Friday, June 22, 2012

Trinity Mirror (TNI) key points

Please note: I prepared this note on Trinity Mirror (TNI) for my own reference in late May 2012, now updated with current share price. I have posted it previously on advfn's bulletin board, but thought it would be useful to re-publish it here for anyone who hasn't seen it, and also to keep it in a handy place for reference. Usual disclaimer - this is not advice, but just for information & opinions are mine.

Trinity Mirror plc (TNI)
Key points

258m shares in issue, 10p ordinary
Fully Listed, LSE
Current share price = 25p
Market capitalization = £65m
Potential upside share prices/mkt caps;
60p = £155m
80p = £206m
100p = £258m
150p = £387m
200p = £516m

Here is the chart for the last 6 months, courtesy of

Click on the Chart to add a Cross Hair Price Indicator

And the longer term (5 year) chart - pls note the 20p to 200p move in 2009!

Click on the Chart to add a Cross Hair Price Indicator

1. Nationals Division - newspapers (Daily Mirror, Sunday Mirror, The People, and 2 Scottish titles  Daily Record & Sunday Mail)
The most important division, both in turnover (61% of 2011 total), and operating profit (69% of total, before central costs)
Very high operating profit margin: £83.1m op profit divided by £453m turnover = 18.3% profit margin (before 15.1m Group costs), not bad for a declining business!
Circulation revenue is the largest part, at 57%, with advertising lower at 30%, and other at 13%.
2. Regionals - local newspapers and digital operations.
Note how, despite long-term decline in turnover, profitability has been stabilised by cost-cutting, and efficiency measures (e.g. TNI owns modern, full colour presses, and back office software, so little capex now required).
Debt & covenants
Market perception is that TNI is highly geared, however the debt actually appears manageable in the light of cashflows.
All TNIs outstanding debt is private US loan notes, with repayment schedules which broadly match TNIs cashflows. A large repayment was made in Oct 2011, and further repayments are due as set out below, from the 15 March 2012 RNS on refinancing; 
The new bank facility and reduced pension contributions ensure that the Group has sufficient financial flexibility for the foreseeable future.  The cash flow of the Group coupled with the flexibility of the new bank facility ensures the Group can repay £168 million of maturing US$ private placement loan notes which are due as follows:
 ·June 2012:         £69.7 million
·October 2013:    £54.5 million
·June 2014:         £44.2 million
 (note: my bolding)
 The most recent announcement, IMS dated 10 May 2012 said, inter alia;
Strong cash flows enabled net debt reduction of £24 million to £197 million during the period and we anticipate a further decline in net debt for the remainder of the year. We anticipate repaying the £70 million of US Private Placement loan notes maturing in June 2012 through a combination of cash balances held at the period end, further cash generated during May and June and a drawing on the Group's existing bank facility.
The 2011 Annual Report shows that TNI has ample headroom on its loan covenants (see note 34 in the AR, available online at TNIs website).
TNI also has a recently renewed bank overdraft facility, of £110m to Aug 2015.
NB. Both the US loan notes, and the overdraft facility are UNSECURED.

Most recent IMS is here;

Most recent results (Prelims to 1 Jan 2012) are here;

2011 Annual Report, presentations, webcasts, etc are here;

Freehold property
TNIs Balance Sheet shows net book value of £176.8m for freehold property, as of 1st January 2012.
This property does not appear to have been revalued, hence is assumed to be included at cost. It is not known how far market value deviates from book value, and the Chairman was charming but evasive on this issue when asked at the AGM. He did however indicate they have considered sale and leaseback type arrangements, but had decided against it. However, this is a substantial asset which any potential acquirer may be able to leverage or sell in future, so more enquiries are needed to determine the current value and use of the freeholds.

Note the redevelopment of the freehold site in Coventry, with a hotel, residential, shops & student accommodation - good to see the value in the property being unlocked;

Deferred taxation liability
TNIs Balance Sheet contains large intangible assets and related deferred taxation liabilities. In my opinion these are neither real assets or liabilities, and both should be ignored in valuing the company.
Current trading
This is detailed in the IMS dated 10 May 2012, and shows Group revenues down 1% for Jan & Feb (flattered by closure of NoW against prior year comparatives), and down 6% for Mar & Apr (due to competition from Sun on Sunday launch).
Hence revenue trends on both circulation and advertising are still downwards, although it is expected that advertising revenue should recover somewhat once the economy is growing again (since not all the fall is structural, some is also cyclical).
Whilst managing the profitable decline of the newspapers well, most investors seem to believe that Sly Bailey failed to deliver a convincing digital strategy. A new, digital focused CEO could potentially change the stock market perception of the Group, triggering a re-rating.
Given the problems at the Murdoch’s newspaper empire, it is perplexing as to why TNI has failed to aggressively take advantage and grow its own circulation at Murdoch’s expense. This is surely a major opportunity for the UKs only Left-leaning tabloid, at a time of an increasingly anti-Government mood of the public, tired of recession and “austerity”.
Takeover potential as acquiree and acquirer. TNI has already done a spectacular deal in recent years to acquire the local GMG Media titles such as Manchester Evening News, and then restored them quickly to profitability. Such further opportunities must also exist with so many other distressed competitors, especially the highly indebted Johnston Press.
At this ultra-low valuation (compared with cashflows) TNI is surely also a takeover target? Interesting to note that Warren Buffett has recently bought some US local newspapers, stating that they still have a near monopoly on local advertising, despite the internet.
Pension fund
TNI is responsible for several large pension funds, with total assets of 1.4bn at the most recent Balance Sheet date, and total liabilities of £1.65bn. However this deficit shrank sharply in the first 3 months of 2012 to £176m.
Over-payments (above the P&L charge) of £33m p.a. were being paid, but a reduction to 10m p.a. has been agreed with the pension fund trustees for 2012-2014, which assisted in the renewal of the bank facilities.
An article appeared in the Financial Times in Mar 2012 sabre-rattling about the potential for the Pensions Regulator to over-turn this agreement, however at the AGM the Chairman refuted such a suggestion, making clear that the deal was done.
Given that this is a long-term liability, and hence overpayments will be phased over many years, a deficit of £176m, whilst substantial, does not look insurmountable given the business is generating over £100m p.a. in operating cash flow. In my opinion (and that of the Chairman) the stock market has exaggerated fears about the pension issue, which may be creating a buying opportunity in the shares.
The pension deficit is arguably being inflated artificially by QE pulling down Gilt yields to historic lows – since these yields are used to discount pension liabilities, thus increasing them. As interest rates normalise and equity markets rise, the pension deficit may simply melt away. But clearly it is a risk factor.
For such a highly cash generative business, TNI shares look extraordinarily cheap. Broker consensus is for around 27p EPS in 2012, therefore the shares trade at a little under a PER of 1. Given the likely resilience of earnings this seems a ridiculous under-valuation, even allowing for the pension fund problem. Net debt will be largely cleared by 2014, and the run-off of the newspapers is expected by the Chairman to be 10 years+. Therefore there is an opportunity for excess cashflows to be used to develop a serious digital business, something which has not been achieved so far.
There is also the potential for significant dividends to be paid from 2014 onwards.

Thursday, June 21, 2012

Report on Home Retail Group (HOME)

Yesterday & today I have been further researching Home Retail Group (HOME) as this has now become one of my larger positions - I've been very encouraged by the recent IMS which indicated trading had bottomed out at Argos, and was only negative at Homebase due to the unseasonal weather - a credible excuse this year. Therefore I've bought more shares at 81p and 89p, in my view this is a very favourable price, but as always it is NOT a recommendation or advice at all, and please Do Your Own Research!

Here is the link to the IMS dated 19 June 2012;

A couple of comments on that IMS - the market had assumed that HOME was in structural decline, hence overwhelming "Sell" recommendations from almost every broker. However, by delivering flat (well, 0.2% down) LFL sales at Argos (the main part of the group), with virtually flat margins (25bps down), against a very poor economic backdrop of mild double-dip recession, the picture has radically altered - despite unseasonal weather. It now seems that trading has stabilised, and given that overheads should be flat against last year, since the strategy is to make cost savings which offset cost increases, then we should be looking at profits around the same level as last year. Indeed, management confirm they are comfortable with market consensus forecasts.

Given that the squeeze on household incomes is now coming to an end, with inflation falling to 2.8% most recently, and average incomes rising by almost the same amount, then in my opinion this could be the bottom of the cycle for earnings. Factor in some modest recovery, and with operational gearing inherent in retail, there is scope for HOME's earnings to begin rising again from here - which should attract a premium, rather than a discount PE rating. So potentially nice upside here as it gets re-rated. Certainly the shares bounced strongly, and were up about 25% on the week, but have softened somewhat today - making this a good entry point in my opinion at around 84p/share.

Also factor in that HOME is one of the top shorted shares in the market, at around 20% of shares out on loan & shorted, then a short squeeze is one of the reasons why I think this share could have very good upside, as all those shorters become forced buyers.

Also please note all my research is entirely independent - I have never accepted any kind of fee from companies to promote their stocks. It is something I might consider in the future, but it would only ever be for companies that I already like, and would be clearly stated at the beginning of any article. And I would NEVER write anything that I didn't 100% believe to be true. My motto is that "honesty is the best policy", and it's never worth compromising your reputation for anything.
But anyway, that's just musings. For the moment, everything is independent, although of course like everyone else, I'm talking my own book, as I hold shares in this.

That's enough disclaimers & general ramblings, let's get into the analysis.
I'm focusing today on HOME's most recent Annual Report, for the 53 weeks ending 3 March 2012, which you can download here;
Also some useful presentations on that page, worth checking out.

The market cap is £707m (based on 87p/share * 813m shares in issue)

Here's the 3-year chart

Click on the Chart to add a Cross Hair Price Indicator

HOME operates Argos and Homebase. Argos has 10% of the market in home & general merchandise. Homebase has 23% of the sheds DIY market (itself about half the total DIY market), and given the demise of Focus DIY in June-July 2011 (most of whose stores were closed) this market share is the highest recorded. There are now only 2 competitors in the DIY sheds market - B&Q and Wickes.

The reason I like Argos is because they are the last man standing in general retail on the High Street, and have successfully embraced technological changes, with internet sales now 41% (33% last year) of their total sales (with either pick-up in-store on the same day - a crucial point of difference, or home delivery).

Argos is the second largest internet retailer in the UK, which excites me given that I can buy these shares on such a cheap rating.

Mobile is now 7% of total Argos sales (3-fold increase on previous year).

Argos has 746 shops (with net closure of 10 stores planned for 2012/13), whilst Homebase has 341 stores.

Some investors are frightened by retailers' rent liabilities, but as a former FD in retailing, I can tell you that profitable shops are never a problem. The leases are only a problem if the shop is loss-making. HOME makes provisions for onerous leases, and there is a £153m provision on its balance sheet (see AR note 24) which is mainly expected to be utilised between now and 2019.

Interestingly, 300 stores (30% of the total) have lease renewals or break clauses falling due in the next 5 years, so HOME has the opportunity to easily dispose of loss-making shops, or renegotiate the lease terms on renewal at potentially much lower rents. Being large units, there are only a limited number of alternative tenants, so HOME should be in the driving seat when it comes to lease renewals - so the opportunity is there for them to gradually reduce their fixed overheads.

Incidentally, AR note 7 shows rents as £368m, which at 6.7% of turnover is pretty low in comparison with other retailers. Therefore in my opinion lease obligations seem less of a problem for HOME than with other struggling retailers.

Bear in mind also that inflation gradually erodes problem leases, since rents are fixed for 5-yearly periods, whilst over time turnover will rise, especially once the economy begins to recover, which it will at some point (even though when in recession, nobody can see the way out at the time). As investors we should be thinking ahead to recovery, when cyclical, operationally geared companies will see profits rise strongly again.

The 5-year P&L performance for HOME has been poor, with a steady decline in benchmark operating profit from £398m in 2007/8 to £251m in 2010/11, not unexpected considering the effects of the credit crunch on household spending. But HOME has a particularly bad 2011/12, with profit plunging to £98m on the back of a dreadful LFL sales decline of 8.9% at Argos, and a much smaller LFL decline of 2% at Homebase.

The AR states that 80% of the decline in sales at Argos was due to a 20% fall in sales of consumer electronics, partially offset by growth in laptops & tablets. So it seems a concentrated issue, rather than an ebbing away of sales across the board, which would be more worrisome.

Given that mgt have this week confirmed they're comfortable with consensus forecasts, that means we're looking at around 6p EPS this year. So why do I think the shares are cheap at 83p (a PER of 13.8) then?

It's all about Balance Sheet strength. HOME is debt-free, and indeed had £194m in net cash at the most recent reported date, 2 March 2012. Better than that, they had an average net cash balance of £320m throughout the year (see AR page 25, first column), or about 45% of the mkt cap. There is a huge £700m unused overdraft facility available, so this business clearly has surplus cash that could be removed by an acquirer. Facilities are due for renewal in June 2013, so I would expect a smaller overdraft facility from then. 

However, better than all that net cash, is that HOME finances its own store card operations internally, with no associated borrowings!
This is a major bull factor for the shares, because they own outright a net customer loan book of £457m (stated after bad debt provisions) at 3 March 2012. As stated on page 29 of the AR (middle column, top);

"The Group has the ability to monetise this loan book, for example by securitising it, should it wish to do so".

Arguably therefore HOME is a deal waiting to happen. Someone could come along and launch a takeover bid for the group, at say 120p (which would cost them £975m), and then strip out all the average net cash balance of £320m, sell off the loan book for £457m by e.g. getting in HSBC to buy their store card operations (much like HSBC operates M&S Bank for them), which would recoup £777m of the £975m takeover bid. Add in £200m of debt (bear in mind we're only at a cash/debt neutral position after stripping out £777m of cash & debtor book) and you've bought a £5bn+ turnover, profitable retail group, the second largest internet retailer in the UK, for nothing! Bear in mind those figures also include a 45% takeover premium above the current share price.

It's a deal waiting to happen in my view, and I'd be amazed if venture capitalists were not salivating over this potential. Indeed I note there are a number of US investors on the books with disclosable stakes, which can sometimes be a precursor to bid activity.

So it's very much the combination of the Balance Sheet stuffed full of surplus capital, which is actually more than the entire mkt cap, and the fact that trading now seems to have stabilised at the same level of profitability as last year.

There is a pension fund deficit. It was roughly in balance, but as with other pension schemes, the recent fall in discount rate has sharply enlarged the present value of scheme liabilities. Although the £115m pension deficit (up from  only £7.5m last year) is covered almost 3 times by average cash balances throughout the year, and should probably be taken into account when thinking about a takeover deal - as the pension fund trustees might be able to block a deal unless it recouped the deficit first? I'm not sure of the exact rules, so if anyone is expert in this area, please feel free to add a comment after this article - would be good to ascertain the position of the Pensions Regulator, etc.
But I seem to recall reading somewhere that they can block takeover bids, or at least insist on the pension deficit being made good first, etc.?

I note there is also £107m of freehold property, so arguably that just offsets the pension fund deficit, since the figures are about the same.

Dividends/Buybacks - HOME did an ill-timed share buyback scheme, which wasted about £100m by buying back shares at more than double the current price. But that has stopped now, and the dividend was slashed by about two thirds to 4.7p last year. There must be a risk that the divi might be passed altogether this year, but given the strong cash position, and stable trading, I hope that they maintain it. But no guarantees. Although on page 26 of the AR, they state that the Board recognises the importance of dividends to shareholders, and that future dividends will be set at a level which is sustainable & reflects the trading prospects and financial position.

If 4.7p is maintained, which looks reasonable, then the yield will be just over 5%, not to be sniffed at.

Other points;

Directors Remuneration - I was somewhat surprised to see that the CEO & FD both received bonuses of £217k and £124k respectively in 2011/12, which seems bizarre given that it was an extremely poor trading result. The bonuses seem to have been based on hitting cashflow targets, despite lousy profitability & a slashing of the dividend. This does not pass the common sense test in my opinion, and I would suggest that the Board should be a little more careful to not fall foul of the shareholder spring by continuing perceived rewards for failure. It also raises the question whether they managed cashflow in such a way to boost it in the short-term, in order to hit bonus target? If so then that could be an example of targets incentivising behaviour that is not in the long-term best interests of the company or shareholders.

Personally I feel we need to ditch the ludicrous bonus culture, and just pay executives a fair salary & expect them to do a good job to the best of their ability.

The CEO received £1.1m in total, and the FD £612k. Those figures are just too high in my opinion, taking into account the reality that this is a bread & butter retailer, and this type of business is run by an army of middle managers, and doesn't really require that much input from its main board.

£250k for a Chairman too! Really? Someone who essentially just turns up for a board meeting once a month & fills in a lot of forms. It's far too much.

One other point I forgot to mention. When I began this review, I was only really interested in Argos, and thought Homebase was probably a bit of a liability. However, on going through the figures I'm encouraged that Homebase has value. Partly because Focus DIY going bust has thinned the competition down to just B&Q and Wickes in the sheds market, but also because Homebase has a £43m depreciation charge annually. So when you look at its cashflow, it's not too bad.

Profit has ranged from £15m to £48m in the last 5 years, but it's not a declining trend, it's erratic but no trend is visible. When you add back the depreciation charge (non-cash) then cashflow in the good years is knocking on the door of £100m.

Although LFL sales were down 8% this year to date (weather-driven), the gross margin being 225bps up recoups about half of that gross profit fall, by my calculations.


Key points;

  • Balance Sheet contains excess assets (cash and storecard debtor book) equal to the entire mkt cap, so profitable business is in for free.
  • IMS this week confirmed that sales at Argos have stabilised, compared with sharp falls last year - turning point?
  • IMS also confirmed management comfortable with consensus forecasts for this year.
  • Takeover potential due to opportunity from leveraging Bal Sheet.
  • Dividend yield still over 5% despite reduction.
  • Squeeze on consumer real incomes now ending.
  • Strong internet & mobile growth - 2nd largest internet retailer in the UK.
  • Pension deficit recent & manageable size.
  • 30% of stores lease renewals or break clause in next 5 years - mitigates risk of problems. Onerous leases already provided for.
  • £107m of freehold property.
  • Cashflows still strong (add back £126m depreciation & amortisation charge to profit)
  • Operationally geared to economic recovery.
  • Valuation very cheap once surplus assets on Balance Sheet taken into account.

Please remember this Blog is purely for information only, and is just expressing my personal opinions. Nothing written here should ever be misconstrued as being advice. Please therefore always Do Your Own Research. Sensible cmments are welcomed after the article, whether you agree or disagree with me, and especially if you have spotted an error in the article. This is a completely independent Blog, and no fees are received by me from any companies covered, although readers should note that I sometimes own shares in companies that I write about, but will make this clear from the article. Thank you for reading this. Oh, I do receive a tiny amount of money from ad revenues, but thought why not, since ads are pretty invisible to most people, and they do seem relevant & there are only 2 or 3 on a page.

Norcros (NXR) Results

Good morning. There was no Blog post here yesterday, as there were no company results of interest to me. I did however spend most of the day analysing Home Retail Group (HOME) and drafting a report on that, which will be published here later today when it's finished. As usual I will Tweet when publishing any article, so if you don't already, please follow me @paulypilot on Twitter to get those alerts.

FTSE100 Futures are down about 23 points at the time of writing, so a soft opening likely.

Results from Norcros (NXR) caught my eye this morning. It is a group which has activites in the UK and South Africa, making Triton showers, and Johnson Tiles, plus other tiles and adhesives businesses. So fairly dull, but cyclical activities.

I liked the results this morning, and the shares really do look cheap to me, but as usual, DYOR.

Mkt cap £64m (11p * 580m)

Here's a quick snapshot of the results issued this morning (copied from the results RNS);

"Financial Summary

(52 weeks)
(53 weeks)
% Change as reported
% change LFL weeks** and constant currency
Underlying* operating profit
Underlying* profit before tax
Profit before tax
Underlying* earnings per share
Dividend per share

    *Underlying is before exceptional items and where relevant, before non cash finance costs and after attributable tax
**Adjustment to the previous period which covered 53 weeks compared to 52 weeks for this period


·    Group revenue increased by 5.6% on a constant currency like for like number of weeks basis
·    Group underlying operating profits increased by 5.7% on a constant currency like for like number of weeks basis
·    Exit of onerous legacy lease at Springwood Drive, Braintree at a cost of £7.8m but saving £3.3m per annum in future years
·    Completed bank refinancing, securing £51m bank facility on improved terms until October 2015
·    Sale of surplus land to WM Morrison Supermarkets plc subject to successful planning application for approximately £2.6m
·    The Board is recommending a final dividend of 0.28p per share in addition to the interim dividend of 0.14p per share, making a full year dividend of 0.42p, a 16.7% increase on last year"

So we're looking at a PER of only 5.8, which seems excellent value to me, given that profits have risen usefully - although the 25% increase in profit before tax appears a red herring, since the main driver appears to be a one-off pensions credit. So focus on the 5% increase in underlying profits (8% at constant currency) - a solid performance given difficult economic conditions.

Dividend yield is 3.8%

Outlook statement is pretty solid too;

"Summary and outlook
Group revenue in the first two months of the current year is in line with expectations. Johnson Tiles UK and South Africa have started well, but Triton has been weaker.
Our businesses continue to trade robustly in uncertain markets and management will continue to drive the self help strategies that have proved successful over the last two years. The strength of our brands, our market positions, our customer relationships and the encouraging operational improvements in the latter part of the year in both the South African and UK tiles businesses gives the Board confidence that unless markets deteriorate further, our businesses will continue to make progress in the coming year."

Net debt rose to £17.8m, but the increase was driven by a one-off £7.8m charge from an onerous lease surrender, but this will benefit future cash costs by £3.3m p.a.
There is a pension fund deficit which rose from £7m to £18.7m unfortunately, although the size is reasonable compared with the size & profitability of the business. As with most other pension schemes, the deficit widened significantly due to the present value of liabilities being enlarged due to a lower discount rate (linked to lower corporate bond yields, itself driven by lower Gilt yields & QE). Arguably then this is a transitory factor, and the deficit could melt away once interest rates normalise. Or it might not, we don't know for sure.
Bank facilities were refinances in Sept 2011 and look adequate, and charged at only 1.5% over LIBOR, which seems reasonable.

Overall then I like these results, and believe there's good upside on this share - it's cheap even in a weak economy, so once you factor in some economic recovery, then earnings could rise nicely. With a long-term view, it's not difficult to imagine these shares doubling from the current price.

Additional note:

Norcros FD has just bought 300,000 shares at 11.958p each;

Tuesday, June 19, 2012

Home Retail IMS

Good morning! The most important announcement for me this morning is the IMS from Home Retail Group (HOME) - the retail group which owns Argos and Homebase.

It's been a poor performer in recent years, but I'm going to be bold here and call the bottom! Instead of the usual heavily negative sales, they have this morning announced that Argos at least has bottomed out, with Like-For-Like ("LFL") sales roughly flat at -0.2%, and Gross Margin also slightly down at 25 basis points (i.e. 0.25%).

Whilst that may sound uninspiring to the non-shareholder, to HOME shareholders this is a stellar performance, since we are used to being served up -8% declines in sales routinely!

I have always believed in the Argos format, as they not only capture passing trade in town centres, on the last man standing basis for general retail, but also now achieve 41% of their sales via the internet, which increased by 17%! So it's arguably the cheapest and largest internet retailer out there! It's far superior to buying on Ebay, as you are guaranteed product quality, refunds, etc, but also you reserve online, then pop into town to collect. I use their reserve & collect service a lot, it's great for smaller items as you have the item within maybe an hour of ordering it online. Not convenient for everyone, but for people who live fairly close to town centres, it's ideal.

The IMS makes this comment about current year forecasts, which is the key sentence in the report, and should put a rocket under the shares today, in my opinion;

"At this early stage of the financial year we are comfortable with current market expectations for full year benchmark profit."

Turning to their other business, Homebase, the picture is not so rosey (geddit?!).

LFL sales are down 8.3%, but gross margins are up a useful 225 bps, which will considerably offset some of that sales fall. However, they blame this on highly unseasonal weather, which in the case of a garden centre, I feel is justifiable, as it has been bizarrely odd weather this year.

Current broker consensus (per Morningstar) is for 6.3p EPS, so that puts the shares on a fwd PER of 12.7 at this morning's higher open of 80p. Not cheap, you might think? But check out the Balance Sheet! They had £300m average net cash last year (per the results narrative, which is close to half the mkt cap), plus they own a debtor book (instalments from customers) of around £500m, which is a securitisation deal just waiting to happen.

This stock appears very cheap to me, now trading has bottomed out.

Please DYOR as usual! I have a long position in this stock (and have just bought more at 81p this morning).

Regards, Paul.

P.S. Forgot to mention - despite the dividend being slashed last year, consensus forecast is for a 4.4p divi, so even after this morning's big rise, we're still looking at a yield of over 5%. Plus bear in mind that this is probably the low point in the cycle for their earnings, so future growth is not priced-in at all.

Monday, June 18, 2012

Report on QED Investor/Analyst Meeting, 18 June

I've just got back home from the Quintain Estates (QED) meeting at their Head Office, in Grosvenor Street, London. The meeting was arranged (as always!) by David Stredder (thanks very much Dave!) and thanks also to Quintain's CEO, FD, and a couple of other Directors for taking the time to brief a group of about 30 private shareholders. I wish all companies were as shareholder-friendly as this, it really is impressive.

The meeting was mainly going through some presentation slides on a screen, with both the newish CEO, Max James, and the highly-regarded FD, Rebecca Worthington, taking centre stage.

These slides are publicly available, being on QED's website, here is the link first to their results slides for y/e 31 March 2012;

There's not really any point in me rehashing those slides, as they're all pretty self-explanatory, so check them out! For me, these are the key points from their latest results;

  • Gross profit rose marginally to £27.8m, but most of this was absorbed by costs, leaving behind only £5.8m in adjusted profit before tax (up from £3.6m prior year)
  • Another revaluation loss this year on the properties resulted in overall loss before tax of £43.5m (£48.1m loss pr.yr.)
  • EPRA NAV per share fell from 125p to 116p
  • No dividend is paid
  • Net debt peaked at £535m, now falling from disposals, targeting 40% LTV by 31/3/2013 (48% at 31/3/2012)
  • Debt maturity is fine, with cashflows matching repayments due in next few years, and most debt not due until 2016. Difficult to extend maturities beyond 5 years

The main thing to note with QED is that it's basically 2 large London development projects, Wembley & Greenwich. Added onto that is a Fund Management property business, with over £2bn assets under management, and some other niche property businesses, mainly iQ (student accommodation), Quercus (health & care homes), and SeQuel (their name for secondary property assets), plus a recently acquired West End property mgt business. Most of their businesses are JVs with various partners, which seems a good model as it allows flexibility & makes it easier to raise funds.

The reason there is such a deep discount to NAV is probably because QED's main assets are development projects, which therefore consume cash rather than generating it. Hence no divi. However, QED is now starting to look interesting as an investment, in my opinion, because their 2 main projects are actually now being built. So we're at the start of the delivery phase. As the CEO said (convincingly, didn't sound like spin to me),
"We've got real momentum in what we're bringing forward. We've reached a tipping point in projects, finances, and fund management scale".

There seemed a definite buzz with the Directors, who have today announced a highly significant deal with a billionaire Hong Kong investor, Dr Henry Cheng, through his investment vehicle, Knight Dragon.

Full details of the transaction are given here;

In a nutshell, at the moment QED own the land, and have a 50% JV with Lend Lease for the development. Knight Dragon have bought the Lend Lease 50% share, plus 10% of QED's share, so now hold 60% of the whole project, including the freehold (which was previously 100% owned by QED, I think).

QED will also earn developer & project manager fees, and recoup it's infrastructure expenditure previously incurred, but most importantly won't have to stump up any more cash for development of Greenwich - and very importantly, there's no risk of QED needing another Rights Issue to fund Greenwich, so it seems a pretty positive deal to me.

As slide 2 of the above presentation shows, QED will receive cashflows from the deal of around £150m over the next 6 years, plus development gains (which are estimated to be £10m p.a.).

They sounded buoyant about the London property market generally, saying that foreign demand is very strong. They see Greenwich as being an area that will be in demand for residential property at £600-650 psf, as it's opposite Canary Wharf, where 100,000 people work, many of whom would like to be closer.

By recyling capital, this frees up money to develop the Wembley site, especially the London Designer Outlet Centre, which looks very interesting. Note also that the LDO will be let on turnover rents to the non-food (also not the cinema) shops, and the beauty of those is that the actual rent is often substantially more than the base rent. Hence could be big upside for QED if the centre trades well.

The CEO said that in summary, their new partner is, "a big gorilla with a lot of money to drive forward this project". When asked how they met the new partner, they said that QED Directors had gone round the world presenting to about 10 of the richest investment groups in the world. They found much more interest in Asia than from the Middle East. Also, the properties being built in Greenwich will appeal to Asian buyers, as they like new build, and like Canary Wharf.

The CEO also commented that this deal to fund Greenwich, "takes Quintain off the back foot, and onto the front foot", which I think is real. Their Balance Sheet is shored up, and the Directors seem buoyant now they have funding in place to develop their 2 main projects.

I like the Directors here, they seem straight & competent. We got direct answers to questions, and there seemed no evasion or hype.

We touched on other points, including cost cutting - they said that costs & headcount had been reduced, and that they were lean. But then proceeded to serve drinks & food in a palatial Board Room in their prime Mayfair offices! So there is clearly a lot of cost in there still that probably could come out. I did enjoy the food though, M&S rolls & nibbles, mini quiches, etc. I also had 2 glasses of a pleasant red wine, many thanks for that. It also gave us a chance to chat more informally with the Directors, which was appreciated.


Please bear in mind that all of this is my personal opinions only. I am not offering any advice either way, this is just for information purposes, and please do your own research (DYOR).

However, I came away from the meeting feeling that today's deal is very significant, and now means QED can forge ahead with development of Greenwich. Both their main projects are now real - i.e. actually being built, although Greenwich could take 10-20 years of rolling build programmes to complete. At some point the economy will begin improving, and that's when QED shares could get really interesting, once you start to factor in bigger future development gains.

In the meantime we get to buy the shares for just over a third of NAV, so a good measure of downside protection factored into the price. I suppose the main risk is that of economic calamity triggering a meltdown in London property prices. Personally I doubt that is a serious risk, but who knows.

It wouldn't surprise me to see the shares rise nicely from here, 60p is the short-term target I've got in mind, so a 50% gain looks possible, but of course that's purely guesswork, as none of us have a clue what the market will actually do. That would still leave the shares trading at a discount of almost 50% to NAV, so it seems a hardly demanding target.

(in the interests of full disclosure, I have a small long position in this share)

Please feel free to comment or query below.

Regards, Paul.

Quintain Estates investor presentation on Greenwich

Quintain Estates have published an investor presentation about their funding deal on Greenwich Peninsula, which should clarify the position;

Strong start after Greek Election

Good morning! My first proper post. Greek Elections over the weekend seem to have been received well by markets - FTSE100 opened up about 50 points at 5550.

My portfolio - good announcement from Quintain Estates (QED), of a JV funding deal from a Hong Kong investor for their large Greenwich Peninsula site. My only reservation is that it seems to give away 60% of the equity in the project. Market loves the announcement, QED shares currently (08:11) up 21% to 40.5p. I got lucky here, and bought back in last week at about 33p.

I am seeing Quintain's management later today, at an investor meeting that Dave Stredder set up, should be interesting as I also went with him to their last AGM, where we gave the Board hell! I told them that the company is being run for the benefit of management & staff, not shareholders! The stunned look on their faces was a joy to behold as these pesky small shareholders gave them a grilling. Recent management changes, and Laxey sold out, who will be kicking themselves now.
RNS is here;

The only other small cap reporting today which interests me is Majestic Wines (MJW) - always liked their model of bulk wine sales from cheap premises, but it's never looked cheap enough to interest me into buying the shares.

MJW are flat at 410p for £260m mkt cap. EPS up 15% to 26p, good considering flat economy. Total dividends for the year up 20% at 15.6p, a pretty decent growing yield of 3.8%. PER is 15.8, so a tad pricey for me. Debt? It has net funds of £1m at 2 April (just after rents paid on 25 March), so none. Facilities available.

Results are here;

My verdict - good growth company, but priced about right. I would be a buyer around 300p if the chance arises.

Other shares in my portfolio;

Trinity Mirror (TNI) possibly starting to gain traction, it's 27/28p this morning, and is in my opinion the cheapest stock on the market - its true financial position is completely misunderstood by the market. Huge upside in my view.

Lamprell (LAM) - great company, shocking profits warnings recently caused huge fall from >300p to <100p. However, my view is this year's a write-off, but next year should be fine. Deal potential too. Hence I'm bullish on this one. Market responded very well to change of Chairman, up 20% on Friday. Up another 6% this morning to 101p, I'm going to run with this one.

Relief rally on FTSE100 fading already, now up 30 points (Futures were up 100 when they opened on Sunday night).

I remain of the view that there is some staggeringly good value in UK small caps, being created by the ongoing Eurozone crisis, which has shattered private investor confidence. However, in my opinion the Eurozone has no option but to eventually inflate away the public & private debt through some form of money printing from the ECB. But the Germans will only agree to this when the whole thing is teetering on the brink of collapse. This crisis has to be fixed, as the alternative of a disorderly collapse is too ghastly to imagine.