Search Results for: Boss score

Boss Score harvest: Bouygues “family” (Bouygues SA, Colas SA, Alstom SA, TF1) part 1

When I published the https://valueandopportunity.com/2012/09/26/publishing-the-boss-score-top-25-france/ Top 25 Boss Score List for France, I was not aware that in the 3 lists, basically all listed subsidiaries including the mother company of the Bouygues Group showed up.

As far as I have seen, Bouygues owns the following percentages in those listed companies:

Colas SA       96.55%
Alstom SA   30.71%
TF1            43.59%

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Publishing the Boss Score -Top 25 France

Following the Top 25 Germany post, let’s look at the next big Euro stock market, France:

Top 25 France 10 Year Boss Score:

Top 25 France 5 Year Boss Score

Those lists are based on a sub set of ~ 400 french stocks.

The most fascinating aspect about the French market for me is the fact that French companies look much much cheaper than their German counterparts. Of course, both list contain some “deep value” stocks like Toupargel, where a “terminal decline” might be possible.

On the other hand, there are still enough cheap “quality” companies. For instance, if we include an additional criteria like Stock Price > 1.25x book value, we still get a nice list of cheap “higher quality” companies:

For me, France is currently one of the most interesting markets for Value investments. Despite the bad press, there are many interesting and cheap companies. It reminds me a little bit about Germany and German companies 10-15 years ago, when Germany had to suffer the “reunification hangover”.

Looking back it is hard to understand why German quality companies were so cheap. I think there is a good chance that France will do its homework. One shouldn’t forget that most of the tough reforms in Germany (Hartz 4, work flexibility etc.) were actiaslly implemented under a Socialist government.

Publishing the Boss Score – Top 25 Germany

As announced in the last post, until I find a nicer solution for the whole file, I will publish selected lists.

As there are many German readers, I start with German stocks.

First the Top 25 German stocks based on the 10 year Boss Score:

and then the German Top 25 stocks based on the 5 year Boss Score

This is based on ~400 German stocks, so it is not a complete list.

Not surprisingly, a couple of stocks are in my Portfolio (Hornbach, AS Creation, Rhoen) or were in the portfolio at some point (Frosta, Einhell, Bijou). Interestingly, one can see that in the 10 year Top 25, there is a mixture of cyclical stocks (Salzgitter, Aurubis, H&R, Bauer), Holding Co’s (Indus, Gesco), port operators (Eurokai, Bremer Lagerhaus) and Nanocaps (Nucletron)

One of the stocks I really have to check out is Mühlbauer, I always considered it as a “neue Mark” stock but maybe it is worth a second look. Also I find interesting how well the expensive “quality stocks” like Sixt and Grenke are scoring.

From the 5 year list, I find IVU and Bechtle most interesting. Eurokai might be worth a second look as well.

All in all however, German stocks look relatively expensive in my model. Other countries like France yield a lot mmore interesting companies.

All tables will be posted on the Boss Score page.

Publishing the Boss Score – call for technical help

A few month ago I described my Scoring model which tries to identify potentially interesting stocks which show low fundamental volatility at attractive valuations and ROEs above cost of capital (“Boss” for “Boring sexy stocks”).

Part 1
Part 2
Part 3
Part 4

In the meantime I have built up a Excel database of around 1.500 stocks (and growing…). As I am a big fan of sharing information, I tried to come up with a convenient and cheap way to publish the results.

Ideally I would like to have something like an “Online database” where one could search & filter by certain categories, like Name, Score, Volatility, ROE and then get the results. And of course this should be easy to implement (no programming, easy update and free of charge).

So far I managed only to embed a google spreadsheet into WordPress. I imported the first 50 stocks in the database starting with A in a test page on the blog. The page is online already since a couple of weeks but so far no one has noticed (or no one is interested anyway). The result looks like this:

(By the way, Accell really looks good in the model…..)

Google Docs is a great way to do this. As soon as I update the Google sheet, it updates automatically in the blog. However, embedding the sheet in WordPress does not allow to use the search function or similar things

So here is the question:

Does anyone have an idea how to make the embedded google sheet more user friendly, i.e. searchable through something like a drop down menue ? I don’t really want people to access the underlying sheet.

Or is there another way to put a searchable Excel sheet online without programming and costs ?

In the meantime alternative I would just publish selected subsets like Top 10 per country or something like that.

So if you know how to do this, please send me a mail or comment on the page.

Magic Sixes meets Boss Score: Mr. Bricolage (ISIN FR0004034320)

As some might remember, I kind of like the Magic Sixes Screen (P/E < 6, P/B 6%) initially mentioned by Peter Cundill.

Many of the “Magic Sixes” companies are declining and/or cyclical companies which do not score well on my Boss Screen which is looking for stable companies.

The exception at first sight seems to be French DIY chain Mr. Bricolage.

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Boss score harvest part 6: Reply SpA (ISIN IT0001499679) – Quick check

Cheap Italian companies are ” a dime for a dozen” at the moment. Cheap Italian companies with rising sales, improving margins and solid balance sheets are however as common as the common “black swan”.

One Italian company which looks good under my Boss Score model is Reply SPA from Italy.

Reply SPA looks relatively cheap based on traditional metrics, especially P/E and EV/EBITDA

Market Cap: 160 mn EUR
P/B 1
P/E Trailing 5.9
Div. yield 2.85%
EV/EBITDA 3.6

What really raised my interest was their half year update, which shows nicely improving figures:

The Board of Directors approves the Half-yearly Report as at 30 June 2012
2 August 2012

“Double digits” growth for all economic and financial indicators:

Consolidated turnover of 244.2 million Euros (+11.6% compared with H1 2011);
EBITDA of 30.7 million Euros (+15.9% compared with H1 2011);
EBIT at 27.6 million Euros (+19.8% compared with H1 2011);
Earnings before taxes of 26.8 million Euros (+18.9% compared with H1 2011)

This is even more astonishing, as they have 3/4 of their activities in Italy. So how are they doing it and what are they doing anyway ? Bloomberg says the following:

Reply S.p.A. specializes in the design and implementation of solutions based on new communication channels and digital media. The Company’s services include consultancy, system integration, application management, and business process outsourcing. Reply S.p.A. provides services to business groups within Telco & Media, Industry & Services, and Banking & Insurance sectors.

If I understand correctly, they seem to be a kind of IT systems integration company. In their annual report, they use all the “buzzwords”, like cloud computing, mobile payments, big date business security etc.

Similar to German IT company Bechtle, Reply seems to have grown through acquisitions in the past and is more a “collection” of smaller IT companies than one monolithic company.

Balance Sheet

A quick look into the balance sheet:

Reply has relatively low debt (they had zero debt in 2010) which is good. However we can see a significant amount of Goodwill. This is a problem if profitability would go down.

So far it looks OK. With ROE of 16.5% and ROIC in the double digits (including Goodwill, 13.7%) it looks like they did not overpay for acquisitions.

One thing which caught my attention was the high amount of receivables, with almost 50% receivables compared to sales. However looking at the past, this seems a “normal” amount for reply. If we look at historic numbers, they were always in that range:

Receivables Sales  
2007 121 230 52.6%
2008 144 277 52.0%
2008 144 330 43.6%
2009 153.7 340 45.2%
2010 189.1 384.2 49.2%
2011 219.0 440.3 49.7%

German IT company Bechtle AG, which seems to have a similar business model however has only 10-15% receivables compared to sales. So this is definitely something to explore further.

Stock price, shareholders etc.

Although the stock is clearly below 2007 highs, the stock has clearly outperformed the Italian index as one can see in the following chart:

Typically for Italian companies, the majority yof the company is is controlled by a family, in this case by Mario Rizzante through his Alika Srl holding. Hi daughter Tatian is CEO of the company.

Among the other shareholders, I found the “Franfurter Aktionfonds für Stiftungen” very interesting. I am not sure how succesful they are but in their portfolio are many stocks I find interesting as well. For them, the 4.83% stacke is one of the largest fund positions.

Special stuff

I overlooked almost one very interesting detail about Reply: Reply owns 78.6% of German listed “Reply Germany”, the former Syskoplan AG (ISIN DE0005501456).

Reply Germany is interestingly valued much much higher, at around 11.7x EV(EBITDA and 1.6x P/B. and a P/E of 13. A quick back of the envelope calculation shows the following

– value of the stake 37 mn EUR
– trailing 12 m earnings 0.72 cents per share or 3.5 mn EUR

If we deduct this from Reply’s 140 mn market cap and Reply’s profit, we can see that Reply’s business ex Syskoplan is actually valued at a P/E below 5.

Quick summary:

Reply SpA looks like a really interesting stock. However I do not have a lot of experience with investing in IT service companies, despite having started by professional carreer in one. So I will have some more work to do with Reply, especially a comparison with companies like Bechtle. The one thing to watch out is clearly the receivables issue.

Boss Score Harvest part 5: – L.D.C. SA (ISIN FR0000053829)

In the fifth part of analysing the results of my Boss Score model, i want to look at the French company L.D.C. SA next.

The reason is not that LDC has the best score, but it is relativley comparable two 3 other companies I have analysed so far, Cranswick and French companies Tipiak & Toupargel.

According to Bloomberg,

L.D.C. SA processes and sells a wide range of specialty poultry products ranging from fresh prepackaged chicken to more elaborate prepared dishes. Those products are sold under brand names including “Loue,” “Bresse,” “Landes” and “Le Gaulois.”

So will French chicken be a good fit to British Pork ? Let’s look at traditional fundamentals:

Market Cap 690 mn EUR
P/E Trailing 12.2
P/B 1.1
P/S 0.2
EV/EBITDA 4.2
Debt/Assets 9.5%
ROE 9.5%
ROC 8.1%
Dividend yield 2.1%

At a first glance, relatively unspectacular. Not overly cheap but not expensive. EV/EBITDA looks attractive, almost no debt is normally a good sign. Market cap a little high but still ok.

What makes the company score quite well in my model is the very constant Comprehensive income yield on equity. This 10 year history:

12M EPS BV/share Div
31.12.2002 4.19 33.50 1.15
31.12.2003 4.11 36.05 1.23
31.12.2004 5.48 42.288 1.15
30.12.2005 5.76 47.4188 1.25
29.12.2006 5.30 51.8404 1.25
31.12.2007 6.63 56.4853 1.25
31.12.2008 5.29 60.7223 1.50
31.12.2009 7.83 67.144 1.30
31.12.2010 5.9 71.1595 1.93
30.12.2011 6.97 75.8072 1.80

creates an average 11.5% CI Yield on Equity with only a 3.2% standard deviation.

Looking at some further metrics we can see that unlike Tipiak and Toupargel, LDC is growling nicely however margins have been eroding somehow since 2009:

Sales p.s. NI margin  
31.12.2002 191.7 2.19% 10.69%
31.12.2003 186.4 2.21% 10.63%
31.12.2004 170.8 3.21% 19.07%
30.12.2005 193.2 2.98% 14.00%
29.12.2006 195.0 2.72% 11.43%
31.12.2007 226.8 2.92% 10.88%
31.12.2008 242.1 2.18% 9.36%
31.12.2009 256.6 3.05% 12.39%
31.12.2010 315.5 1.87% 7.69%
30.12.2011 342.7 2.03% 8.95%
       
avg   2.54% 11.51%

The stock chart shows a very boring but steady developement since 2004:

Beta to the French CAC40 is an incredibly low 0.46. 10 Year performance for the stock is 7.53% p.a. against 4.11 for the CAC

Business model:

Other than Cranswick, LDC is actually producing a significant part of their own poultry as we can read on their website:

Supply
The acquisition of Group Huttepain enabled the LDC Group to become closer to its farmers and make sure that they felt closer to the upstream part of the business. The companies belonging to Group Huttepain operate in cereal collection, feed manufacture and poultry farming (chicken, turkey and duck). This live poultry represents 55% of the group’s entire supply.

So as a first thesis compared to Cranswick I would argue that

– LDC should be more capital intensive
– more exposed to cost pressure (animal feeds)

than Cranswick.

So let’s have a quick look at some capital metrics:

Cranswick LDC
  2010/2011 2011
Sales 758.3 2,774.0
NI 35.3 56.7
NI in % 4.7% 2.0%
 
Inventory 35.7 178.3
Receivables 78.7 343
Trade liabil- -84.9 -308
 
Net WC 29.5 213.3
In % of sales 3.9% 7.7%
 
PPE 123.3 421.6
in % of sales 16.3% 15.2%
Goodwill 127.8 164.1
 
Net WC+ PPE in % of sales 20.2% 22.9%
     
Net WC +PPE+GW in % of sales 37.0% 28.8%
 
 
 
Inventory / Sales 4.7% 6.4%
 
Depr. 12.44 80.9
Depr /Sales 1.6% 2.9%

So we can see that Cranswick is better in working capital management, whereas LDC has slightly less PPE than Cranwick. interestingly, LDC deprecates a lot faster than Cranswick, almost a fifth of their PPE whereas Cranswick deprecates a tenth of PPE.

This faster depreciation explains 1.3 % of the Margin difference.

Some other notable differences are:

– LDC has to spend ~22% of sales on salaries vs. 13% at Cranswick, so LDC’s business model is clearly more labour intensive.

Due to the significant depreciation, LDC’s Cashflow before investments is around 2.3 times net income compared to Cranswick’s 1.2 times. However LDC is investing back all the depreciation plus some into the business. This explains the tripling of sales over the last 10-12 years, however at a decreasing rate of return on capital.

Similar to Cranswick they move strongly into processed and packaged food.

Looking at the English language annual comments, the processed food part seems to be in difficulties (same as Tipiak and Toupargel), whereas the Poultry business itself seems to run quite well. Representing around 20% of sales, the convenience food actually produced a loss.

Unfortunately, they do not publish segment numbers, so we do not know how much capital is used by the convenience segment. However my assumption would be that the “pure” poultry business looks a lot better stand alone and might be comparable to Cranswick’s.

management & Shareholder structure

The company is majority owned by a couple of families, with the executive board recruiting only members form the different families. This is not necessarily bad, but implies that there will be no real change going forward.

Value Shop Sparinvest has a little position as well.

Summary:

LDC SA is a very steady company with a rock solid business model. Unfortunately,the convenience food business seems to be in some kind of trouble. Stand alone, the company looks interesting as a very defensive “Boss” investment, but in comparison to Cranswick it looks like the inferior business.

The company seems to “overinvest” especially looking at the diminishing returns on capital in the past few years.

For the time being, I will not invest but put it on my watch list. If they manage to turn around the convenience segment, I might consider an investment.

Boss Score Harvest part 4: Tipiak SA (ISIN FR0000066482) & Toupargel (ISIN FR0000039240)

Back to the micro level ;-). Let’s jump back over the channel from Dart Group, Braemar and Cranswick to France.

Tipiak is a French Company which according to Bloomberg does the following:

Tipiak SA manufactures and distributes frozen food, prepared dishes, grains and sauces in France and abroad. The Company’s products are marketed under the “Tipiak” and “Relais” names.

So its basically the French version of Frosta AG, the company I used as Benchmark for Cranswick.

The company looks cheap under standard metrics:

Market Cap 32 mn EUR
P/B: 0.7
P/S: 0.2
P/E 2011: 10.1
P/E 2012 (est): 6
Dividend yield trailing 8.5%
EV/EBITDA 4,5

In the Boss model, they show an average ROE of 16% over the last 10 years with a standard deviation of only 6.6%, which puts them in the absolute “top decile” in the database.

However if we look at the “Boss ROEs”, we can quickly see that this is a company where things deteriorated significantly in 2011:

Boss ROE NI margin
2002 14% 1.7%
2003 15% 1.7%
2004 31% 3.1%
2005 19% 3.7%
2006 21% 2.9%
2007 19% 3.8%
2008 12% 2.9%
2009 12% 2.7%
2010 14% 2.8%
2011 6% 1.9%

The stock chart shows a pretty alarming picture:

So this is definitely a warning sign at first glance.

A quick look in to the French annual report 2011 shows that the reason for the decline in profits is mostly a relatively strong increase in costs across all categories which could not be compensated through the increase in sales. Somewhere hidden in the annex they show that the reserves for doubtful receivables on outstanding receivables have increased from 2% of outstanding to 4% which explains around half of the decrease in profits.

As we had checked Cranswick and Frosta with regard to capital management and capital efficiency, let us quickly check how Tipiak looks there:

2011 2010 2009
Sales 167.6 158.1 154.6
NI 3.2 4.5 4.2
NI in % 1.91% 2.85% 2.72%
 
Inventory 19.8 18.6 15.9
Receivables 50.1 47.1 48.3
Trade liabil- -27.6 -27.8 -27.2
 
Net WC 42.3 37.9 37
In % of sales 25.24% 23.97% 23.93%
 
PPE 44.6 45 45.3
in % of sales 26.6% 28.5% 29.3%
Goodwill 6.9 6.9 6.9
 
Net WC+ PPE in % of sales 51.85% 52.44% 53.23%

Short answer: Bad news.

Both, working capital and fixed investments in comparison to sales are higher than at Frosta (25% WC vs. 20%, 27% PPE against 21% at Frosta) and miles away from the efficient capital management at Cranswick. Interestingly, in one of his many writings Warren Buffet warned that companies with high working cpital requirements are suffering most from inflation. This is what one can see live at Tipiak.

So without digging deeper: Tipiak might be a “reversion to the mean” play at some point in time but at the moment it is a business in trouble and not what I am actively looking for.

To make this post a kind of “French frozen food” edition, lets look at another company as well, Toupargel Group SA.

Toupargerl has a slightly different business model:

Toupargel Groupe specializes in the home delivery of food products to individuals. The Company operates through two segments: Frozen Foods and Fresh Foods & Groceries. Toupargel Groupe is based in France.

Toupargel also looks “suspiciously”cheap:

Market Cap 75 mn EUR

P/B 0.9
P/S 0.2
P/E (2011) 9
EV/EBITDA 2.9 (!!!)
Div. yield 5.5%

The stock chart looks similar bad like Tipiak’s:

Average “Boss ROEs” and NI margins are higher than Tipiak but also more volatile and declining as well:

Boss ROE NI margin
2002 20.6% 1.7%
2003 44.7% 1.7%
2004 43.0% 3.1%
2005 34.2% 3.7%
2006 18.0% 2.9%
2007 17.7% 3.8%
2008 20.3% 2.9%
2009 23.0% 2.7%
2010 15.4% 2.8%
2011 13.0% 1.9%

Still this would result in an excellent score overall.

A quick view into the business developement looks impressive but only if one reads it from the wrong side. according to the annual report, sales and profits are shrinking almost every year since 2006.

According to their annual report, they are a clear market leader in the French market, but it seems to be that the market is shrinking as well.

Just for fun a quick look at capital usage:

Toupargel    
  2011 2010 2009
Sales 339 351 359
NI 8.1 12.9 12.9
NI in % 2.39% 3.68% 3.59%
 
Inventory 12.6 11.6 12.2
Receivables 2.9 1.7 1.8
Trade liabil- -23.6 -22.6 -22.4
 
Net WC -8.1 -9.3 -8.4
In % of sales -2.39% -2.65% -2.34%
 
PPE 43 46 47.6
in % of sales 12.7% 13.1% 13.3%
Goodwill      
 
Net WC+ PPE in % of sales 10.29% 10.46% 10.92%

And surprise surprise, they manage to run their business with negative working capital !!! Overall capital requirements are very low which explains the historically strong ROEs.

The reason is also relatively clear: Like a super market, Toupargel distributes directly to retail clients against cash, but enjoys the usual payment terms from its suppliers. So capital wise this business model is much nicer than being a supplier to a supermarket etc. but it seems to be that despite the internet boom, frozen food home delivery has seen its best days in the past.

Summary:

Both companies show, that of course the “Boss Score” is not the perfect model for each and every situation. As with every mechanical screener one has to be carefull not to get sucked into value traps.

Of the two companies, Toupargel seems to have the more capital efficient business model, but unfortunately the business model looks like terminal decline. If they manage to reinvent them somehow (Internet ?) they would be however a prime turn around story. But so far both companies do not qualify as “BOSS” (boring sexy stock).

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
EV/EBITDA 6.8
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:
Debt to total assets is at only 10% and has declined since 2004 when they had around 40% gross debt to total assets.

M&A
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

Pensions

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.

Management

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.

Business

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%
EV/EBITDA 5.7

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

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

EPS BV p.Sh. DVD CI ROE
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.

Summary:

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.

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