As I mentioned last post, while looking over my portfolio I thought it'd probably be prudent - at long last - to take another look at Creston (LON:CRE) and Plastics Capital (LON:PLA) . Both are companies which have been with me since 2011, and their fate is something of a sorry one. They originally had weights of about 5-6% in a portfolio with more stocks than I now particularly like holding, and since the rest of portfolio happily appreciated while both CRE and PLA hovered around the same, they now occupy about 3% each in a portfolio with only 11 shares. They haven't done that badly, to be fair - PLA is up 15% pre-dividends and CRE about 20%, but that's hardly an exciting return for a small cap share over the last couple of years. The last paragraph of my last post most or less sums up my thoughts:
I'm not averse to having such small holdings, but given their size I haven't taken the care I should do with considering them. I'm very much of the opinion that too much diversification simply dampens returns, so I want to either reaffirm that I like the shares - and therefore buy more - or decide that holding them simply because they haven't done much and I haven't given them much thought is a fool's errand, and therefore sell. Expect a post on that soon!
So, without further ado, a short section on each of the offenders, and what I'm planning to do with them.
Plastics Capital is a 'consolidator' - they acquire different companies, cut out centralised costs and generally enjoy some of the advantages of scale. They're not huge, mind you, but they are certainly a collection of companies which benefit from being under the same banner. The sort of companies they acquire are achingly niche, too - a producer of 'crease matrices', for instance, which are components used in the production of cardboard boxes and packaging.
I like the business strategy, and given the niche nature of it it's perhaps not that surprising that the company has consistently earnt a strong return on capital - above 20%, for the most part. Its figures as reported under-represent the strength of the business, since the company has about £1m of amortisation chopping down their profits every year - a charge which basically comes about from the reduction of an intangible asset on the balance sheet. Since I mentally chop intangible assets out of the equation anyway, and as amortisation is an entirely non-cash cost, I add this back in when considering a company.
In their most recently released results - the 2013 prelims - the company noted that it had been a difficult year, but posted figures broadly comparable to last year. The outlook was notably more bullish, with apparently 'initial indications that trading conditions would improve'. If you were to normalise their figures, something I don't do for the metrics to the right, I reckon the company's on a P/E of about 8 or 9. Certainly not expensive. The group does have a reasonable amount of debt - net debt stood at £8.4m at year end, and a reasonable amount of effective debt in operating lease obligations.
You're on board with the directors here, who hold about 27% of the outstanding shares (worth about £7m at today's prices) and who seem capable given the acquisitions they've made so far. They do note they're interested in further acquisitive growth, which is a positive if they can continue to find companies of the quality and at the price they have done in the past, which may be getting less likely!
Creston is a slightly less ideologically appealing company for me; they're a marketing group, with all the trappings that usually come with that field. I have a good number of hang-ups about service companies like this, perhaps irrationally, which might explain why Creston occupied such a small position in the first place - and why I never really got involved in any others (except Morson - but look how that turned out!). My biggest problem with them is where the value is created - it is, predominantly, by the people employed in the organisations, and not by any proprietary process, by big factories with expensive equipment or by financial wizardry. I guess it's a testament to inefficiency of the market that more of the returns don't flow to the real value creators.
Ideological questions aside, none of this changes the fact that Creston - along with other marketing companies - can churn out impressive results with consistency. Take a look at something like WPP if you want proof of that. Perhaps the fairest way to value an advertising company is simply to look at what it's done in the past, then, and assume - since the business is fundamentally the same, with most of the same people, processes and customer relationships, a reasonable continuation thereof. Creston, for their part, have done a pretty good job of bringing profits up over the last 7 years.
Judging by their interim statement, this year might not be quite as good as last year, though there are some reasons for positivity. Call me a cynic, but given these are people paid to persuade, I ward myself more than usual against management bullishness! There seems to be potential for growth, though, and management do talk a good talk about cross-selling and up-selling and selling generally in directions which don't mean a great deal to me but probably mean more profit for the agencies.
I actually quite like both companies - more than I thought I would having ignored them for so long. They both have a decent amount going for them, and while not exactly grabbing me by the throat and urging me to invest more, I think they're likely to do better than the market over the next few years. When looking at whether to buy or sell, I was reminded of a rather good reason to sit on your hands with small caps - trading costs. It costs a lot to trade small cap shares because of the wide difference between the ask (the price you pay) and the bid (the price you sell at). In PLA's case, it's 5% - by no means a decisive factor, but it at least gives me a little more reason to like the status quo. As it stands, I have no cash left in the portfolio, but I don't particularly want to sell any of my other shares. If PLA or CRE fall, or if another of my stocks shoots up and leaves me with a glut of cash, I might consider reallocating more towards them. For now I take the easy option, and keep them as they are.