deduct that off the cash balance to strip out the cash effect of such up-front customer payments. Sanderson is about cash neutral when you do this. Important to remember this, as otherwise you end up over-valuing companies when you work out Enterprise Value if this adjustment is not made.

However, Sanderson seems a fundamentally sound company, which has repaired its balance sheet, and makes good margins, with a quality customer base. So it's good to have met management, and park it in the section of my investing memory which says: decent company, buy if/when the shares get cheaper, e.g. on a profits warning.

Quite a lot of larger cap trading statements today, so I'll have a quick skim of the retailers, since that's my background (I was the FD of a ladies wear chain for 8 years in the 1990s), and I maintain an interest in the sector.

Ocado (OCDO) is a stock I am very bearish on, since their business model is fundamentally flawed - they deliver Waitrose goods, but do not have exclusivity. Plus it's a low margin, competitive area. They require huge capex, and have never made a profit! Yet it's valued at £470m. Absolutely crazy, and an accident waiting to happen, in valuation terms, in my opinion.

Their top line figures, reported today, look good with gross sales up 14.2% in the 6 weeks to 6 Jan 2013. Sales of Ocado own label products (surely the only area that might take them into profit?) are up 70%, but it doesn't quantify the total, so that might be 70% on top of a tiny number, which is still a tiny number. Or it might not be, the statement just doesn't give enough information. There's nothing on profitability (or lack of) either - funny that.

Market consensus is for further losses in 2013 and 2014, so what's the point in this company existing? You could argue that it makes a positive EBITDA, but that argument falls apart when you consider that it actually needs heavy capex to exist and expand. Is that a good use of capital, ploughing it into a business that generates no return? I would argue not.

Another stock I'm bearish on is Quindell Portfolio (QPP). They've put out a positive-sounding trading statement, but I will reserve judgment until their next balance sheet is issued. The key line to look at will be Debtors, which I suspect will be roaring up inexorably higher as all those "profits" are booked. The same thing happened with Helphire & Accident Exchange, and it didn't end well.

I may be wrong, but one thing I have learned over the last few years, is that if there's a nagging doubt in your mind about a company, deploy your bargepole. Plenty more fish in the investing sea.

It's sad to see HMV finally lose its heroic struggle for survival, but the pincer attack of technological progress (internet & downloads), unaffordably high rent & rates, and high levels of bank debt from foolish acquisitions, just squeezed them out. That said, I'm sure a phoenix company will emerge from Administration with the profitable shops only, last another 3 or 4 years, and then go bust again. The bottom line is, if we want a High Street CD/DVD retailer, we have to use it. When it's so much easier & quicker to shop at Amazon, why bother?

I'm surprised Halfords (HFD) have managed the last 5 year downturn as well as they have, but for whatever reasons the internet doesn't seem to have harmed them much at all.

They had a solid Xmas, with LFL* sales up 1%. It is worth noting that retail achieved +0.4%, but the Autocentres (car repair shops) achieved a very creditable +5.6% LFL sales growth. So clearly the expansion into car repair shops is working.

The most noteworthy thing about Halfords shares is the stonking dividend yield. They have paid 22p in each of the last 2 years, so that's a yield of 6.6% with the shares at 334p. If you think that can be maintained, then the shares look attractive. The forecast PER is about 11.6, so the divi is not well covered - hence I'd be nervous about buying just for the divi, since the risk of it being rebased to a lower figure looks quite high. So would be worth scrutinising their last couple of Annual Reports to see how committed management sound to maintaining the divi (although it's often best to ignore such assurances, as they mean nothing).

Hydro International (HYD) is a specialist waste water management company. Their trading update today indicates that whilst 2012 will be in line with expectations, prospects for 2013 and beyond are not looking good, due to 3 major contracts with Thames Water coming to an end. This has knocked 16% off the share price, which is down to 104p at the moment.

I've always liked this company, so it might be a buying opportunity, and they do have a strong balance sheet. Might do some more digging on this one. Although lumpy orders to major customers does increase the risk of mishaps a lot, as today's RNS demonstrates. Often a big risk with smaller caps, who can be over-reliant on one or two big customers.

Alliance Pharma (APH) is a stock I've looked at closely before, but never taken the plunge. Its trading statement today looks good - due to stronger gross margins, profits are expected to be slightly ahead of current market expectations.

Taking into account their debt, the shares look priced about right to me, hence are of no interest - I'm looking for bargains, not fairly valued companies!

Mears (MER) has issued an in line with expectations trading update for 2012. Shares here also look priced about right, although I note EPS has been rising quite strongly recently.

OK, that's it for today, sorry it's a bit late. Normal time tomorrow hopefully!

Regards, Paul.

(of the shares mentioned today, Paul owns none of them)

* LFL = Like-For-Like, i.e. stripping out the distorting effect of newly opened or closed stores, and comparing only the aggregate trading performance of shops that were open in both the current and prior year comparative periods. Thus LFL gives the truest reflection of underlying sales performance.

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