Small Cap Value Report - PMP, HYC, CRE, RHL, BON, ARDN

31st Jul '14 by Paul Scott

15 comments 22821 reads

Good morning!

Portmeirion (LON:PMP)

Share price: 815p
No. shares: 10.7m
Mkt Cap: £87.2m

Interim results for the six months to 30 Jun 2014 have been published today by this crockery maker.

Portmeirion owns a number of well-known brands, and the screen grab on the right from their website shows the classic "Botanic Garden" range.

It's probably my favourite long term hold, as the company ticks all the boxes I like - modest valuation, good profit margins, a strong Balance Sheet with freehold property and net cash, steady growth even in weak economic conditions, good progression in dividends, competent management, and predictable revenue streams. Having a product which will be dropped & broken by owners from time to time gives a nice replacement cycle too!

Look how well the company has done, during a 6-year period where its main markets (UK, USA & S.Korea) were economically soft;

It's a quality business, on a modest valuation in my opinion, which is confirmed by the high quality scores on the Stockopedia graphics below, and its very high 95 score on the StockRank system;

Valuation - Note that the PER & dividend yield have only just turned yellow, having been green for a long time. That is probably because PMP shares have been strong in recent months, whilst many other smaller caps have been weak. So the undervaluation is arguably now not as pronounced as it was. Although to my mind this is a business that should command a PER of about 20, so the valuation of 14.1 seems to build in an attractive margin of safety for investors.

Interim results - The figures look good. Although as noted in the commentary, Portmeirion makes most of its profit in H2 each year, due to the dependence on the Xmas Tree line (which is a big seller in the USA), and the overall suitability of its products as seasonal gifts.

Nevertheless, the company has put in a creditable performance in H1, with EPS up 53% to 9.21p (2013: 6.03p).

Outlook - Since H2 represents the overwhelming bulk of full year profit, the outlook statement is more important than the H1 figures. So a "strong order book" for H2 is reported, and the Chairman comments;

"The performance of Portmeirion Group in the first six months of 2014 has been in line…

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raggedtp

31st Jul '14

Hello Paul
Thank you for your comments, which I follow with interest. Agree about Portmeirion, although I wish I'd bought earlier at 750, so I will sit and hope for a pullback on a bad news Friday. Think I might be trying to track too many things. In an earlier posting, you mentioned a spreadsheet of yours which has live prices from Google. I'm trying to do something similar, as the one vital thing I can't do with Stockopedia, it seems, is see my portfolio's share prices set alongside the target lows and highs I would like to set. Any advice on how to set up something like this would be most welcome.
Thanks a lot

monzo

I'm a happy holder of Hyder Consulting (LON:HYC) today. I was hoping for a rather more upbeat trading statement but then had the nice surprise of the offer. Good solid company that had a blip in trading that offered up a great entry price. Nice to be sitting on 50%+ plus a couple of % of divi's a few weeks back. Makes up for missing out on £KENZ!

valueman

Sound article Paul but a reason I would not invest is the amount that the directors lavish upon themselves .If you look at last year'a accounts you will see a cost of £1.878m of directors emoluments -thats over a quarter of the profits !
Do you think that the company may be run rather more for the benefit of the directors than the shareholders .After all this is only a smallish company with sales of less than £100m .

Paul Scott

Hi Valueman,

Thanks for that, interesting point.
I've looked into Director Remuneration at Portmeirion (LON:PMP) before, and concluded that it was OK, so to refresh my memory here is the relevant info from the 2013 Annual Report (below).

The base salaries look OK, although I think the Chairman, Dick Steele, is handsomely rewarded. I know him funnily enough, as we worked on a corporate deal about 15 years ago. Not only has he got a fantastic name, but he's also an intelligent & experienced businessman. However, £82k p.a. remuneration for a small cap Non-Exec role seems very generous to me. Especially as he didn't reply to my last email.

Note that what takes the salaries up a lot, is the bonus elements - the LTIP, and the gains on share options. Those won't happen every year, remember. Given how well the company has performed, with a decent amount of shareholder value created, I'm struggling to begrudge them these rewards.
Personally I don't mind Directors getting a slice of the action where they have delivered decent medium to long term shareholder value, as they have here. But it's an area for judgment.

Regards, Paul.

jonesj

I use a google spreadsheet to track my share portfolio.
Due to the need for ISA, SIPP & "normal" trading accounts, plus deliberate diversification to prevent one broker holding a large proportion of my assets in a nominee account, I've ended up with 6 broker accounts. 2 ISA, 1 SIPP, 3 normal accounts.
To monitor this, I use a google spreadsheet. This works well for UK and US holdings. I need to import quote data from Yahoo for other markets.
Google PE ratio data seems notoriously unreliable & they are slow to correct bugs. However, this is by far and away the best way I have found to get an instant valuation and track holdings which may be split over several trading accounts. Please reply if you want an example.

GavinT

1st Aug '14

Hi Paul,

Do you think Portmeirion (LON:PMP) deserves a PE rating of 20 because it's a growth company or because it is a quality company?

If it's the former, I struggle to see evidence of growth -

2013 revenue - 5% increase;
H1 2014 revenue - 3% increase vs comparative period. Even if we were to assume USD/GBP rate to be constant, the growth would have been around 5%.

shanklin100

Hi Paul

A very minor point!!

You may wish to add the date to the title of this SCVR, as per your usual title format.

HTH. Best wishes, Martin

emptyend

Hi Paul,

Just adding to GavinT's query on growth, I thought I would mention the main reason why I wouldn't touch Portmeirion (LON:PMP) with a bargepole. And that has nothing to do with your very fine exposition on its financial merits.....

....it is simply that I hate their core products with a passion!

I think they are outdated, unattractive, formulaic and derivative - and have been fundamentally unchanged for about 20 years (IIRC). In my book just plain ugly.

Accordingly, I see them as the pottery equivalent of Laura Ashley - once you have saturated the market for people who like flowery creations, where does the growth come from? And what happens if/when your core market declines?

For the effects of this, look no further than your local auction sales. Boxes upon boxes of fine china tea-sets, that are being sold for peanuts.......not because they are badly made or anything (in fact, very often the reverse)......but simply because they have fallen out of fashion and are less intrinsically-useful than they were.

Accordingly I think the big issues going forward for Portmeirion (LON:PMP) will be maintaining volumes and margins. There is ultimately a finite demand from people who will buy flowery pap.

ps.....I really am prejudiced against it, in case you can't tell! ;-)

ChristopheBassons

Paul,

Interesting to hear your comments on PMP. I have a slight soft spot for this company, as it was my very first small-cap purchase in the late 90s. That investment only just worked out, despite obvious value credentials at the time, and the company went through a rough patch. Looking back, there were two areas where the business was in trouble: manufacturing cost base; design. The sorted the manufacturing out, but the various design initiatives over the years have seemed to have gone no-where. This is where i share EmptyEnd's concern - I don't think they're investing enough to protect the brand (and hence their sales and margins going forward) by updating their designs and their marketing. While I'm not particularly fond of the classic Botanic Garden, a lot of people do seem to like it, so I'm not suggesting an overhaul, rather they need to manage this brand and the design range rather better; they also don't look like they're forward looking when it comes to new designs. There's a little bit of a ceramic design renaissance in the marketplace and for PMP to be considered a real growth company, they should be capitalising on this (e.g. check out Jars, a French company with similar heritage and classic designs, who are bang on trend and also managing their classic design portfolio well). Maybe I've underestimated the power/loyalty of their customer base, but I find it hard to buy a company whose products I fundamentally don't like, and also where I can't see where they might be going with future designs.

AIM Prospector

AIM Prospector (an online magazine from Blackthorn Focus) recently made Portmeirion 'Top Pick' in a 'what AIM share would Buffett buy' feature. I hope no-one objects to me wading in with my 2p worth at this point. In the 'bear points' accompanying the article I wrote:

"Product is a fashion item"

and of course fashions can change. However, it is worth noting how diverse Portmeirion's sales are. Korea is almost equally important as the UK. That reminds me of the Burberry (LON:BRBY) experience - when the trademark check became much-maligned on these shores, it continued to sell like hot cakes in the Far East.

What I am trying to say is that investors should probably not try and second-guess global sales trends of fashion firms.

David O'Hara, Editor

note: Blackthorn Focus, publishers of AIM Prospector, may have enjoyed past, or seek future, commercial relationships with companies featured.

That is a fair point, David, but those who buy Portmeiron are doing precisely that. Those who simply choose to avoid it are not.

Whilst it may remind you of Burberry, I am reminded more of Mulberry (down 70% from its peak just over two years ago). The Burberry check is unique (and trademarked) - but any old crockery will do for many. Just as with handbags, there are plenty of substitutes available. And even Burberry is at risk of its design being ripped off by the locals.

cig

3rd Aug '14

It's hard to imagine Portmeiron stuff as high fashion, with hipsters following hot trends and changing their allegiance en masse overnight. Nor can I imagine hooligans adopting it as a symbol as happened with the casual movement, which damages brands for the mainstream.

I'd expect their distribution channels to be relative stable: the sort of crowd that buys granny crockery one year will tend to still be there the following year, if perhaps slowly thinning down/dying out. So slow decline is plausible, but that risk is present in some form or other in most sectors.

4th Aug '14

the sort of crowd that buys granny crockery one year will tend to still be there the following year, if perhaps slowly thinning down/dying out. So slow decline is plausible, but that risk is present in some form or other in most sectors.

In the late 1990s, that used to be the sort of thing that fans of Marks and Spencer (LON:MKS) said. Then fashion changed (and the product became less reliable due to overseas supply switch).

Granny crockery is just as likely to involve pictures of cats as to require Portmeirion (LON:PMP) flowers. Or....(and here there may be a gap in the market? ;-)) ....someone may bring out a "Great British Bake Off" line of crockery - for which I see there is already a cake stand. Either way, it is folly to assume that the supply of people buying tasteless tat will continue unabated - just ask Gerald Ratner

ozzygoff

6th Aug '14

Hi Paul. I would just like to point out that the range of crockery available on the Portmeirion website is more modern than you might first think. Pimpernel range for instance, and under the header Portmeirion there is a "Dusk" range, that is far from old school.
Great work by the way.

timarr

8th Aug '14

690p counter bid in for HYC from Nippon Koei this morning.

I bought sub-150p in June 2009 but you could have had them for nearly half that price even a few months earlier. Remember 2009? Collapsing currencies, bust banks and dirt cheap stocks?

And you try and tell young people that these days ... and they don't believe you.

Small Cap Value Report - PMP, HYC, CRE, RHL, BON, ARDN

Portmeirion (LON:PMP)

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Paul Scott

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