Monthly Archives: June 2012

Cranswick Plc (ISIN GB0002318888) – Business model and valuation

After the first post on Cranswick Plc, as promised some more thoughts about the business model and valuation.

Business model – peer company Frosta

As mentioned, Cranswick operates mostly in the private label market. Frosta AG a company I owned when I started the blog is a relatively similar company. They are also food producers (however frozen food and fish instead of “chilled” food and poork) and most of their sales are private label products for supermarkets.

Let’s look at a quick comparison table focusing on net margin, ROE and debt/assets for both companies:

Cranswick Cranswick Cranswick Frosta Frosta Frosta
  NI Margin ROE Debt/Assets NI Margin ROE Debt/Assets
31.12.2002 5.3% 22.0% 6.2% 0.8% 5.9% 31.9%
31.12.2003 4.7% 19.3% 12.6% -2.9% -23.4% 36.3%
31.12.2004 5.1% 20.1% 39.2% 2.9% 18.7% 26.1%
30.12.2005 5.2% 22.2% 35.7% 3.1% 14.3% 30.8%
29.12.2006 4.4% 18.2% 30.4% 3.4% 15.6% 30.9%
31.12.2007 4.6% 17.6% 31.6% 3.5% 16.2% 35.0%
31.12.2008 3.1% 11.8% 27.1% 3.1% 14.4% 37.6%
31.12.2009 4.4% 18.1% 17.7% 2.9% 13.2% 36.1%
31.12.2010 4.7% 17.0% 15.2% 2.5% 10.0% 30.1%
30.12.2011 4.6% 16.1% 11.0% 2.3% 8.4% 27.2%
Avg 4.6% 18.2% 22.7% 2.2% 9.3% 32.2%

One can easily see that Cranswick earns twice the margins and ROEs of Frosta. Additionally they are employing on average a lot less financial debt than Frosta.

So what are the reasons for this discrepancy ?

One thing which distiguishes many good companies from mediocre companies is capital management. The less capital a company needs, the better is not only the return on capital (and equity) but also the net margin.

So let’s have a quick look at how those to companies compare with regard to Asset (and capital usage)

First Frosta AG:

  2010 2009 2008 2007
Sales 392.6 411.3 391.8 348.7
NI 9.8 12 12.1 12.2
NI in % 2.50% 2.92% 3.09% 3.50%
Inventory 56.5 61 70.9 57.7
Receivables 68.2 67 68.9 62.9
Trade liabil- -40.6 -27.7 -44 -34.3
Net WC 84.1 100.3 95.8 86.3
In % of sales 21.42% 24.39% 24.45% 24.75%
PPE 77.9 78.9 84.5 71.8
in % of sales 19.84% 19.18% 21.57% 20.59%
Goodwill 1.2 1.1 2.2 1
Net WC+ PPE in % of sales 41.26% 43.57% 46.02% 45.34%
Net WC +PPE+GW in % of sales 41.57% 43.84% 46.58% 45.63%

I have concentrated on Working capital and fixed assets only. Frosta needs ~24% of sales in net working capital. Besides inventory, receivables are always much higher than payables which means that Frosta basically finances the supermarkets as they are not able to mirror their payment terms with their suppliers.

Fixed assets account for another 20% of sales on average, Frosta does not show any Goodwill as they haven’t made any acquisitions in the past.

So how does Cranswick look compared to this ?

  2010/2011 2009/2010 2009 2008
Sales 758.3 740.3 606 559
NI 35.3 32.5 19.9 25.7
NI in % 4.66% 4.39% 3.28% 4.60%
Inventory 35.7 36 28.5 30.6
Receivables 78.7 84.1 73.7 77.3
Trade liabil- -84.9 -86.7 -75.2 -73
Net WC 29.5 33.4 27 34.9
In % of sales 3.89% 4.51% 4.46% 6.24%
PPE 123.3 106.1 91.7 92.7
in % of sales 16.26% 14.33% 15.13% 16.58%
Goodwill 127.8 128.7 117.8 117.8
Net WC+ PPE in % of sales 20.15% 18.84% 19.59% 22.83%
Net WC +PPE+GW in % of sales 37.00% 36.23% 39.03% 43.90%

The short answer is: Much much better !!!

Especially working capital management seems to be extremely efficient. They can basically finance their receivables out of payables and inventory is on average only 5% of sales compared to 15% at Frosta.

Also fixed assets are around 5% less compared to sales than at Frosta, however Goodwill adds to assets which have to be financed.

The interesting fact about this asset usage is also the impact on the P&L. More fixed assets mean higher depreciations charges and maintenance capex. Goodwill on the other hand doesn’t require depreciation nor a lot of maintenance capex.

When we compare the two companies, Cranswick showed around 1.8% of sales in depreciation over the last 4 years against 3.0% at Frosta. If we assume equal tax rate, this alone explains the difference in net income margins over the last 4 years !!!!

A second smaller effect where capital management influences net margins is the cost of interest. Currently interest rates are low, but nevertheless, Frosta had 0.2% higher interest cost compared to sales over the last 4 year on average. Especially for instance in 2010, where Forsta’s NI margin was 2.5% against 4.6% for Cranswick, the difference in interest expense (-0.7. ) and the difference in depriciation charges (-1.5%) fully explain the difference in profitablity.

Why is Cranswick managing capital so much better than Frosta ?

As we all know (now), competitive advantages are almost always local. If we look at Cranswick’s business locations, one can clearly see the regional concentration:

Most of theiz facilities are concentrated in and around the Yorkshire area. Due to their overall size one can assume that Cranswick has a dominating position in this local area with the local suppliers. Their suppliers are most likely several hundreds or thousands of pig farmers. Another aspect of this is that for a British farmer it is much more difficult to export living pigs to Europe for instance. I highly doubt that the Eurostar transports live pigs so you have to involve ships in the transport route which makes it much harder to transport the pigs than for instance driving them form Poland to Germany. If you just want to export just the meat, you will have to go to a Cranswick facility first……

In terms of payyments, it is most likely easier to negotiate “back to back” pamant terms than for Frosta which has to buy its suplies from fish markets or b2b traders etc. So this leaves Cranswick with a significant amount of negotiation power with its suppliers.

Another advantage of the regional concentration is of course inventory management. The longest distance between any of their sites is 250 kilometers, a distance which could be covered back and forth most likely within a day. With such short supply routes it is much easier to run “just in time” production than if you get your supplies from thousands of miles away by ships.

This was for instance also the problem of another company I used to own but sold, Einhell AG. They are sourcing most of their supplies in Asia but have to pay before the merchandise even gets shipped from China. Due to the relatively long time of ship travel, they have to finance 6-9 months of supplies upfront and then they have to wait another few weeks to get their money from the DIY stores.

Cranswick, on the other hand seems to have a quite powerfull local position, being able to pass through the payment terms of the supermarkets to the pif farmers, leaving it only with a relatively small amount of “just in time” invesntory to finance.

I am not sure how easy this is to copy, but it protects them at least also to a certain amount against cheaper imports.


As mentioned in the first part, the value in Cranswick doesn’t is not in its asset base or any mean reversion phantasy. It lies in a consistent business developement with stable and high ROEs.

If Cranswick would manage to deliver 20% ROE going forward, my Boss modell would indicate a fair value of around 2.000 Pence per share or an upside of 160%. If we assume going forward 15% ROE, Cranswick would still be a double with an Intrinsic value of ~1.550 pence per share. I think this is definetely possible over a time period of 3-5 years without any P/E expansion.


Of course, as any company, the busienss of Cranswick is subject to a lot of risks.

As Tobias mentioned in the comments, among them are:

Hygienic risks

This can kill food companies. One of the most recent examples is Mueller Brot in Germany. However at least in Germany, this is usually a developement over years. Normally, the authorities give many warnings before they really take actions. Of course in the interent age, this can go much quicker. But this is not only an issue for Cranswick, but for all food and beverage companies incl. the “Star” companies like Coca Cola and Danone as well (anyone remembering the Perrier scandal ?).

Customer power

The custumors of Cranswick are of course extremely powerfull, with a few names dominating the client list. But again, this is an issue for many food producers and other consumer product producers have, as retail is consolidating more and more. The loss of one client can harm the business significantly.

On the other hand, I highly doubt that any of the supermarkets can come up from scratch with such an efficient organization like Cranswick. As we have seen, they do not calculate crazy margins into their products but they are really great capital managers.


Of course, Pork products can be substituted through different meats. As we have seen, in the downturn, Cranswick has profited from substitution, so chances are high that in an upturn they will suffer from the tendency to buy more expensive products. It will be interesting to see how successfull they are with their other ventures, such as dried ham, olives, meat pastries etc. This should lower the risk of substitution to a certain extent.


If for some reason, for instance the EUR would depreciate strongly against the GBP, EU imports would be a lot cheaper than locally produced pork. Although I assume there is “sticky” demand for British pork, this could impact Cranswick’s margins to a certain extent. On the other hand this might be a good hedge against Dart Group’s off setting EUR exposure !! Howver Cranswick has proved that it can maintain margins in the past and I do not see any reason why this should suddenly change.


Although Cranswick is no “cheapie”, I do think that Cranswick has some local competitive advantages which allow them an extremely efficient capital management and corresponding high returns on equity. As they have proved to maintain this through out the cycle, I will add a half position (2.5% of the portfolio) of Cransdwick Plc Shares to my portfolio.

The current valuation looks attractive enough, any take-over or recap upside is basically “for free”.

After the 2011/2012 report in July I will then decide if I double up to a full stake.

Weekly links

Interesting post about possible moats at Indian IT companies

Interactve Investor is tired of “mechanical screening” and wants to analyse UK companies one by one

Greenbackd with yet another (16 page) study which about the advantages of “mechanical” value investing

Damodaran also has a great post about screening. Interestingly he concludes that screening itself seems to be not a competitive advantage for an invetor any more due to the abundance of available resources.

Great post about net-net investing from Nate at Oddball

Interesting interview with Ed Thorpe, one of the first Quants about momentum strategies

Brooklyn investor analysis about the current state of the stock market compared to the good old times.

The case for Greek stocks.

Boss score harvest part 3 – Cranswick Plc (ISIN GB0002318888)

After Dart Group and Braemer, another UK stock with interesting characteristics is Cranswick Plc.

Cranswick according to Bloomberg

Cranswick plc manufactures and supplies food products to grocery retailers in the United Kingdom and the food service sector. The Company supplies fresh pork, gourmet sausages, charcuterie, cooked meats, sandwiches, and dry cured bacon. ”

Standard valuation metrics are extremely unspectacular:

Market Cap 390 mn GBP
P/E: 10.3
P/B: 1.6 (P/B tangible 3.1)
P/S: 0.5
Div. Yield 3.9%

However what makes Cranswick interesting in the Boss model is the really high and constant ROEs over the last 10 years:

BV/share Dvd/Share EPS CI ROE (CI)
2002 147.81 0.13 0.31 0.30 21.7%
2003 165.63 0.14 0.30 0.31 19.9%
2004 210.76 0.15 0.39 0.59 31.3%
2005 251.59 0.17 0.51 0.56 24.2%
2006 295.36 0.19 0.50 0.61 22.2%
2007 335.86 0.21 0.52 0.59 18.8%
2008 358.33 0.23 0.41 0.43 12.5%
2009 409.01 0.25 0.70 0.73 19.1%
2010 463.79 0.29 0.75 0.80 18.3%
2011 514.1 0.31 0.79 0.79 16.2%
    2.06 5.16 5.71

So even in real tough environments like 2008, Cranswick is still able to manage 12% ROE calculated on the basis of the comprehensive income which I find pretty remarkable.

So we do have a company which trades significantly (1.6) above book value, but churns out 20% ROE over the last 10 Years with a standard deviation of only 5%.

If I just look at my current database of around 1.100 stocks, I only have 12 stocks which show similar ROE/Std deviation characteristics and they trade on average at 2.8 times book value. Among those are well-known market leaders like Fastenal, Fielmann or Becton Dickinson.

Balance Sheet quality (based on “old” annual report 2010/2011) :

Debt to total assets is at only 10% and has declined since 2004 when they had around 40% gross debt to total assets.

Cranswick did 6-7 smaller acquisitions in the last 10 years, mostly in the 15-20 mn GBP range (Sandwich Factory in 2003 for 15 mn, Delico in 2006 for 18 mn, Bowas of Nrofolk in 2009 for 18 mn). There was one larger acquisition, Perkins Chilled Food for 80 mn GBP in 2005. All in all it looks like a very reasonable add-on acquisition strategy funded out of free cash flow


No problems here, company has only a small DBO plan with ~17 mn GBP and a deficit of around 2 mn GBP.

Operating Leases

Also only 12 mn GBP of total operating leasing liabilities as of year end 2010/2011

So balance sheet quality looks really good and conservative.

Management /Shareholders

According to Bloomberg, the largest Shareholder is fund manager Invesco with ~30%, the rest is distributed among several fund managers, however no “famous” value investor amongst them.


In 2011, management received a total comp of 3.8 mn GBP, based on total profit of 35 mn GBP, that’s 11% which is quite a lot. But maybe its OK for a UK company. Management holds around 400 k shares which is not much. However there is a LTIP with a couple of hundred k shares for the management which hopefully should align interest to a certain extent.


It seems that Branswick sold a lot of their products not under their own brands but as private label to UK supermarkets. Somewhere in the annual report they state that the two largest customers (most likely Tesco and Morrison) account for almost 50% of sales.

According to the annual report they try to establish own brands with the help of Jamie Oliver and Weight Watcher’s:

They seem to concentrate on pork products. It seems that pork as one of the cheapest “red meats” has benefited from price increases for lamb and beef as strained UK customers then substitute with pork. This might also explain part of the resilient returns.

Unfortunately, they do not split out the different food categories themselves. According to the overview they also deliver sandwiches for airlines and are moving more into other staff like pork pastries.

One question which I could not answer was the issue why the UK supermarkets allow Cranswick to earn relatively high returns. If I look at comparable German companies, they earn much lower returns, especially if they sell under private label.

Maybe UK supermarkets are not as tough as Aldi and Lidl in Germany with their suppliers or Cranswick has some competitive advantages like size. They stress their origin as pig food producer and pig rearing, so I guess they have very long-established relationships with pig farmers etc.

What others say

As always for UK stocks, you find interesting posts from the “usual” suspects:

Expecting Value has an excellent post mentioning that Cranswick seems to be able to increase exports significantly. He also links to this fantastic chart which shows Cranswick’s growth over the last 2 decades:

A quick look at the stock chart:

Interestingly, Cranswick underperformed against the FTSE 250 index significantly. Against Tesco, they just managed to “equalize” the score lately:

Even Swiss meat company Bell AG managed to significantly outperform Cranswick:

However, if we look at 2004/2005, Cranswick traded at around 2.5-3 times book and EV/EBITDA of 12, almost double the level of today.

Summary: At a first glance, Cranswick looks like an interesting “boring but sexy” company. They generate nice ROEs very consistently and manage to grow even in difficult times. Although the stock is not “dirt cheap”, I will do a “deep dive” into the business model and valuation hopefully next week.

Boss Score harvest part 2: Braemar Shipping Services (GB0000600931)

As mentioned in the first article about Dart Group, I am looking at the moment at UK companies.

Within my “Boss Screener”, the following company scored really good: Braemer Shipping Services.

According to their website, they are doing the following:

The Group is divided into four operating divisions: Shipbroking, Technical, Logistics and Environmental. These work together to offer a unique combination of skills for clients, at any time, anywhere in the world.

Basic valuation metrics look Ok but not spectacular:

Market Cap ~ 70 mn GBP
P/E 9.8
P/B 1.1
P/S 0.5
Div. Yield 8%

The company has no debt, but net cash (positive).

historically, returns on equity following my “boss” definition were really good:

31.12.2002 0.10 1.04 0.13 14.4%
31.12.2003 0.08 1.14 0.13 21.9%
31.12.2004 0.24 1.29 0.16 23.0%
30.12.2005 0.37 1.69 0.18 37.6%
29.12.2006 0.32 1.78 0.20 15.6%
31.12.2007 0.49 2.00 0.23 22.5%
31.12.2008 0.57 2.51 0.26 32.7%
31.12.2009 0.48 2.80 0.27 20.7%
31.12.2010 0.48 3.07 0.28 18.3%
30.12.2011 0.34 3.08 0.29 9.7%

Although one has to mention, that 2001 for example was a loss year for them. They do make smaller acquisitions from time to time which explains that tangible book is only 50% of actual book value.

As one can also clearly see, 2011 was a more difficult year for them. As one could expect for a potential UK value stock, it is widely covered by the excellent UK value blogs, for instance

Kelpie Capital
Interactive Investor

Especially the Interactive Investor has a very good coverage about the company and another listed UK shipbroker Clarkson Plc.

Shipbroking Business

Again, thanks to Richard Beddard for this fantastic post about the business and the link to some very interesting material about long-term cycles in the shipping industry.

So to summarize it in my own words:

– ship broking (i.e. broking of shipping capacity, not ships themselves) is a cyclical business
– ship broking also seems to be a fragmented business where people seem to have more loyalty to persons than to corporations
– ship oversuply and depressed freight rates will most likely persist for many years to come
– Bramer itself is in a transformation process to diversify into more service oriented areas

If one looks into the annual report, one can clearly see that the ship broking business is in a drastic downturn with sales shrinking by -20%. on the other hand they managed to earn ~14% operating margin (down from 21%). So this means that fixed costs are relatively small. Any manufacturing business would not retain a profit when sales drop 20%.

The other divisions did compensate for revenue loss but not fully for profits. Although the environmental segment looks interesting with almost doubling sales and tripling the operating margin.

So lets stop here and reflect a minute:

The boss score tries to identify reliable boring companies which deliver solid ROEs over several cycles. With Bramer we have here clearly a different situation:

There seems to be a “long-term cycle issue” with the core business and they are in the middle of a strategic business shift. So the past profitability numbers are maybe a relatively weak indicator for future profitablity, as the underlying business changes significantly.

Braemer could be an interesting investment, but it does not really fit into the pattern I am looking for.

Although other factors look good (Management owns a significant share of the company, stock is relatively unknown and not well covered, string free cashflow generation in the past, attractive dividend yield etc.), for the time being I only put it on my watch list, as I don’t know enough about the shipping business to make an informed investment judgement. Also the stock is not cheap enough to qualify as a asset play or mean reversion investment.


Based on historical profitability, Braemer would be a clear buy. But as the whole shipping sector seems to have a long-term problem and Braemer has put itself into a business transformation process, I think at the moment the risk does not justify an investment at current prices.

Investing, speculating and gambling – or why I would never INVEST in Greece and China

It is always interesting to see what other “value investors” are doing. Stefan at simple value investing for instance likes Greek stocks, the German Value fund investor Discover (just as an example) in their Squad Value Fund hold “German Chinese” stocks like Kinghero and Vtion.

In both cases, this is branded as “value investing” or “deep value investing”. As we all know, value investing itself is already a quite wide area or I would rather say it is in danger to become a “stretched brand”. But for this question what is avlue investing goes much deeper.

What is investing ? And how do we differentiate this for example from terms which are sometimes used for the same activity like speculating, trading and gambling ?


Investing as an activity normally implies several important aspects:

– it is longer term oriented
fundamental development usually plays the major role, either in the form of valueing the underlying assets or estimating future profits
– the sale of the investment at a higher price to someone else is only one possibility to realise value, over time “value will prevail” either through dividends, share buybacks etc.

This holds true for both, value and growth investing, stocks and bonds.

Speculation or Trading

– the term speculation or trading is mostly used for shorter time horizons
– it usually implies that one can sell the purchased position at a later time for more money
– fundamental issues play a lesser role, news flow and short term behaviour of other investors are more important

Gambling or betting

– gambling has ussually the “worst reputation” among the described activities and normally relates to non-financial instruments
– it implies to “bet” a certain amount of money with one resulting cashflow which is either zero or a certain amount above the initial bet
– the “underlying” is usually a certain event (wheel spin, horse race, football match)
– although the “odds” sometimes depend on the behaviour of others (sports betting), the payout then usually only depends on the event itself

I think so far there is nothing new in my short theoretical essay.

However most people who are active in some of those areas (or in all of them) are forgetting a very important point: All described activities depend on certain underlying assumptions which should insure that one actually can realise the profit.

The underlying assumption for gambling are relatively clear:

You should not loose your receipt and the bookie (or the casino) has to pay out the quoted amount. So they should not be able to run away with your betting money. Most people know this and this is also why betting in dark street corners at night with a bunch of gusy you do not know might not be a good idea or “negative expected value”.

Other than that, betting is a relatively “fair” and transparent way of risking money, there are few other “strings” attached.

For “speculation” and trading interestingly a lot more implicit assumptions have to hold to realise potential profits

– markets have to be open and liquid
– your counterpart to the trade should be solvent
– your assets should not suddenly dissappear for unknown
– “a priory” you only know the size of your bet, you don’t know the probability of winning or the amoutn you will win (or loose)

In normal times this is not a problem, but as we have seen in 2007/2008, if such issues come up, they ussually appear at the same time. So you could have had the best risk management as a trader, but if you had an account at Lehman London, which had lent out your securities to someone else you were screwed.

Underlying assumptions investing

Interestingly, investing is the activity which relies on the most comprehensive implicitly assumed rules- Those general rules are ussually taken for granted, but let’s look explitly what we are assuming:

A) Underlying assumptions stock and bond investing

If you buy a stock, you are assuming that you get a (small) part of the business and a corresponding part of the current assets and future profits. You are also assuming that you are protected by law and the corresponding institutions that not suddenly the CEO decides to take all the money and run. Or that creditors take out the money or or or…

Those imlicit laws are not only race track or casino rules but very complex company, civil, international etc. laws which have to be safeguarded by a varity of institutions (courts, lawmakers, international courts, police, stock exchange supervision etc.) to provide a more or less “level playing field”.

So what the hell does this have this to do with investing in Greece and German-Chinese stocks ?

Simple example: Greek Government bonds under Greek law

Many people thought that Greek Government bonds were an investment and would be a safe as long as Greece does not become insolvent. As we all know now, the Greek Government just changed the underlying Greek law and could introduce a nice hair cut for certain bondholders why others got away unharmed (Greece actually repaid a UK law bond just recently).

So we know now that Greek bonds under Greek law were actually not an investment but a speculation on Greece not applying this possibility to get way with just paying less. To have known this course of action before was almost impossible.

Application on Greek stocks

The same applies for Greek stocks. Most of the Greek stocks are cooperations under Greek law. As we have seen with the bonds, the Greek Government has full authority on how to interpret and change Greek laws. So in theory they can (like the Argentinians did) say that all profitable Greek companies should be Government owned without compensation if they wish. Or they can exchange all cash from those corporations in worthless Drachma etc etc.

So we are in a situation, where “normal” rules or the rules we implicitly assume do not apply any more. All the nice historical studies (O’S etc.) which value inevstors love, are from the US, a country which hasn’t seen true large scale nationalization or redenomination of currency for at least a hundred years.

So yes, a Greek stock with a P/E of 3 could turn out to be a good speculation but it is definitely not a investment or a value investment. There is no margin of safety because the Government can just take away everything if they want or if they are desperate.

“German-Chinese stocks”

On German listed Chines stocks, we have basically the same issue:

First and foremost: China is still a communist country, where private ownership is only tolerated and capital controls are in existence and enforced. So the Chinese Government (in contrast to the Greek Govenrment) doesn’t even need to change the rules, they just need to apply them or continue to aplly them so that a German investor never sees a single EUR.

I can travel to China and look at the new shiny factory every 4 weeks, but if for some reasons the Chinese Governement just decides that exchanging Yuan into FX is not applicalbe and moiney should not leave the conutry (which they can do at any time), then the “intrinsic value” of my Chinese stock is zero. Maybe one could try to sue them in The Hagues but ggod luck with that.

Another issue on the individual company level is the legal aspect. I am not saysing that every Chinese CEO of a foreign listed company is crook, but the fact that there is no legal action possible against a fraudulent foreign listed Chinese managrment should serve as a big warning sign.

Yes, Kinghero, Vtion and the others look cheap. They start to pay little dividends and do some stock repurchases. But if those guys just dissappear with the money, nothing happens to them.

Of course you can have frauds in other companiws as well (Thielert is a good example) and nothing happens. Even in the US, frauds are common place and not veryone goes to prison, however those who get caught can serve up to 230 years in prison like Allen Stanford. However, in most cases this is not systemically.

Of course Kinghero and Vtion could be good speculations, but they are definitely no investments nor “value investments”.

So if you have read so far you might think: Why is this important, I don’t care how I or someone else makes their profits, be it investment or speculation.

Howver in my opinion, this ASPECT is maybe one of the best long term risk indicators for investment portfolios.

In the short term, all share prices fluctuate, but in the long term, in many cases excess speculation will lead to permanent loss of capital. Good expamles are “legendary value investors” Bill Miller and Bruce Berkowitz who thought that “cheap banking stocks” are a value investment. As they found out the hard way, implictly assumed rules for regulated entities can be changed realtively quickly and any entity with 20 times leverage will never be a value investment.


For many capital market participants, the differentiation between speculation and investing seems to be academic. In the long run, excesss speculation increases the risk of permanent capital losses DRAMATICALLY. There are speculative aspects in many investments, but to have long term success and enjoy the power of compounding, one should try to limit speculation to a relatively small amount.

P.S.: The oldest finance joke goes as follows: What is an investment ? Answer: A speculation gone wrong.

P.S. 2: I did not write a lot about bets. “Financial bets” with a clear pay off profile are in my opinion much more interesting than a “speculation”. Examples are certain distressed debt situations or other “special” situation where the pay out does not depend on someone else buying the position at a higher price. However, the rules have to be clear and should not change within the game…..

“Boss score” harvest part 1: Dart Group Plc (ISIN GB00B1722W11)

After having introduced the “Boss Score” in a series of posts, I have now build up a database of around 1000+ companies. o it’s time to look at results !!!

As I am looking for some UK exposure to add to the portfolio, I concentrate on UK companies first.

One of the best scores is achieved by a company called Dart Group Plc, a UK company which operates

1) a budget airline (Jet2)

2) a tour operator

3) a distribution / ground transport company (Fowler Welch)

The great thing about about potential UK value small caps is the fact that you find many great blog posts among the excellent UK based value logs about Dart Group.

So please read the following post on Dart Group at:

Kelpie Capital (very good blog by the way)
Expecting Value
Interactive Investor
Value Stock inquisition

I would try to summarize the pros and cons for the company out of the blogs as follows:

+ cheap, asset rich company with a conservative (and improving) balance sheet
+ entrepreneurial management, founder holds 40% of company
+ competitive and regionally focused business model, profits from demise of competitors
+ business is growing

– unloved airline sector
– low margin business, exposed to oil price and consumer behaviour
– low dividend payout

Let’s have a quick look at the traditional valuation indicators of Dart Group at the current price of 0.67 GBP:

P/E: 4.7
P/B: 0.6
P/S: 0.1
Div. Yield 2%
Market Cap 97 mn GBP
Debt/Assets 2%
EV/EBITDA 0.02 (!!!!)

EV/EBITDA is tricky for Dart Group. Dart group has a lot of cash on its balance sheet but a lot of that cash is “restricted”. In one of the blogs someone said it is restricted because of the deferred income on prepaid airline tickets.

If we look into the 2010/2011 annual report, it says however the following:

16. Money market deposits and cash and cash equivalents
2011 2010
£m £m
Money market deposits (maturity more than three months after the balance sheet date) 8.5 —
Cash at bank and in hand 98.3 52.2
Included within cash is £81.1m (2010: £38.1m) of cash paid over to various counterparts as collateral against
relevant risk exposures.
These balances are considered to be restricted and collateral is returned either on the
maturity of the exposure or if the exposure reduces prior to this date.

This is something to be explored further, but I assume this has to do more with fuel hedging than prepaid airline tickets.

Historical volatility

Dart Group is a prime example how the Boss Score works in practice. Let’s look quickly at historical EPS vs. historical “comprehensive income”

EPS BV p. Share Dvd CI p. SH
2000   0.22    
2001 0.046 0.25 1.67 0.047
2002 0.036 0.27 1.70 0.038
2003 0.056 0.33 1.70 0.071
2004 0.037 0.36 1.75 0.054
2005 0.052 0.43 1.93 0.083
2006 -0.013 0.42 2.16 0.015
2007 0.062 0.53 2.31 0.132
2008 0.193 0.66 0.72 0.142
2009 0.111 0.82 1.19 0.168
2010 0.122 1.04 0.83 0.233
Total 0.70     0.98

We can see 2 important points here:

A) The comprehensive income over this 10 year period is significantly higher than the stated EPS (by almost a third !!)

B) the volatility of the comprehensive income is much lower than stated EPS, even in the loss year 2006, total comprehensive income was positive

Why is that ? The answer is relatively simple: Fuel hedges !!!!

In the annual report they state the following:

Aviation fuel price risk
The Group’s policy is to forward cover future fuel requirements up to 100% and up to three years in advance. The magnitude of the aviation fuel swaps
held is given in note 22 to the Consolidated financial statements. As at 31 March 2011 the Group had substantially hedged its forecasted fuel requirements for the 2011/12 year and a proportion of its requirements for the subsequent two years in line with the Board’s policy

So what happens is the following: If fuel prices move up like in 2010/2011, margins go down, because the cost increases. However an off setting effect takes place in Dart’s balance sheet because the hedges increase in value and increase equity. The effect is not perfectly correlated as they are hedging partly future years as well but nevertheless, on a combined basis, the total P&L is a lot less volatile than if one just looks at EPS.

Banks for example do exactly the opposite. A bank will always try everything to smooth earnings but to book everything unpleasant into comprehensive income.

If we look at the corresponding P&L lines we can clearly see the effect:

Fuel costs increased significantly from 95 mn GBP or 23.1% of total cost in 2009/2010 to 128 mn GBP or 23.8% of total cost in 2010/2011. Gains from hedging in 2010/2011 were 23 mn GBP. If we just deduct this gain from fuel costs, we would end up at 105 mn fuel cost or 20.3%. As they have mentioned before, they have “overhedged” for one period, but in general I would say that Dart’s results including the hedges are a lot less volatile than simple EPS would indicate.

Chart, relative strength and momentum
A comparison with the FTSE all share shows at least, that the stock doesn’t have a real negative momentum.

Compared to Halford’s, which is still in its free fall phase, the stock looks surprisingly strong

Also relative performance with the last 6 months or so is neutral or positive:

dtg ln equity 1.2% -6.1% -0.3% 1.2% -16.8%

Current developements

In april 2012, Dart issued a cautious trading statement saying:

The Group continues to develop and grow its business base across its operations, although in the current challenging trading environment, limited profit growth is expected in the current financial year.

Based on the current valuation one might think that the market expects a significant profit drop, so for me that is actually good news.

Management / Founder

Philipp Meeson is a 63 year old trained RAF pilot

The CEO seems to be very hands on but also sometimes quite rude to his employees like this article from 2009 shows:

Philip Meeson, boss of budget airline, was warned by police after flying into a rage at his own staff after becoming annoyed at the length of time it was taking them to deal with a long queue of passengers.

Officers had to be called as the airline’s chief executive berated check-in workers during an early morning ‘spot-check’ visit to Manchester airport.
Police had to warn the millionaire about his conduct and behaviour after he used a string of four-letter words – even though his outburst was applauded by many of the 200 passengers.

Could be that clients like him better than employees….

A nice quote from the same article is that one:

But it’s not the first time Mr Meeson has attracted controversy.
Three years ago he condemned strike action by French air traffic controllers by writing an article on his company’s website which called for “lazy frogs to get back to work”.


Founder Philip Meeson holds around 39.6% of the shares, followed by Schroders (according to Bloomberg either 25% or 22%), Jo Hambro with 6.3% and Norges Bank with 3%.

For some strange reasons, no real “value shop” is invested, which might be a good thing after all after having read Nate’s blog post about shareholder structure at Oddball.

Interestingly, Bill Ackman form Pershing seems to have established a new position of ~0.4%, whereas Standard Life seems to have sold down more than 1% in the last few months.

EDIT: Bill Ackman was nonsense. I mixed upPershing Llc with Ackman’s Pershing Square.

Business model

There is an interesting discussion about the business model to be found here.

In essence within the airline business, their main competitive advantages seem to be

– regional focus (not fighting on the crowded London market)
– buying cheaper used airplanes for cash instead of leasing new ones (used aircraft buying seems to be one of the special abilities of the CEO..)
– higher flexibility due to ownership and contracts with Royal Mail
– differentiation with slightly better services as a “family budget” airline

I am not able to judge how this holds against Ryanair and Easyjet going forward, but so far the strategy seems to have worked OK and better than many of the smaller competitors.


A few simple thoughts about valuation:

Dart Group will never be a P/E 15 company, but it could easily be a P/B 1 company. At the moment, you get a company which increases shareholder equity by something close to 20% p.a. at 0.6 times equity. If we assume for instance they manage to generate 15% ROE in the next 3 years and the company would trade at book at that time, we would have a fair value of 1.7 GBP per share or an upside of 150% over 3 years. More than enough for me.


After reading all the blogs and going through annual reports, the company grew on me. In the beginning I thought: Airlines – keep away. But the more I looked at the company the better I liked it.

The reason why its cheap is relatively clear, no one likes airlines, especially when fuel prices are increasing. On the other hand I think the market is exaggerating the implied volatility and is not giving credit to the hedging program, which I think is one of the “hidden stories” of the stock.

So to summarize the stock I would pick out the following aspects:

+ stock is really cheap and unloved and in an extremely tough sector (so no “feel good” value investment)
+ company is led and owned by an entrepreneurial founder which has proven that he can grow the business ( no “cigar butt” either)
+ underlying returns on equity are really good despite asset intensity and low margins

I will add Dart Group with a limit of 0.7 GBP to the portfolio as a “half position” (2.5%) under the usual rules (max 25% of daily VWAP). After the final 2011/2012 numbers in July I wull then decide if I increase it to a full position.

Halfords Group Plc (GB00B102TP20) – UK Retail contrarian opportunity ?

I have been looking at only a few UK stocks so far in more detail, mainly Creston PlC, Colefax and Home Retail Group.

So far, the results have always been rather dissapointing. Nevertheless I still find depressesd sectors such as UK retail interesting from a contrarian point of view. Also from a portfolio risk point of view, I could afford some UK exposure as with the exeption of Total Produce, I have virtually no exposure to UK stocks or markets.

Let’s look at Halfords Group Plc:

According to the website,

Halfords is the UK’s leading retailer of automotive and leisure products and leading independent operator in garage servicing and auto repair

The Halfords Group comprises two strategic business units — “Retail” in the United Kingdom (UK) and the Republic of Ireland (ROI) and “Autocentres” in the UK.

Halfords Retail operates through a national network of stores and an innovative online offer. The product ranges are divided into three categories: Car Maintenance, Car Enhancement and Leisure (Travel Solutions & Cycling).

Halfords Autocentres offers MOTs, car servicing, repairs and tyres to both private motorists and fleet clients throughout the UK. It provides customers with dealership quality service at more affordable prices backed by the guarantee of Halfords’ trusted brand.

Fundamental overview:

As always, let’s start with a quick overview of traditional valuation metrics:

P/E: 7.0
P/B: 1.67
P/B tangible: neg.
EV/EBITDA (12m): 4.8
Div. Yield: 10.2%

A quick look into the history (since the IPO in 2004) shows relatively consistent and high profitability and cash flow generation:

EPS FCF ROIC dvd Net margin
31.12.04 0.24 0.29 16.3 4.11 8.1
30.12.05 0.24 0.17 16.4 13.67 7.9
29.12.06 0.26 0.25 16.8 14.56 7.7
31.12.07 0.29 0.23 17.5 15.83 8.0
31.12.08 0.27 0.27 17.7 17.06 6.9
31.12.09 0.37 0.63 19.4 18.78 9.3
31.12.10 0.41 0.47 21.3 24.44 9.8
30.12.11 0.34 0.36 17.1 24.44 7.9

So clearly, Halford’s is not an asset play but a cashflow play. Which is not a surprise as before its IPO, Halford was owned by PE inevstor CVC.

A quick look at the stock chart shows some serious negative momentum:

Potential issues to look at

For A UK retail Group, I would like to look first if anything is lurking in both, Operating Leases and pensions. As a reference, I use the PDF version of the 2011 annual report.


The only reference to pension I could find was this statement:

24. Pensions
Employees are offered membership of the Halfords Pension, which is a contract based plan, where each member has their own individual
pension policy, which they monitor independently. The costs of contributions to the scheme are charged to the income statement in the period
that they arise. The contributions to the scheme for the period amounted to £2.8m (2010: £3.2m).

So I assume that they only have defined contribution plans and no DBO’s (defined benefit obligations), which is VERY GOOD.

Operating Leases

One of the big issues for retailers in a declining market are often the leases which represent to a certain extent fixed liabilities but do not show up on the balance sheet under current accunting rules.

Halford’s as well doesn’t own its retail outlets but leases them.

For 2011 they state 87 mn GBP property rent payments and income of 7 mn GBP from subleases. In the notes they show around 740 mn GBP total lease commitments on a gross basis which translates into a ~8.5 year average duration.

As future lease commitments include interest and pricipal, one should try to adjust for this by a factor. If we assume for instance an implicit interest cost of 5%, then we would have basically 8 x 5% “coupons” include in the obligation. So to derive a “real” liability”, we would need to deduct the interest.

With a very simple calculation and assuming 5% interest on 8 years, we would get =740/1.4 ~ 530 mn GBP “on balance sheet” liability.

We can then recalculate EV/EBITDA by adding net rent income 80 mn GBP to EBITDA and add 530 mn GBP to EV.

Current EV is stated by Bloomberg at 618 mn GBP, EBITDA at 618/4.8= 129 mn GBP.

Restated EV/EBITDA would then be (618+530)/(129+80)= 5.45 . So not as cheap anymore as before (4.8) but still Ok.

A quick look at other factors:

Share buy backs: Additionally to dividends, the company has a history of significant share buy back programs since 2007. Total share count has been reduced from 227 mn shares to currently 190 mn shares.

Management & Compensation: At a first glance positive. Moderate salaries howver ongoing share option programs which slightly increase sharecounts.

Shareholders structure

Company is widely held by investment management companies (Capital Research, Artemis, Blackrock). So a take over could happen and should protect the stock to the extreme down side, on the other hand maybe long term investments are not popular. So far I would say the company is very shareholder friendly which is good.

Analyst sentiment

Stock is covered pretty well by analysts, but sentiment is pretty bad, some analysts (JP Morgan,HSBC, Deutsche) just downgraded the stock. From a contrarian point of view, bad sentiment is good.

Known Problems

The biggest problem for Halfords is the shrinkage in its core Retail segment (they acquired the auto repair segment only in 2010).

In the 2011/2012 statement, retail shrank like for like by -2.7%, which is still better then the -5.5% decrease in 2010/2011. If one considers the relatively high inflation rate in the UK, the decrease in real term is even more significant.

Especially in car audio and sat nav systems, Halfords is clearly suffering thorugh the disintermediation of Amazon and Co. Howver, management seems to have reacted to the trend and seems to concentrate now on services and “i need them now” items and services.

For me how ever it is really difficult to evaluate how much of the “retail segment” is stil exposed to the structural shift and how succesful Halfords own online sales will be.

Quick view at valuation

The question is of course what could Halford be worth ? A very rough indicator would be the average 5 year free cashflow of 39 cent and a discount rate of 10% which would indicate a´”going concern” value of 390 pence or a healthy 63% upside.

The simplified 7 year Boss Score would be 2.74 which is very good and would also imply signifcant upside, howver assuming constant profits.

Momentum / relative strength

So now we come back to relative strength and momentum. The following table shows the relative performance against the index over the last relevant periods:

hfd ln equity -14.0% -5.5% -11.2% -21.2% -34.2%

We see negative relative performance over the last 12 months in every period. Under my current leanring experience regarding momentum, this is a clear warning sign that despite the big repurchase program, the performance is so bad.


+ Halford is very shareholder friendly and cash generative
+ valuation on looks quite attractive for a “FCF play”
+ no hidden pension liabilities etc.
+ very transparent reporting, clear communication

– due to private equity pasts no significant assets to protect downside
– business model is in a transition phase, main business line still deteriorating and shrinking
– negative stock price momentum

I could live either with a shrinking core business or negative momentum but not with both. So for the time being, I will put Halford on “watch” only and wait for either a turn around in sales in their core business or at least “neutral” relative price momentum before investing here.

April SA and the momentum issue

I have written a couple of posts about April SA. In the last post, i decided the following:

At current prices (EUR 14,60 per share) and based on the underlying business developement, the risk/return profile is not attractive enough.

Now the stock price is close to last year’s lows and we certainly don’t see a lot of positve momentum:

After the reading of O’Shaughnessy’s book, momentum is such an important factor, that one should keep way from a falling stock. On the other hand I am quite sure that the business of April is worth much more than the current 10,80 EUR quoted on the stock exchange.

So should I wait until the stock gets more expensive and buy then ? This sounds still very counterintuitive for me. O’S strategy relies on not analyzing the companies but “data mine” for factors to produce historical outperformance.

Does a active value investor really have to wait until the stock gets more expensive before on invests ? I would agree for distressed or turn around companies. But in other cases this “negative momentum” might even create investment opportunities

By the way, April issued a relatively positive trading update for Q1 2012 and a comprehensive presentation in English for the 2011 results and the strategy.

As I really like April’s business model, I will ignore momentum and starting to build a position in APril from today. I will start with 1% and then increase in increments.

Edit: For some strange reason, the stock jumped immeadiately after my posting almost 9%

My limit was 11 EUR, so I did not get any shares and will wait for the time being.

Performance May 2012 comments & outlook

“Sell in May and go away” is the famous rule which would have been good for many market participants this year.

The benchmark (50% Eurostoxx, 30% Dax, 20% MDAX) lost -6,8% in May, however the portfolio gained +0.8%, making this the best month in relative terms since inception. Performance YTD for the portfolio is now 13.5% against 4.4% of the benchmark, a relative outperformance of +9.1%..

Bench Portfolio Perf BM Perf. Portf. Portf-BM
2010 6,394 100      
2011 5,510 95.95 -13.8% -4.1% 9.8%
Jan 12 5,972 99.27 8.4% 3.5% -4.9%
Feb 12 6,275 105.90 5.1% 6.7% 1.6%
Mrz 12 6,330 107.22 0.9% 1.2% 0.4%
Apr 12 6,168 108.02 0.8% -2.6% -3.3%
Mai 12 5,750 108.90 -6.8% 0.8% 7.5%
YTD 12 5,750 108.90 4.4% 13.50% 9.1%
Since inception 5,750 108.90 -10.1% 8.9% 19.0%

Also within each month on a day by day basis, the portfolio is very stable with a low amount of volatility. I am really happy that the portfolio really works as I have wanted it to (so far….), despite some significant “PIIGS” bets.

Portfolio activity in May was relatively limited. I sold Wal Mart, increased SIAS to a full position.

Ongoing are the build up of positions in Installux and Poujoulat (Poujoulat goes really really slow…) and the ongoing sale of the DJE Real estate fund.

This results in the following portfolio composition as of May 31st:

Name Weight Perf. Incl. Div
Hornbach Baumarkt 5.1% 5.04%
Fortum OYJ 3.9% -22.13%
AS Creation Tapeten 3.8% -6.14%
EVN 2.8% -13.15%
WMF VZ 4.1% 41.26%
Tonnellerie Frere Paris 4.8% 6.41%
Vetropack 4.5% -1.57%
Total Produce 5.0% 19.91%
OMV AG 1.9% -22.81%
Piquadro 1.5% 4.73%
SIAS 5.4% 3.24%
Installux 0.5% 1.71%
Poujoulat 0.0% 0.11%
Drägerwerk Genüsse D 8.7% 43.93%
IVG Wandler 2.1% 3.88%
WESTLB 6.9% 5.6% 36.25%
DEPFA LT2 2015 2.9% 21.93%
AIRE 5.1% 111.40%
HT1 Funding 4.4% 0.76%
EMAK SPA 5.0% 6.97%
DJE Real Estate 3.3% -4.58%
Praktiker 2016 2.5% 0.54%
Short: Kabel Deutschland -2.1% -20.17%
0 0.0% 0.00%
Short Ishares FTSE MIB -2.1% 16.63%
Terminverkauf CHF EUR 0.2% 4.41%
Tagesgeldkonto 2% 16.7%  
Summe 100.0%  
Value 47.5%  
Opportunity 39.7%  
Short -4.0%  
Cash 16.7%

With a current quash quota of 16.7%, I am at the upper bound of what I would normally like to have. As the WestLB Genußscheine are actually maturing today, June 1st, cash will increase to 22%. As the build up of Poujoulat and Installux need a lot of time, I will have to come up with some ideas pretty soon.

Outlook and market comment

As expected, we are still in “rough waters” and in my opinion this will persist for many months to come. Despite the head line Euro mess, the BRICs finally start to crumble. Brazil and India show massive slow downs in growth rates, in China despite the official numbers everything points to the end of the real estate and infrastructure boom. If history is any guide, after an epic real estate boom one nromally gets an epic bust.

At the moment, this is one of the strangest investment environments I have ever seen. On the one hand record profites of multinational companies (esp. US), on the other hand large parts of the world economy are in deep sh… ah problems.

Interest rates are so low that it is hard to understand who invests voluntarily into a 0% two year Bund.

For the value investor however this opens up a lot of opportunities. Whole sectors and countries are getting cheaper by the day. Of course this does not mean that a stock is “cheap” just because it has fallen dramatically in value. For many companies, the actual business prospects have worsened significantly. The trick will be to sort out the “good value” companies against the “terminal decliners”.

Many so called “value investors” prefer “stable” companies which perform well at the moment but are realtively expensive. In my opinion, this “trend” will turn not so far in the future, as even the best company cannot compensate a real global donwturn forever. Already in late 2008 and 2009 we have seen, how quickly this can turn, especially for the more cyclical companies.

For the portfolio I will continue to look for interesting special situations as well as “boring” off the map companies which trade at depressed prices. I will try to avoid all “great” companies, this is somthing for people who buy lunch with Warren Buffet for a million Dollars. I will also try to avoid any “hot potatos” however there is always the tmeptation to buy into those.

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