Search Results for: Boss score

South Korea – value investor’s dream ? (plus Top 20 Korean BOSS Score stocks)

At the moment, the Japanese Stock market seems to be “red hot”. Finally, after 25 years or so, Japanese stock seem to be one of the top stories. Honestly, I do not really understand why. Despite the Japanese Finance Minister targeting actual Nikkei levels, I was quite disappointed when I ran a couple of Japanese stocks through my “Boss” screen.

Although many Japanese companies trade at significant discounts to book value, the problem is with Japanese companies that their returns on book value are extremely low. Many companies over time even are actively destroying value. Dividend payouts are extremely low and shareholder activism is not really an option for Japan Inc.

In the past, I had looked at some Korean securities as well, however only at “special situations” like LG Household prefs, Hyundai prefs and Hankook Tire.

Out of curiosity, I started to screen Korean companies with my BOSS model as well. Before jumping into the list of the most interesting companies, let’s review a few facts about South Korea:

Somehow “under the radar”, South Korea has been one of the most succesful economies over the last 20-30 years. Even the Asian crisis could not stop the South Korean economy from growing at around 5% p.a. since 1990.

The countries’ economic position compared to Japan is very healthy, Debt/GDP is only 30%, the Government currently runs a surplus and the current account is of course positive.

Korean stock market

According to Bloomberg, there are currently 1973 traded stocks. Interestingly, this means that there are 600 more traded stocks than in Germany. The market cap of the major Index KOSPI is ~1.100 trillion won or around 760 bn EUR, almost equal to the German CDAX (820 bn EUR) or 2 times Apple…..

20% of the Index alone is giant Samsung electronics, followed by Huyndai with 4.3% and Posco at around 3% index weight. For some reason, Bloomberg shows a trailing P/E of 26 for the Kospi, however the forward P/E is estimated at 10.3. Price Book is a cheap 1.1, dividend yield only 1%.

First results from the Boss model

So far, I have added 160 South Korean stocks to my database. The first results are quite interesting. Sorted by the 10 Year Boss Score, i get the following Top 20 stocks:

Name BOSS 10Y BOSS 5Y
MI CHANG OIL INDUSTRIAL CO 436.0% 577.2%
KYEONG NAM STEEL CO LTD 403.0% 262.9%
SEOUL CITY GAS CO LTD 324.5% 226.0%
POSCO 304.1% 235.7%
GS ENGINEERING & CONSTRUCT 272.8% 199.1%
INDUSTRIAL BANK OF KOREA 258.6% 199.9%
OCI MATERIALS CO LTD 255.0% 403.8%
KYUNGDONG CITY GAS CO LTD 230.4% 270.7%
NICE INFORMATION & TELECOM 229.5% 185.0%
SAMYOUNG M-TEK CO LTD 219.1% 227.9%
HANNET CO LTD 217.9% 154.4%
MK ELECTRON CO LTD 213.1% 190.2%
FURSYS INC 206.9% 125.6%
WONPOONG CORPORATION 205.5% 227.0%
HANIL CEMENT CO LTD 201.5% 103.4%
KORTEK CORP 200.5% 213.3%
WISCOM CO LTD 197.8% 284.7%
SAMYANG GENEX CO LTD 191.9% 65.3%
KYUNGDONG PHARM CO LTD 190.9% 135.4%
BUSAN CITY GAS CO LTD 184.6% 185.4%

I only superficially checked the companies, but some look interesting:

MI CHANG OIL INDUSTRIAL according to Bloomberg seems to be the Korean Fuchs Petrolub, Fidelity is owning 10%.

KYUNGDONG PHARM CO LTD has among its shareholders Delta Lloyd (10%) and Baupost (5%)

Foreign shareholders

One of the big issues with Korean stocks is that only very few of them are listed outside Korea. Out of the top 20, I only found Posco with a meaningful foreign listing. It seems to be possible however to open a Korean trade account as a foreigner. E-Trade Korea for instance seems to offer this service but I haven’t tried contacting them yet.

Anyway, I think I will need to do some more research into Korean stocks but I think the list is already a very good point to start.

Boss Score: Top 25 Scandinavia

Next in my “top 25” series from the “Boss” database is now Scandinavia or the “Nordic” countries, namely Denmark, Finland, Norway and Sweden.

Again, as the process is only semi-automated, I have currently “only” about 300 Nordic companies in my database.

Let’s start with the Top 25 according to the 10 Year score:

Followed by the ranking for the 5 Year score

Finally I want to introduce something a am also looking at: A “pure” quality score without actually looking at the current market price. As some readers might recall, the Boss model first calculates a theoretical fair multiple to book value and then divides this by the market price.

If we leave out the last step, we can sort by the achieved multiple. Based on empirical experience, I use a blend of the 5y and 10y value with a double weight for the 5 year score.

After sorting the list by this criteria, we get the best “quality” companies:

Again there seem to be some interesting companies in the Nordic countries. Let’s have a quick at some of the names which I find interesting at a first glance:

B&B Tools (Sweden)

They seem to have a quite interesting business model, a servicer and supplier (without own production) of tools and consumables to industrial companies. However they seem to have some problems at the moment. Strongly declining profits, new CEO etc.

Capman OY

Finish private equity vehicle. Maybe worth a look at some point in time.

Takoma OY

Finish engineering group. However Stock chart looks like free fall. According to one of their publications, they are currently in breach of loan covenants. So a “no go” here.

KABE

Very interesting. One of the leading caravan manufacturers. Also “high quality” in my model. Maybe

Fenix Outdoor

Both, designer of outdoor products as well as operating a retail chain. Relatively expensive but high profitability.

NIBE

Producer of heat pumps, boiler, freestanding fireplaces. Expensive but high quality.

Rapala

Finish specialist for fishing tackle. Main competitor for Shimano in this area.

Gronlandsbanken

This might be an interesting special banking stock. It seems to be the ONLY commercial bank in Greenland according to Wikipedia. The balance sheet is super solid and if the Greenland natural resources story would really play out, this would be the stock to have. So a “hidden” commodity play so to say.

Summary:All in all my feeling is that the Nordic capital markets are much more efficient than for instance France. Thos companies which score well do mostly have some issues or their overall scores are not very high compared to other countries. “Quality” companies seem to be priced accordingly.

Boss Score Harvest: Accell Group (NL0009767532) – maybe another time

Accell is by far the best Scoring stock in my Boss Score Top 25 Benelux. According to Bloomberg their business is focused on bicycles:

Accell Group NV designs and manufactures racing, children’s, hybrid, mountain, electric, and luxury bicycles. The Company manufactures its bikes under the brands Batavus, Hercules, Koga-Miyata, Lapierre, Mercier, Loekie, Sparta and Winora. Accell also makes bicycle accessories and fitness equipment. The Company markets its products in Northern and Central Europe.

Traditional metrics:

Market cap 299 mn EUR
P/E 8,1
P/B 1.19
P/S 0.39
EV/EBITDA ~ 12Div. Yield 7.4%

So the company looks cheap from a P/E perspective, but expensive from an EV/EBITDA point of view. Debt to Equity is ~56% or 5.12 EUR net debt per share.

Business model

Accell is producing and wholesale distributing bicycles, not retailing them. They have been constantly acquiring smaller competitors over the last years. Bicycles were good business over the last years. If we look at the currently listed manufacturers, we can see that valuations are generally quite high (just for fun I added Shimano to the peer group):

Name Mkt Cap P/B P/E EV/EBITDA T12M P/S PM LF ROE LF ROIC LF
                 
MIFA MITTELDEUTSCHE FAHRRADW 62.7 2.0 83.2   0.6 2.0 2.2  
MERIDA INDUSTRY CO LTD 894.6 4.7 17.6 17.0 1.6 6.7 29.6 13.8
SHIMANO INC 4664.3 2.5 17.1 8.3 2.0 12.3 15.2 14.2
GIANT MANUFACTURING 1510.0 4.1 18.9 12.7 1.1 5.7 22.7 12.4
ACCELL GROUP 300.6 1.2 8.1 12.3 0.4 4.6 15.0  
DERBY CYCLE AG 242.6 3.7 21.7 11.4 1.0 4.8 22.3 20.5

I guess this is mostly due to the fact that the bicycle producers have gained from two major tailwinds: high fuel prices and E-Bikes. One can also see that Accell looks relatively cheap on a P/E and P/B basis.

From a business model perspective, I see some positive and some negative aspects for bicycle producers:

+ there are no really dominant retailers for bicycles. So a large producer does have a better competitive advantage
+ the business is not very capital-intensive
+ there is a secular trend in many countries / cities to a more bicycle friendly environment (health and fuel cost, see for instance here)
+ The internet might not disrupt the sector as much as other area
+ the market is still divided between many smaller players, so further consolidation might be possible

Howver there are also some factors which I consider negative

– brand awareness: People might pay a little more for a branded bike but there is not so much brand loyalty like for instance cars
– the high tech part of bicycles are mostly outsourced to suppliers. Best example is Shimano which has basically a monopoly on gear shifts
– it is therefore quite easy for small competitors to start production, as welding a frame is not so difficult and you can buy the parts pretty easily
– the European market is protected by a heavy 48.5% tariff. According to the Bloomberg article, this has been extended 3 years until 2014. But if this falls, the European producers would be in big difficulties soon. A good general source for market data, news etc. is this website.

So to sum up the industry:
The industry has/had some secular tailwinds, however the overall competitive landscape is average. Combined with the really expensive overall valuation, the listed companies look vulnerable to a certain extent. The success of the European producers might also be a result of the massive tariffs for Chinese manufacturers, so there is also some kind of “regulatory” risk.

Company valuation:

The company scores so well in my model because they have shown phenomenal ROE and ROICs in the last years and steadily increasing net margins:

ROE Ni Margin EPS EBITDA/share
31.12.2002 17.02% 2.6% 0.41 1.01
31.12.2003 20.34% 3.2% 0.55 1.23
31.12.2004 24.23% 3.9% 0.77 1.59
30.12.2005 22.51% 4.2% 0.88 1.70
29.12.2006 21.72% 4.3% 1.00 1.91
31.12.2007 19.91% 4.2% 1.30 2.17
31.12.2008 23.89% 5.3% 1.48 2.86
31.12.2009 23.07% 5.7% 1.65 2.88
31.12.2010 21.91% 6.3% 1.79 2.64
30.12.2011 20.39% 6.4% 1.93 2.13

However I also showed EPS and EBITDA per share over this period. The strange thing is that EBITDA per share and earnings per share more or less “converged” whereas in earlier years, the relationship EBITDA to EPS was on average 2:1.

So let’s quickly compare the 2003 P&L (from the 2003 annual report) against 2011:

2003 % 2011 %
Sales 289   628.5  
Material cost -184.5 -63.8% -420.2 -66.9%
Personel -45.1 -15.6% -82.9 -13.2%
Depr. -3.8 -1.3% -7.4 -1.2%
other oper. -39 -13.5% -83 -13.2%
Financial /part -2.5 -0.9% 8.6 1.4%
Tax -4.9 -1.7% -3.1 -0.5%
Net 9.2 3.2% 40.5 6.4%

So we can clearly see that there is a big “special” effect in 2011’s results. If we look into the P&L, we can see the following note:

This is the result realized with the sale of the in 2011 acquired 22% investment in Derby Cycle AG. The result consists of the capital gain less corresponding expenses.

So this was a nice but one-time gain during the (short) fight for Derby cycle, the German listed bicycle manufacturer where Accell lost out against Dutch competitor Pon.

So let’s look at 2010 instead to see if this was a “normal” year:

2003 % 2010 % Delta
Sales 289   577.2    
Material cost -184.5 -63.8% -373.9 -64.8% -0.9%
Personel -45.1 -15.6% -76.6 -13.3% 2.3%
Depr. -3.8 -1.3% -7.5 -1.3% 0.0%
other oper. -39 -13.5% -73.3 -12.7% 0.8%
Financial /part -2.5 -0.9% -4.1 -0.7% 0.2%
Tax -4.9 -1.7% -5.8 -1.0% 0.7%
Net 9.2 3.2% 36.0 6.2% 3.1%

One can see that also in 20110, there must have been some special effects, for instance the tax rate looks low. Again the notes give the following explanation:

The effective tax rate is the tax burden relating to the book year divided by profit before tax. The effective tax burden amounts to 20.6% (2009: 27.5%). Accell Group and the Dutch tax authorities agreed on the applicability of the so-called patent/innovation box. For the years 2007 – 2009 part of the Dutch taxable profit is taxed against a tax rate of 10% (instead of 25,5%), resulting in a refund of b 1.7 milion. In 2010 part of the Dutch taxable profit is taxed against a tax rate of 5% (instead of 25,5%) resulting in a tax saving of approx. b 1.0 milion. In accordance with IAS 12 a tax receivable is recorded as tax receivable for an amount of b 2.7 milion.

So just based on those 2 examples, I would already state that “earnings quality” at least in 2010 and 2011 is somehow mixed. Especially the 2011 result would look a lot worse than reported if they wouldn’t have the gain.

Other considerations:

So let’s have a quick overview on some other check list items:

+ Good growth over the last 10 years
+ Consistent payout of around 509% of net income
+ good underlying “story”: E-Bikes, roll up opportunity
+ only covered through 7 local analysts, bad ratings (which i see as a positive)

– many acquisitions
– increasing share count (increase by 50% over the last 10 years)
– accounting “special effects”, operating results more volatile than they appear
free cashflow generated only ~ 20% of stated earnings over the last 14 years
insiders are/were constantly selling according to company info
deteriorating Business in 6M 2012 despite large acquisition, again suspiciously low taxes
– balance sheet now much weaker after Raleigh acquisition (more debt, more goodwill)
– according to the shareholder information on the company web site, there seems to be some kind of take over poison pill in place which limits any take over /control premium catalyst
The stock price seems to be clearly reflecting those issues:

On a 2 year basis we can clearly see that the stock looks vulnerable:

Longer term, the cahrt looks relatively OK, the stock had an incredible run over the last 10 years or so:

So let’s stop here and summarize:

– the reported earnings, especially in 2011 do not show fully the underlying results
– Accell made a rather large acquisition into a difficult market
– going forward, it is pretty clear we will see lower earnings and lower profitability
– if things deteriorate, there is not a lot of margin of safety in the balance sheet (high debt load, Goodwill)
– the business doesn’t look a lot like a moat either
– insiders are constantly selling, any take over seems to be unlikely
– despite the low P/E, valuation is rather expensive on an EV/EBITDA basis and cash flow generation to earnings is weak

So in short, despite the fantastic score, the company at the moment does not look attractive to me. Past profitability seems to be clearly above the historical achievable mean. As I don’t by in principle into “stories” like E-bikes, I will not invest in the stock.

Allow me a small excursion at the end:

Accell might still be a good investment going forward, but in my opinion it is not a good “value” investment. Why ? For a value investment it is not enough to look cheap. You have to have a margin of safety. This comes in two forms

– either a margin of safety based on the balance sheet (Graham style)
– or a margin of safety in the business model (moat, Buffet style).

Accell in my opinion has neither. Maybe they will make a ton of money with E-Bikes or not. I don’t know. But if things get worse, there is not real downside protection for the stock. As a value investor one should not speculate on stories or secular trend, because they can change more quickly as one might think (see Solar).

Boss Score harvest: Top 25 Benelux

After looking at the Top 25 according to my Boss model from Germany, France and the UK, let’s look at the Benelux area (Belgium, Netherlands, Luxemburg:

Top 25 10 year Boss score:

Top 25 5 year Boss score:

I have to admit that I do not no much about a couple of the stocks which score well . So let’s look at some of those stocks which might be interesting (apart from Accell which I have to tackle anyway at some point in time…)

Macintosh Retail
Retailer with UK exposure, market cap 200 mn EUR. Struggling lately (loss in first 6 month 2012). Might be interesting. Bestinver holds 10%.

Floridienne
Also interesting. Mkt. cap 100 mn EUR. Seems to process food but is also active in chemical business. Loss 2nd half of 2011 and first half of 2012.

Hamon SA
Market Cap. 80 mn EUR. Producer of cooling systems and air polution control. Relatively large US activities.

CFE
Construction & engineering company, 46% owned by Vinci.

Ten Cate
Specialty textile company. Doesn’t seem to have majority shareholder

SA Belge Constr. Aeronautique
Thinly traded supplier to Airbus & Co. 98% owned by Dassault and Focker.

Fugro
Large cap (4bn). Interesting business model (collects and sells geological data).

Miko
Coffee distribution and plastic packaging.

Sligro Food
Market cap 900 mn, food distributor. Very stable margins.

Summary: So all in all some really interesting companies to research in the Benelux area. I guess Accell and Macintosh will be my first priority.

Boss score harvest: Morgan Sindall (GB0008085614) part 2 – no investment

After part 1, I have to admit that I share some concerns some commentators raised:

– the lack of tangible book value combined with a P/B of 1.3
– the cyclically of the business which however does not really show in the balance sheet (yet
– volatility of cash flows

The first issue is something one has with almost all UK groups. Anglo Saxon companies are almost always “capital light”. I guess the reason is that there are so many active PE investors, raiders, activists etc., which make sure that a well capitalized company will not long stay well capitalized.

However, this pressure sometimes produces much more capital efficient business models. As we all know, price to book is not really a good value indicator. Let’s look at a small collection of construction companies with some multiples:

Name EV/EBITDA T12M P/B P/E ROE LF ROIC LF PM LF WC to Sales
MORGAN SINDALL GROUP PLC 5.30 1.22 8.60 14.30 11.88 1.52 -0.03
STRABAG AG 9.81 1.25 11.77 10.90 3.05 -5.75 0.05
KONINKLIJKE BAM GROEP NV 11.42 0.57   9.62 2.86 -13.43 0.13
HEIJMANS N.V.-CVA   0.29   -8.84   0.38 0.12
BILFINGER SE   1.94 15.09 21.95 7.71 4.80 -0.02
VINCI SA 7.15 1.47 9.88 15.01 6.59 4.37 -0.06
CARILLION PLC 7.04 1.38 8.23 16.38 11.64 3.24 -0.06
KIER GROUP PLC 4.66 3.36 9.25 34.35 37.95 2.89 0.06
BALFOUR BEATTY PLC 6.62 1.71 10.86 16.22 8.24 1.72 -0.08
COSTAIN GROUP PLC 0.82 4.13 5.98 64.01 66.71 3.17 -0.01

Here we can see some interesting items:

Generally, the higher the ROE & ROIC the higher the price book valuation. With the exception of Kier, there is also a clear relationship between WC to sales and ROE and ROIC. Especially the Dutch companies seem to have to fund a lot of their working capital themselves. Interestingly those companies also operate at a loss level.

For me it is very interesting to see how the UK companies seem to have changed their business models to a certain extent.

Interestingly, the largest company Balfour seems not to be able to create any advantage out of their market share, which according to this list of UK construction market share for 2011 was around 15%.

On the same page, there are also a lot of news about the UK construction sector. All in all it doesn’t look pretty, it seems to be that 2012 seems to be even worse than 2008 at least in the UK. That might be the reason why UK construction groups look so cheap.

If we go back to Morgan Sindall, I see another issue: There is not a lot of mean reversion potential. Morgan Sindall is only 10% below its average profit margin. Historically they were values ~10 P/E and 4.7 x EV/EBITDA which is more or less where they are today.

Combined with a clearly donwtrending ROE (both, absolute and under “boss” definition”, I will pass over Morgan Sindall for the time being.

Nevertheless I want to follow up more on “negative working capital” companies because I firmly believe there is a lot of hidden value in such business models.

Boss Score harvest: Morgan Sindall Plc (UK GB0008085614) – negative invested capital

Morgan Sindall ist one of the best scoring UK companies in my Boss Score screener, so I thought I might have a closer look into it.

Company description per Bloomberg:

Morgan Sindall Group PLC operates a specialist construction group. The Group’s activities include office design, fitting out, refurbishment, building contracting, property investment, and related specialist services. Morgan Sindall operates in the United Kingdom and the Channel Islands.

Traditional metrics look Ok, no “deep value” but “cheap”:

Market Cap 293.5 mn GBP
P/E 8.7
P/B 1.2
P/S 0.1
EB/EBITDA 5.4x
Dividend yield 6.9%

Other quick check Items:

+ company has no financial debt (GOOD)
+ management holds significant shares (GOOD)
+ however no majority shareholder (GOOD)
+ constant and high ROE/ROE/ROIC (GOOD)
+ long established operating history (GOOD)
+ relatively low beta against Footsie of 0.66 (GOOD)
+ almost no pension liabilities (GOOD, important for UK companies)
large intangible assets (TO BE CHECKED)
– low but stable margins (TO BE CHECKED)
UK only construction company (TO BE CHECKED)
– volatile free cashflows (TO BE CHECKED)
– increasing share count over the last decade (TO BE CHECKED)

So the big question one has to solve with Morgan SIndal is: How do they manage to have such stable margins although they are so razor-thin ? “Classical” competitive theory would suggest that a company with 1-2% margins is in a very difficult situation from a competitive point of view. Morgan Sindal howver seems to be able to constantly earn those razor-thin margins and turns them into great ROEs with efficient capital management.

Prof. Margin ROE ROA
31.12.1998 1.8% 48.4% 34.7%
31.12.1999 1.6% 30.7% 26.9%
29.12.2000 1.7% 29.7% 27.5%
31.12.2001 1.6% 27.4% 26.1%
31.12.2002 1.0% 15.9% 16.0%
31.12.2003 1.3% 20.0% 21.4%
31.12.2004 2.0% 27.0% 28.1%
30.12.2005 2.3% 27.5% 28.1%
29.12.2006 2.2% 25.4% 26.0%
31.12.2007 1.9% 25.6% 26.8%
31.12.2008 1.8% 25.0% 26.1%
31.12.2009 1.5% 16.4% 16.5%
31.12.2010 1.4% 13.9% 14.2%
30.12.2011 1.5% 14.4% 14.8%
 
Avg 1.7% 24.8% 23.8%

The table clearly shows the discrepancy between “moat like” returns on assets and “distressed” profit margins.

Interestingly, Morgan Sindall is also an extremely good long term performer. The longe term chart does only show this to a certain extent:

Over the last 20 years, Morgan Sindall was under the Top 20 performers of the UK small cap index, with an incredible performance of 15.4% p.a. vs. 4.6% for the UK all share index.

I guess the low margins are also one of the reasons, why Morgan Sindall is not the darling of UK stock bloggers.

Paul Scott for instance writes:

Construction company Morgan Sindall (MGNS) report a “satisfactory first half”. It seems to consistently throw out about 75p EPS each year, and pays 42p in divis. So at 615p it looks fair value. I don’t like this type of company with huge turnover £2.2bn p.a., and wafer thin profit of around £40m p.a., as they are only one problem contract away from a profits warning & potentially insolvency.

John Mc Elliot covered it a little in his Valueinquisition blog, but I think he didn’t buy and his blog is not very active anymore.

There is also a rather shallow article on Motley Fool Uk.

Sell side wise, the stock is covered from 8 analysts, 5 buys, 3 holds, the more recent recommendations were buys. So not a totally uncovered stock but definitely not in the spotlight.

Business model

The company is first and foremost a construction company. Additionally the provide “fit out” services for offices and “affordable housing” projects. A new business field is called urban regeneration.

A quick look into the balance sheet quickly shows where the capital efficiency comes from: Negative working capital

Let’s quickly look at 2010/2011 net working capital:

2010 2011
Inventories 146.0 141.1
Amounts due from constr. Cust 228.6 178.4
receivables 186.5 229.2
cash 108.9 148.6
  670.0 697.3
     
     
Trade payables -620.9 -667.2
amounts due construction contr. -78.8 -70.7
others -14.1 -39.4
  -713.8 -777.3
     
Net -43.8 -80.0
Net ex cash -152.7 -228.6

Nice business if you can get it, at least from a Working capital perspective. Where does that come from ?

A quote from the notes of the 2011 annual report:

The average credit period on revenue is 15 days (2010: 23 days). No interest is charged on the trade receivables outstanding balance. Trade receivables overdue are provided for based on estimated irrecoverable amounts.

and:

The directors consider that the carrying amount of trade payables approximates to their fair value. The average credit period taken for trade purchases is 28 days (2010: 25 days). No interest was incurred on outstanding balances.

So a “Quick and dirt” calculation tells us: Morgan Sindall gets paid 15-28 = -13 days earlier than they pay their bill. 13/365*2 bn = 80 mn EUR on average “net negative working capital”, so the year-end numbers above are somewhat higher than average.

What I find even more amazing is the fact that property, plant and equipment is a mere 21 mn GBPs, the rest of the long term assets are Intangibles and special investments. Only 6 mn in property (freehold, financial lease) and 15 mn EUR in equipment.

They only have around 24 mn operating leases for buildings outstanding, so no big issues. So the Negative working capital is additionally funding all the fixed assets (excluding goodwill) and some more

So my stupid question is: Where do they get all the machinery etc. from ? The answer seems to be simple. Outsorcing. For example to Speedy Hire Plc as this web site shows.

Speedy Hire’s balance sheet is like the (bad) mirror image of Morgan Sindall: Lots of fixed assets, positive net working capital. Higher gross margins but very volatile. Operating cashflow looks better, mostly because of depreciation of the fixed assets.

Howver if we look at Speedy’s historical numbers we see that despite the higher net margins, the business model of Speedy Hire is much more volatile and returns less on capital:

NI Margin ROE
31.12.1998 4.0% 19.8%
31.12.1999 15.5% 26.9%
29.12.2000 -12.0% -17.4%
31.12.2001 2.1% 4.0%
31.12.2002 9.2% 17.9%
31.12.2003 10.3% 20.4%
31.12.2004 8.8% 18.0%
30.12.2005 8.7% 17.7%
29.12.2006 7.9% 17.1%
31.12.2007 5.0% 11.4%
31.12.2008 -11.4% -27.1%
31.12.2009 -5.2% -8.8%
31.12.2010 -5.4% -8.1%
30.12.2011 0.5% 0.7%
 
Avg 2.7% 6.6%

To me it seems that Morgan Sindall managed to pass on a lot of capital requirements and volatility onto its “partners” like Speedy hire.

Summary:

Despite being an UK construction company working on very thin margins, Morgan Sindall seems to have a very interesting business model. They run the firm as a whole on negative invested capital requirement (ex Goodwill) which is quite an achievement and seem to have outsourced a lot of volatility.

Together with the other positive aspects mentioned above, this definitely is worth a deeper look into it and the UK construction sector. The main question is if the comapny is cheap enough to offer a “margin of safety”.

To be continued……

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Boss score harvest Bouygues family – back to Bouygues SA (FR0000120503)

After looking at one of the main subsidiaries Colas in the last post, let’s have a quick look back at Bouygues, the holding company itself.

Sum of part valuation

As I have mentioned in the initial post, Bouygues has 3 listed subsidiaries, Colas, TF1 and Alstom as well as 3 unlisted major subs which are Bouygues Construction, Bouygues real estate and Bouygues Telecom.

To get a feeling for a “sum of parts” valuation, we should start with the listed subs and then make assumption for the unlisted ones.

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