Small Cap Value Report (11 Jul 2016) - MCB

11th Jul '16 by Paul Scott

16 comments 10753 reads

Good morning!

It's the worst type of Monday morning today - the type when you wake up thinking it's Sunday. Also, my patience has finally snapped with the noise-polluting bus drivers whose day-to-day conversation is held at c.120 dB at the bus stop near my open window here in East Canonbury. I've escalated things from giving them dirty looks combined with mild tutting, to a strongly worded email. That should get things moving.

Markets seem to be regaining their poise somewhat too.

McBride (LON:MCB)

Share price: 165p (up 7.8% today)
No. shares: 182.2m
Market cap: £300.6m

Trading update - the turnaround seems to be continuing apace at this maker of household & personal care products;

The Board expects that adjusted operating profit for the full year will be slightly ahead of its previous expectations.

The Group's full year performance has benefited from better than anticipated progress on cost saving initiatives, including the final year impact of the UK business restructuring project. Purchasing-driven savings, in part a result of the decision to reduce the Group's range of products and customers, have additionally contributed to the result.

Turnover continues to fall, but as the saying goes, "sales are vanity, profit is sanity".

The simplification programme to reduce the number of small customers served by the Group remains on track with full year sales lower by approximately £6m as a result of this action.

Additionally, revenues have continued to be affected by ongoing price pressures in a number of key markets, especially in the UK. Consequently, on a constant currency basis, Group revenues for the year ended 30 June 2016 were 1.9% lower than the prior year.

Outlook - this is interesting. McBride has a confident comment re Brexit;

There has been no impact to date on the Group's day-to-day operations from the outcome of the EU referendum in the UK and it remains too early to determine the longer-term effects on McBride's activities, of which approximately 70% are in subsidiaries based outside the UK.

"No impact to date" is very reassuring. Note also the geographic spread of activities.

Valuation - seems reasonable (see below), although note that there's a fair bit of debt on the balance sheet.

My opinion - I quite like it. There's been a strong turnaround underway here for a while. People I know who have met…

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janebolacha

11th Jul '16

Paul,

McBride (LON:MCB) reducing the number of their small customers ought to do wonders for their productivity.

One of the features of that kind of contract filling operation is that each and every customer
is likely to have slight variations in the product they buy, a different kind of colorant in the
washing-up liquid, a different softening agent, a slightly different concentration of the shampoo
or shower gel, etc, etc. All that means that the changing from one batch to another brings
inevitable downtime in the whole blending and filling operation, exacerbated by changes to
labelling and packaging. All that adds up to unrecovered hourly fixed costs, actually the bane
of all contract filling operations.

If they can pull that one off, there ought to be enormous benefits.

The possible downside is that the greater concentration on a smaller number of bigger
customers may bring pressure on margins. They will need to be hard-nosed commercially.

FREng

With Leadsom withdrawing, we might see some stability returning.

TraderTim

I think the markets are now fed up with politics as I think we all are! Still pretty volatile, but I think things will steady over the next month or two. The added clarity will help though.

Rusty2

Looking at McBride (LON:MCB) their margins look very low. Maybe they will get squeezed more by the supermarkets, seems Asda is starting a price war.

imranawan

Hi Paul

If you do have anytime today, I'd appreciate your comments/views about the Amino Technologies (LON:AMO) interims issued this am. Results look to be in line albeit, with lots of adjustments. SP has barely moved so I suspect these were priced in after the recent TU issued in June, and I guess it will take time for confidence to return to the share after the PW in October last year.

Best wishes,
Imran.

richjp

Hello Paul,

I would be interested in AMO as well. I may be mistaken but I thought you might have mentioned it previously?

fred9566

Hi Paul - like Imran above I was also hoping that you would rule your slide rule over the interim results from Amino Technologies published this morning .On your last look you still did not understand exactly what they do and this interim report shed some light on it - as a lot of their income is in dollars and thye are in a fast growing sector I am a big fan but would be interested in your views on the latest report

cheers

Keith

Joeydisco

The markets and the pound have already reacted well to May being named as PM.

Thankfully we won't have to endure a 9 week contest. In future they, or at least the Conservatives, should make a rule whereby if the party is in government then only the MP's should be allowed to vote on the new PM. And I say this as a conservative party member.

Lots of countries have been making public noises about securing trade deals with us and Osborne and Javid are already touring the world to make sure these major deals start happening as soon as we are able.

The country needs proper leadership and direction and with the new PM there is now the chance of that.

Interesting RNS just now from British Land:

"British Land and Oxford Properties announce today that The Leadenhall Building is fully let.

Current customers Kames Capital, MS Amlin and Rothesay Life have committed to take the last remaining three floors, with two of the three transactions completing since the EU Referendum on 23 June.

Kames Capital, which currently occupies Level 26 and has £58 billion under management, has completed an 11 year lease over 7,000 sq ft on Level 43, the highest remaining available floor in the building.

MS Amlin has taken expansion space on Level 27, which provides 13,000 sq ft of offices. The company signed leases over 93,000 sq ft in 2013 and welcomed 800 staff to its new global headquarters in the summer of 2015.

Rothesay Life, currently resident on Level 25, has agreed to take Level 32 which comprises 11,000 sq ft. The specialist insurer, which is owned by Goldman Sachs, Blackstone, GIC and MassMutual, will occupy a total of 25,000 sq ft across its two floors.

The Leadenhall Buiding, designed by Rogers Stirk Harbour + Partners, provides 610,000 sq ft of office space over 45 floors and has attracted the highest rents ever paid in the City of London. The building was the winner in the 'Office Building' category at New London Architecture Awards earlier this month.

Tim Roberts, Head of Offices and Residential at British Land said: "This is a significant milestone, and underlines that our decision to hold our nerve early in the cycle and attract lettings on the upper floors post-completion was the correct one.

"Moreover, to receive commitments from occupiers so soon after the EU Referendum is not only a tremendous endorsement of the building; it underlines the enduring appeal of London."

http://www.investegate.co.uk/british-land-co-plc--blnd-/rns/leasing-of-the-leadenhall-building-complete/201607111303178364D/

Early days, I know, but has the London commercial property scare in recent days perhaps been over-egged?

Possibly, property shares are the big gainers today, some up over 10%.

JohnEustace

I know of a number of new developments that have been put on hold. The BoE decisions re interest rates and QE on Thursday may influence things. Also I think the markets are clutching at the straw that Mrs. May won't Brexit whereas I fear she will do it as quickly as possible.
I try hard not to bottom fish and only buy things that are going up but my bargain picking temptation is more likely to suck me into the affordable home housebuilders. Of course we may, or may not, have a new Chancellor by the end of the week who is less friendly to the builders. Interesting times.

Low business confidence which results in investment and projects being on hold is the biggest risk to the UK economy just now.

This can be improved with proper direction and certainty provided from the government.

Sentiment, that is all this is, and it can change quickly.

I'd expect (observing from my detached overseas perch!) the new government and its policies to be strongly pro-business but pragmatically rather than ideologically (MacMillan rather than Thatcher?), but also with a firm "one nation" social commitment, very centrist in its policies and appeal. Housebuilders seem to me to be well placed to benefit.

timarr

The recovery in prices in the property sector today looks pretty indiscriminate and based more on hope than hard data. That said I think there have been some genuine opportunities in the London based REITs. There are a range of factors to consider:

In 2008 the REITs fell 40% peak to trough and discounts to NAV widened out to 40%. We were looking at similar levels in some of them last week since the back end of last year;
Brexit or no Brexit the UK is viewed worldwide as a safe haven, governed by the rule of law with cast iron property rights: and prime Central London property is always going to be the most desirable;
There is a hideous amount of residential property in London that's exposed to foreign hot money and recession, you need to avoid it;
There is a wall of new commercial property due to hit London in the next few years; it will push down lease values for all but the very best;
Foreign investors looking to acquire portfolios are most likely looking at the mid size REITs - the devaluation of sterling makes it 10% to 20% cheaper for them to buy;
Retailers in Central London are likely to see a significant boost from tourists armed with extra pounds.

My conclusion on this last week was that the very best portfolios from the best REITs were likely to be of interest to acquirers, that a lot of the pain was already in the prices barring a really deep recession and even in that situation there was little chance of a permanent capital loss barring a deeply discounted opportunistic acquisition.

I picked up some Great Portland Estates (LON:GPOR) on that basis - a discount to NAV of over 30%, property based in and around the West End, almost no exposure to residential, 25% exposure to retail and a big net seller over the last three years to the point of being virtually debt free with long leases in place.Based on previous behaviour as soon as the BoE has cut interest rates I expect them to lock and load for the next set of purchases at cyclically low prices.

The timing here may turn out to be terrible, but I'd rather be buying quality assets in Central London at decent prices than fiddling about with regional housebuilders even if they do look dirt cheap.

simoan

Jane,

Aren't all of these UK companies?? I believe so, in which case I'm not sure it tells us anything at all about the likely effect of Brexit on prime London commercial property. I believe two of the companies have Scottish origins so perhaps it's more telling with regard to the possibility of a second referendum north of the border :-)

All the best, Si

jonesj

Long leases do not provide certainty when the retailers go bust. Although, if the price is right, central London property is better than some other options.

Small Cap Value Report (11 Jul 2016) - MCB

McBride (LON:MCB)

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Paul Scott

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