Small Cap Value Report (21 Aug) - AGA, PPH, RNWH, RBN, STVG

21st Aug '13 by Paul Scott

27 comments 22807 reads

Good morning. Let's start with AGA Rangemaster (LON:AGA), the maker of posh cookers. I like the company's turnaround potential as economies and the housing market recover, but the massive pension scheme deficit has put me off in the past. The recovery plan for their deficit stipulates that, having paid £20m into the scheme recently, they now have a breathing space until paying £4m in 2015. From 2016-2021 Aga must pay £10m p.a. into the pension scheme, with another £30m payable in 2020. So that is a total of £94m in payments due over the next few years! A huge amount considering the market cap is currently £74m at 103.5p per share.

I was amazed to read a short article on Aga in Shares magazine which didn't even mention the pension deficit here! So I suspect that some new investors are buying the shares unaware of the seriousness of the pension deficit, and that it could quite easily consume virtually all of the group's cashflow for the next eight years.

The narrative to the interim results (six months to 30 Jun 2013) published today do mention these overpayments, but interestingly they indicate that perhaps lower overpayments might be negotiated in the next couple of years:

As market conditions alter and as the increase in yields on government bonds has a positive impact on the actuarial valuation of liabilities, it remains the intention of the Group to rebalance the relationship in terms of scale and financial strength between the scheme and the Company before any new formal funding arrangements are to be put in place in relation to the next triennial actuarial valuation to be undertaken as at 31^st December 2014.

The accounting deficit appears quite small, and the latest figures are scheme liabilities of an astonishing £828.9m (!!) and scheme assets of £813.3m, giving a deficit of only £15.6m. However, the nonsense of pensions accounting is such that a separate (and usually more conservative) valuation is agreed every three years, which drives the negotiated overpayments. So for the purposes of investors, we have to understand two completely different pension scheme valuations - one for the Balance Sheet, and a different (in this case much worse) valuation for overpayment calculations.

This is probably the biggest pension scheme relative to the market cap of the company that I…

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deucetoace

21st Aug '13

Good news for Pressure (PRES) with orders for the one division that has been losing a little money in the past. Ok it looks like the impact will be in the next financial year but longer term it looks very positive as well. It helps to firm up the projected earnings for next year

Bruaich

Dear Paul,

Thank you for your balance sheet analysis. I suspect all this is a common-place for most of your readers but I found your analysis extremely helpful, bringing together in a straight-forward manner many of the things I have learned in a somewhat haphazard over the years. This sort of exercise and your great custom illustrating your comments with clips from Stockopedia is an exemplary educational exercise for the inexperienced like me!

Yours,

David

Paul Scott

Hi Ramridge,

In response to your query, I've done a brief review of Robinson (LON:RBN) Balance Sheet today, to give a flavour for how I assess B.S. strength. For me it's a key way to reduce investing risk & hence enhance long term returns, because a Bal Sheet filter will usually filter out disastrous losers, which are the ones that hit performance hardest I find.

Cheers, Paul.

Thanks for the message David.

I'm really glad you found today's report useful!

Regards, Paul.

Chrisfarrell21

Absolute mammoth report today, appreciate the time and effort.

Chris.

Yantomawr

Fully agree with Chrisfarrell21, the combination of Paul's hard work and analysis together with Stockopedia's attractively presented in-depth and up-to-date information is hard to beat.
By the way Paul, I assume from the positive comments and conclusions about Robinsons, they are at least on your "watch-list"?, if not your "buy-list" - (Shame about the 5%+ bid/offer spread)

Hi Yantomawr,

Thanks for your kind comments, much appreciated.

You asked:

By the way Paul, I assume from the positive comments and conclusions about Robinsons, they are at least on your "watch-list"?, if not your "buy-list" - (Shame about the 5%+ bid/offer spread)

Good question. It's a failing of mine, but I just cannot bring myself to buy things that have already gone up several fold. If I already held Robinson (LON:RBN), then I'd definitely hold, but can't bring myself to make a new purchase given the huge rise that it's already achieved.

Regards, Paul.

PhilHofGrowYourDough

Paul/Ed,

Firstly Paul thanks for putting so much work into detailing how you examine a balance sheet.
I'm wondering if there is some way to provide Stockopedia traffic lights for the balance sheet analysis?
Or perhaps more practical, a flashing red one if there are clear and obvious issues with the balance sheet.
I think this would be really helpful for those of us with no accountancy knowledge.

Maybe it's too complex to reduce it down to that, but I though it might be worth asking.

Thanks again
Phil

garbetklb

Paul
Can I just echo other appreciative comments - especially the excellent report about Robinson. Helped to reassure me that it was an appropriate share to have bought as part of a portfolio of Business Property Relief qualifying AIM shares being assembled for IHT planning purposes following the death of my father earlier this year.
But, as Yanto says, spread (and stock availability) are issues that push this towards a buy & hold account - which is our intention.
I bought a few more this morning for myself as well.
Andy

Entrust

Great stuff Paul, thanks, really look forward to the daily diet :-)

Often throws up a stock I haven't researched, or haven't looked at in a while and is worth a further look. I like the emphasis on small caps that haven't been, and are unlikely to be for that matter, trampled all over by everyone else and their auntie. Gives us a great edge.

A "pensions surplus" you say for Robinson?? What the Hell is THAT?? ;-)

Smudge

Hi Paul,
Your analysis and how you acheived it of the balance sheet was, in my opinion, one of your finest pieces so far. Clear concise with a indicating of what sort of parameters to look for.

Thanks for taking the time to write and to help with my education in this mind boggling, jargon infested world.
Rgds,
Smudge

carmensfella

An epic report today and probably your finest in scope and detail.
I would just like to add that Robinson has been in my portfolio for nearly five years and is a very sound family firm that clearly came to market for IHT benefits for the many tens of family members and to provide liquidity if they needed to sell some shares as very few of them now work in the business.
My original post about Robinson is on this thread and includes details of the property assets....http://boards.fool.co.uk/ooh-mrs-robinson-rbn-12217563.aspx?sort=whole#12870289

SingSing

Thanks - well written, practical, no nonsense analysis.

cig

Great report today, but on PPHE Hotel (LON:PPH) , I am puzzled you're worried about the balance sheet when, if I recall, you liked Newriver Retail (LON:NRR) which is a pretty similar business -- a hotel group as so structured is essentially a REIT that rents the properties at room level on one night leases rather than at building level on longer leases like a classic REIT (which can enhance value if they do operations well).

As far as I can tell NRR has a similar balance sheet re leverage and it's generally okay for well run property companies. NRR sells at twice book value and PPH at about half, and you like the former and not the latter, so I'm puzzled that two apparently similar companies can be assessed so differently.

Also their property portfolio has a sizable exposure to sedate markets (e.g. Germany) which provides some cushion against bubbly property markets. There are some non-balance sheet negatives though, it's registered offshore and closely held, with a succession issue possibly as the founder is well into his 70s.

(long PPH)

Ramridge

Hi Paul
Thanks for the elaboration. Just one follow-up. Intangibles. I come out in a rash when I see a disproportion % of intangibles. In one of your previous analyses w.r.t. SOG, the net assets net of intangibles turned out to be negative, and you rightly lost interest in that share at that point. My sense is that on a market correction, companies with high proportion of intangibles compared to net assets will fall harder and faster than those with sensible values. Which is another sign of a weak balance sheet.
Regards, Ram

Hi,

I see that Robinson (LON:RBN) have restated their interim results to correct the error in the EPS figures that I spotted in today's report. I rang their Finance Dept to flag up this error to them, and thought they would probably issue a correction RNS, but didn't want to embarrass anyone there by commenting further before they had had a chance to re-issue the corrected figures.

It turns out that last year's EPS figures were wrong too - nobody had spotted that the diluted EPS figure was incorrectly calculated on pre-tax profit, where of course it should be calculated on post-tax profit. However, the full year figures were correct, it was just the interims that were wrong.

I spotted the error because I couldn't understand why the diluted EPS was so much smaller than the comparable non-diluted EPS figure.

Anyway, here is their correction RNS:
http://www.investegate.co.uk/robinson-plc--rbn-/rns/half-yearly-report--replacement-/201308211457192153M/

Cheers, Paul.

pyemckay

Paul, i would like to echo most of the posts regarding the fantastic report that you produced today. It is fantastically educational and it has personally improved my stock picking by being more selective about companies and their reports. I also question a lot more now.
Its always nice to read a review of a company that i own to see if i have overlooked or missed something.

much appreciated

paul.

Aislabie

22nd Aug '13

Much appreciate your run through on Robinsons, but there is one other aspect to the BS analysis that is worth reminding readers.
If the current assets less cash (operational working capital) are significantly higher than the current liabilities the company's structure will require cash investment to grow. Whereas a negative current ratio such as an established hamburger joint (selling in cash, very little inventory and 30 day terms to pay) will actually throw off cash from its growth as last month costs are paid by this months takings. It is always worth checking this ratio to see how growth claims will affect the cash position.

Dendyver

Further to your fantastic write-up on Robinson.

You show Broker consensus EPS figures of 12.7p this year and 14.3p next which compare with Morning Stars of 11p and 10p respectively. Where do your figures come from?

When you referred to an acceptable debt level of 1.5 times cashflow - are you referring to the figure Cash generated by Operating Activities, which for Robinson is £886,000?

Do you think this Cash generated by operations figure of £886,000 looks low compared with Operating Profit of £1.899,000? Do you have a rule of thumb for this metric?

23rd Aug '13

Hi Aislaibe,

That's an excellent point.

Businesses with large stocks AND large debtors, but relatively small creditors, will consume working capital as they grow - because growth in sales requires them to grow 2 Bal Sheet debit items (stock & debtors) whilst only 1 Bal Sheet credit item grows. Net result = working capital hungry, which will either gobble up cash generated, and/or require additional equity.

I recall exactly this situation a few years ago with Fayrewood. They were growing nicely, but didn't generate any cashflow. We challenged management about this, face to face, and much to my surprise they agreed with me, and said that they had come to the conclusion that they were "being used as a Bank" by their customers, and that further turnover growth was a poor use of capital. So they dismantled the group by selling off its constituent parts.

Regards, Paul.

Small Cap Value Report (21 Aug) - AGA, PPH, RNWH, RBN, STVG

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Paul Scott

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