Small Cap Value Report (11 Oct 2016) - NXR, ENTU, BDI, CHRT, PHO
Good morning!
I added a few more sections to yesterday's report last night, so to recap on that, please follow this link. In particular, a very interesting turn of events has occurred at Richoux (RIC), which I reported on.
Sterling remains the pressing issue of the moment. At the time of writing it's dropping further, and we're down to £1 = $1.228, or £1 = E1.105 .
There's a good article here, with Lord King welcoming the weaker pound. Economist Vicky Pryce emphasises the inflationary pressures that will be caused by weaker sterling. It's certainly going to make UK industry much more competitive, which is surely exactly what we need when facing all the uncertainty from Brexit?
My main worry is for margins at importers (e.g. retailers). They have no choice but to substantially raise prices next year, but consumers are going to push back against that. We don't know how it will all pan out, but I reckon margins are bound to be hit hard at retailers next year. That will really sort out the wheat from the chaff. Companies like Next (LON:NXT) are likely to sail through relatively unscathed, in my view. Whereas the poorer quality (in terms of operating profit margin) retailers on low margins already could be seriously harmed. I wouldn't touch any low margin retailer at the moment, as performance could seriously deteriorate next year, maybe even into losses. Then the apparently low PER will go out of the window.
So broker forecasts should be treated with great caution right now, or even ignored completely. When circumstances change significantly, a formulaic approach to investing, relying on broker forecasts, can go disastrously wrong. It needs a human being to reasonableness-test things at times like this, to dodge the banana skins as much as possible.
Small caps feel strange to me at the moment - lots of sudden, erratic price movements. It feels as if the market is trying to work out which stocks deserve the big gains that we've seen since July, and which ones have been taken too high on speculative froth.
On the flipside, I'm also seeing signs of life in some really bombed-out small caps. Companies which disappointed have been slammed so hard of late, that I think people are out bargain hunting now perhaps, amongst the wreckage? There could be some nice trades to be done there, if one is very selective? The percentage gains from the lowest point of bombed out shares can be spectacularly good. Remember that, providing the balance sheet is sound, the downside is limited - companies with sound finances don't go bust.
Right, on to today's results & trading updates.
Norcros (LON:NXR)
Share price: 146p (down 0.5% today)
No. shares: 61.3m
Market cap: £89.5m
(at the time of writing, I hold a long position in this share)
Trading update - this covers the 6 months to 30 Sept 2016, being H1 of the y/e 31 Mar 2017. Given that the share price has been selling off relentlessly, I imagined that this would probably be a profit warning. The good news is that things sound fine overall;
Group underlying operating profit1 in the first half is expected to be in line with the Board's expectations.
Previous trends have continued, with the UK market being soft (LFL sales down 5%), with South Africa taking up the slack, with 8% growth (10% in constant currency).
Thus the overall level of sales was only very slightly down at -0.2% on an LFL basis.
Acquisitions boosted total group H1 sales by 8.5% to £128.8m.
Net debt isn't a worry here for me, because the group is nicely cash generative, and has good freehold property backing. At this level I'm comfortable;
Closing net debt is expected to be around £28m (2015: £29.2m). Working capital and cash management remain a key focus for the Group.
Outlook - confirms full year expectations, which is pleasing;
With the continuing strong performance of our South African business and the contribution from the recently acquired businesses offsetting the challenging UK market experienced in the first half, the Board remains confident that the Group will continue to make progress in line with its expectations for the year to 31 March 2017.
Valuation - the forecast (reiterated this morning) I've got is for 27.0p EPS this year.
That puts Norcros shares on a PER of an astonishingly low 5.4.
Net debt is not a problem, but the issue which seems to concern investors and analysts is the pension scheme deficit. Let's try to quantify this. If NXR did not have any pension schemes at all, then I reckon it would probably deserve a PER of about 12. Maybe a bit more, but that will do for now. That would equate to a share price of 324p, or a market cap of £198.6m, compared with the actual market cap of £89.5m.
Therefore, by my reckoning, the market is discounting the value of Norcros by c.£109m because of its pension deficit. Is that reasonable? In a word, no. The pension scheme is mature (average age 77), so will decline in size gradually, but considerably, over the next say 10 years. Also, the recently agreed deficit recovery payments are only £2.5m p.a. - easily affordable whilst paying a generous, well covered, and growing dividend yield of c.5%.
It's a given that, with interest rates so low, the pension deficit may grow in the short term, on an actuarial basis, but it's actually a fairly modest drain on the group's cashflow. I don't see why the market is applying such an extreme discount for the pension scheme - whilst recognising that it is a large scheme overall, so it's an issue that should be carefully considered, not brushed aside.
Given that the company is performing quite well, and executing well with its buy & build strategy (3 acquisitions have all panned out well in the last couple of years), then I think the valuation here looks much too cautious. Mind you, shareholders here certainly need patience. Despite the attractive valuation, and nice divis, the share price seems to be permanently depressed. I can live with that, whilst receiving a 5% dividend yield, which is growing each year.
Forex - not mentioned in today's update, but the company is now seeing a helpful tailwind from the dramatic recovery in the Rand compared with sterling. That boosts the S.African earnings, when translated into sterling. I used to think its S.African operations were a dead loss, but have been proven wrong on that, with an excellent recovery underway.
As much of its UK products are made in the Far East, Norcros will undoubtedly have to raise prices, in common with other importers. I'm not sure what currency hedging arrangements are in place, but in any case hedging only defers the inevitable. So it will be interesting to see how Norcros manages its margins next year, and how customers react to higher prices. The way I look at it, higher prices are inevitable, and everyone else will also be raising prices, so we'll just have to see what impact that has on demand.
My opinion - I think it looks great at this amazingly low valuation. Sure the pension scheme is unhelpful, but it doesn't justify anything like the discount which the market is currently applying. Therefore, for me, this share looks highly attractive. It's just a question of thinking rationally, and overcoming the emotional feeling of negativity which inevitably surrounds a depressed share price.
5% divis (and growing each year) whilst we wait for a recovery is fine by me. So I'll continue to hold, and possibly buy more at this sort of level. But I'm not expecting fireworks any time soon, this one is a long haul, for the patient only!
As a fully listed small cap, Norcros will not attract IHT portfolio money, which is a pity. Maybe it should consider moving to AIM?
Entu (UK) (LON:ENTU)
Share price: 20p (down 18.6% today)
No. shares: 65.6m
Market cap: £13.1m
Trading update (profit warning) - the market cap of this home improvements (e.g. double glazing, etc) company has halved again in 3 months, since I turned bearish on it (not before time) here in my report of 19 July 2016, when the share plummeted 27% to 39.5p on very poor interim results. So with the market cap now down to only £13.1m, I wonder if there's anything left for shareholders to salvage here?
Results for y/e 31 Oct 2016 don't actually sound too bad, considering how much the share price has fallen;
EBITDA on the Group's continuing activities before exceptional items for the year ending 31 October 2016 is expected to be between £3.6million and £4.0million, with an improved performance in the Energy Generation and Savings Division being offset by delays in realising the benefits of the May restructuring in the Home Improvements Division.
Although there will be exceptional costs, and losses from the discontinued activities. So that £3.6m to £4.0m figure could reduce down to very little, once everything is taken into account.
Indeed, checking back to the last interim accounts, headline EBITDA was £3.9m, but the overall post-tax, post-everything earnings figure was only £0.4m.
So it looks like H2 trading has only been around breakeven at the EBITDA level, which isn't great.
More detail is given on how individual divisions are performing, which doesn't particularly interest me - it's the overall result that matters.
Debt - this concerns me a lot;
Borrowings at the year-end are also anticipated to be higher than expected at around £5 million mainly due to exceptional restructuring costs and issues identified within the Home Improvements Division.
A struggling business really shouldn't have any debt, in an ideal world.
Dividends - this looks a mistake to me. Struggling businesses which are in debt, should not be paying divis at all;
The Board expects to be able to pay a final dividend of 1.0p per ordinary share, in line with expectations, resulting in a total dividend for the year of 1.5p per ordinary share, subject to the reserves and cash position at the time the Group announces its preliminary results.
It is the Board's intention to move towards a dividend policy of distributing one half of its post-tax profits as dividends each year split broadly one third as an interim dividend and two thirds as a final dividend each year.
Outlook - this is a profit warning for FY2017;
This reinvestment, coupled with the work still to be done in addressing the issues outlined above and management adopting a more cautious position, means that despite the expected improvement in profitability in FY17, the EBITDA outturn for the year ending 31 October 2017 is expected to be materially below current market expectations.
The thing is that the market clearly didn't believe the existing forecasts, because the forward PER is 2.1 ! So it doesn't really come as a shock to hear that the company is going to miss that forecast. I really do think forecasts should be withdrawn when it becomes obvious that they won't be reached.
Broker forecasts have been repeatedly wrong here, by miles. So I think it's safest just to completely ignore forecasts from now on, as they have zero credibility (along with management).
My opinion - it's pretty obvious that the stock market was sold a pup when this thing was IPO'd. What concerns me most is that it floated together with a sister company, Epwin (LON:EPWN) which makes all the product for Entu to sell.
Epwin shares have done better, whilst Entu has languished from poor performance. That raises concerns about the whole structure, and what the split of margins is between the companies. Has Entu been hung out to dry, in order to create value at Epwin? I do wonder, because that's what the figures clearly suggest might have happened.
Anyway, with performance having been so bad since floating, I'm not interested in getting involved with this one again. It may look cheap, but it's always looked cheap, all the way down from 100p to 20p. So it's a bargepole job for me, having suffered a loss on it before, I'm not going to compound the error by coming back for seconds.
Bond International Software (LON:BDI) - Constellation have indeed come back with a higher offer, at 121p now. I pondered whether that might be the outcome here last week.
As a general point, with sterling so weak I think we'll see an upsurge in foreign takeover bids for UK listed companies.
Cohort (LON:CHRT) - it's not one I follow closely, but news today of a "planned reorganisation" of its SCS subsidiary (nothing to do with sofas, this is a defence contractor) sounds a bit worrying. Could there be a profit warning on the way perhaps?
This follows increased challenges in SCS's markets, further to those noted in the Group's AGM statement in September.
Up-front exceptional costs will produce decent future cost savings;
The exceptional cost, which will be incurred in the current financial year, associated with the reorganisation is estimated at £2m and it is expected to result in a net annual cost saving of approximately £1.6m
Mind you cost savings come at a cost to future business - unless it's getting rid of staff who are currently sitting at their desks twiddling their thumbs.
The Directorspeak reassures;
"After careful consideration, we believe integrating SCS's operations with two of our other businesses is in the best interests of our long-term growth prospects. As noted recently, our order book and near-term prospects provide a good base for future progress."
Peel Hotels (LON:PHO) - interim results today from this small hotels group. As a beneficiary from inbound tourism after sterling depreciation, the hotels sector is one that I will be looking more closely at. Although it looks as if I've missed the boat, as the share price is already up about 25% since July.
Management confirm the benefit of weaker sterling for the UK tourism sector;
...It is difficult to be certain post Brexit but a low pound certainly should encourage incoming volume as well as serving as an incentive for British residents to spend more of their leisure time at home.
This really is a very small company. The market cap is only about £17.5m at 124p per share.
It makes about £0.5m profit before tax each half year. That has risen to £593k this time.
The return on capital seems quite poor. Total fixed assets are £35.7m, so to only be making a net profit of about £1m p.a. makes you wonder what the attraction is? Hotels need constant refurbishing too, so the capex is never-ending. Mind you, the £1m p.a. figure includes finance costs, which I should probably reverse out to make a more meaningful comparison.
The balance sheet contains about £10m in debt, which is fine in a low interest rate environment, when also capital values are high. Although note that debt is coming up for renewal inside 12 months:
The balance of the Company's loan currently £8,557,422 becomes due on 31 August 2017 and we will begin the process of negotiating a suitable long term solution over the coming months.
Shareholder discount - this might be useful, and is a nice touch I think:
We are always delighted to welcome Shareholders to our Hotels where they can see for themselves the progress we have made, whilst enjoying a beneficial discount of 50% of our rack rate tariff, using a special reservations number 0207 266 1100 or e-mail info@peelhotel.com Shareholders can keep in touch with progress in the company and various promotional activities by visiting our website www.peelhotels.co.uk
My opinion - I don't see the point in it being listed, as it's too small. Maybe shareholders like the IHT relief from being AIM listed? There was a 1.5p divi paid in 2015, but nothing either side of that.
I'm really struggling to see any reason to buy or hold this share, other than hoping someone will come along and bid for it. Or if you think there could be upside on the property valuations, fuelled by artificially low interest rates?
Also remember that Living Wage will hurt profits here over the next few years. It's not for me. There's often a problem dealing in tiny things like this, and you can end up taking a nasty haircut if you try to sell in any size.
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53 comments
Re the effect of FX on Norcros (LON:NXR):
Reading through the 2016 annual report, it looks like the effects will be minimal up to Mar 2017 (perhaps a tad longer if they kept a continuous hedging policy over the 3 months leading to Brexit).
However the impact after that will be substantive. On a back of an envelope calculation (and based on annual report disclosures) there is a £3-3.5mm potential impact on profit per 5pct weakening in gbp and rand vs the average 2016 FY fx rate (which was 1.51 for gbpusd). Depending on your assumptions for each currency, this could easily knock off 50 to 75 pct of recurring profits off the table given the current FX environment. Unless of course price hikes are translated to clients - but is this really a possibility given the weak prospects for the construction cycle?
So on that alone (and not even considering the pension fund deficit) the market re-rating seems justified. 2017 profits may hold, but 2018 onwards look dismal.
Note: I don't own any shares, I came to the above conclusions in doing my basic research as I was attracted to the apparent cheapness of the stock. At the risk of letting a good opportunity go, I am happy to wait for a sub-100p price before going in.
Hi Paul,
Tourism and the hotel sector in a area which i have tried to study recently, for what its worth, after taking a holiday in the uk this year it seems certain areas are experiencing increased levels of tourism. This has to be one of the upside of the weak sterling?
Particularly Chinese, they seem to be everywhere! one hotel group grabbed my attention was PPHE Hotel (LON:PPH) hotels. doesn't really qualify as a small cap but looked liked it has decent exposure to the uk. Some of these hotels are quite unique and could provide more of an attraction from the norm.
Revenue was around E302m which has increased of around 100m in the last 5 years so already looks like it has the wind in its sails. E203m of that was from the uk, the rest was from Holland, Germany, Croatia and Hungary.
PBT E38.8m
Modest dividend of 3.5%, coverded 3.5 times.
operating margin around 28%
PE 7.7
Debt is huge at 548m as well as the interest payments totally 26m pa. So this puts me off, but the recent re rating of property, values them around 1.1bn. (NAV of aound 364m)
1300 rooms are expected to be added of the next 2.5 years which is around 15% more than what they have now, it certainly doesn't shout massive growth, but could be decent exposure to an increased demand in tourism.
Ill be interested to hear if there is anyone else exploring this sector and if they have come across anything similar?
Regards
Sean
There's a lot of commonality in the data feeds and basic functionality. The main differences for me are the charting capability in Share Pad and the stock rankings in Stockopedia. I have my own chart setup in SharePad that is a bit unconventional but works for me. I know Stockopedia are looking at beefing up their charting functionality. I tend to do my research in SharePad and then cross check in Stockopedia but that's probably a function of my having used ShareScope before I discovered Stockopedia.
I think the easiest place to get started with SharePad is their YouTube tutorial videos e.g.
https://youtu.be/OzdfCTucQQ0
Thanks,John for your reply. I think you are right. Though I have avoided all property related companies in the past. Of course stockbrokers tend not to be very helpful when you ask them....for obvious reasons they want you to plonk it in their IHT fund at x% p.a. !
One aspect of Norcros (LON:NXR) that has not been raised, is it's attitude to it's aquisitions. Vado and Croydex seem to me, as one who occaisionally fits out bathrooms, to have both gone the same way. They were pretty much top line companies, producing quality products, and presumably taking a high margin. However under Norcros (LON:NXR) the quality seems to have declined. Abode will probably follow the same path. Norcros (LON:NXR) seem to suck the quality out of their acquisitions, which I do not see as a good aspect. I used to hold, but sold a long time ago. Even at this price I think it may still be overpriced.
I share the general concern expressed by many here about the outlook for UK retailers (of imported goods, especially clothes retailers). But it is always interesting to think what is already in the price. N Brown (LON:BWNG) (market cap too big I would imagine to be covered in this blog and a multi-tear restructuring story) today announced results that asar as I could see could only be described as "no worse than feared", saw its shares rally 16% today.
On #NXR, South Africa has its own political turmoil, as evidenced by today's tumble in the rand on the apparent court summons for the internationally respected Finance Minister.
Hi Paul,
Following on from your comments about the restaurant and hotel business, I thought you might be interested in some comments I heard today from a pal who runs a small private asian restaurant chain. C12 units.It has exposure in Central London and the provinces.
His first concern was rising costs of raw materials, most ingredients originate in Asia.
Second, a longer term worry about disillusion with the UK by his mostly European staff. At a guess I would say from my own experience in this sector his non uk staff percentage would be around 80% with more than half of those coming from Europe. He had anecdotal evidence of more people planning to move home and others not coming. Traditionally any gap has always been filled by an influx from a new source but if the UK does manage to get hold of its border control effectively I would expect it to be highly inflationary in terms of wages.
Thirdly and most significant for London operators (in particular the likes of Richoux) or others with exposure to high quality London central or suburban locations, ie all the fast casual dining chains the rates revaluation. He used an example of a unit he has relinquished. 1000 sq ft in an achingly trendy but secondary edge of the city location. Took an assignment of the lease in 2011 with 4 years to run at rent of £42k pa, rates of £20k pa. Hoped to renew and was expecting a new lease at £70k. It was settled recently with a different trader at £130k pa. Rates under the new re-valuation will be North of £50k.
More tourists do not seem likely to be enough to offset all these issues.
If one extrapolates this level of rate and rental increase to the Richoux London estate, it will indeed take a magician to find a great deal of growth. It may be different for the out of town units. There seem to be so many headwinds at this stage that it feels like a barge pole job even at the valuation pre the new appointment.
If anyone can come up with a new idea/brand to roll out and take advantage of a reasonable estate of properties then it is Jonathan Kaye but one imagines there might be better times to consider involvement after the present head winds have subsided.
Hugh
WRT Public and Private sector pensions
The main problems in the private sector include the recession and oversupply of labour since the recession (keeping pay down) and increasingly low interest rates (reducing annuities); exacerbated by the Osborne caps.They also include the switch to defined contributions schemes which employers (taking advantage of TU weakness) have used as a way of reducing their pension contributions. The public sector has followed a different path, where the pensions have been limited by a switch to average rather than final pay and very high contribution rates (approaching 25% of salary, taking employer and employee contributions together).
WRT exchange rates
These have been a permanent problem for the UK because of the size of capital inflows (or the reverse) often overwhelming the natural balance that would exist if flows were purely for trade. Before the referendum, £ was too high (and was going even higher in the early hours after the polls closed); the balance of trade/payments was therefore poor and deteriorating and exporters were struggling. It seems quite likely to swing to being too low (if it hasn't got there yet). A hangover from the £'s history as a reserve currency and the perceived political stability. The $ is often too high, but it doesn't matter that much to the US because international trade is a relatively small % of their economy and no currency is more stable or more tradeable. For the UK the important thing is to for the currency to support the development of industries with potential for the future rather than keeping old inefficient industries going for longer; more stability would be helpful for this, otherwise there is always the temptation to take it easy when you have a currency advantage and then a currency disadvantage is fatal.
I think the market's scepticism about Norcros has more to do with the ability of the rather highly paid management to execute their ambitious growth strategy than worries about the pension deficit. The lack of UK revenue growth is a real concern given that the short/medium term outlook for the UK economy is less rosy than it was six months ago. Hard to see how Norcros can meet its target of doubling revenues 2015- 2018 to circa £420m without more acquisitions and the current lowly share rating is going to make this very difficult. Interestingly, Martin Payne, Norcros's finance director jumped ship a year ago and resurfaced at Polypipe, a construction materials group which still seems to be able to generate healthy revenue growth in the UK
Hello Paul,
Regarding Peel Hotels. Surely it would not qualify for IHT Relief as it would count as a property company ?
Regards
Graham
I think they qualify as a trading company because they operate their hotels.
If they owned the buildings and then rented them out to an operator then they would be a property company.
Thanks John,presumably they own and operate the hotels,and all its assets are property,so I am slightly surprised if it is IHT able.
The LSE guidance is "Investments in shares and securities in trading companies may qualify for IHT business property relief at either 50 per cent or 100 per cent. The 50 per cent relief is available for controlling interests in quoted trading companies. However, investments in unquoted trading companies (including those on AIM) attract 100 per cent relief, which can encourage investment through tax planning opportunities. Restrictions apply where the company owns ‘excepted’ assets not used for the purposes of the trade."
I think they are a trading company but I am neither a lawyer nor an accountant so don't rely on my opinion and do take proper advice etc! I know that the experts all say it's not clear or simple and HMRC avoid committing themselves.
A really good dialogue on here about Norcross and its Pension Deficit, which are relevant to any investment in a company with a Defined Benefit scheme. Three points I would make in addition
Firstly the discussion is around the Accounting Deficit in the Balance Sheet. This number has some cosmetic importance, but the Deficit that matters is the Tri-Annual Valuation. This is compiled by the Actuarial Advisors to the Scheme Trustee and agreed with the Company every three years. In my experience, the Tri-Annual Deficit is usually materially bigger than the Accounting deficit shown in the Accounts.
Up until the Financial Crisis, the Pensions Regulator (TPR) insisted on Deficits being repaid over 10 years. In more recent years, it has come to accept longer periods, and also allowed the payments to be more back-ended. I think the real hope in kicking the can down the road in this way is that, by the next -Tri-annual valuation, that Interest rates will be higher, the NPV of future liabilities consequently lower, and the problem disappears. Given the level and direction of interest rates now, who knows what the next tri-annual valuation will be, and whether The Scheme Trustee / TPR will allow such modest repayments as £2.5m pa ...especially if it sees the Company Owners receiving such generous Dividend payments.
Final Point is the scale of the scheme, as well as the size of the deficit. This is a huge scheme, with £422m of Liabilities (Accounting Basis). That scale means that (say) a 12% change to liabilities because of Gilt Yield/Mortality/Inflation/another factor , and the deficit is doubled.
A business with a market Cap of £90m, but with Pension Scheme Assets and Liabilities of 4-5 times that amount.
I don't think Norcross is a situation where one can hold and patiently wait for a re-rating, taking comfort that current deficit repayments of £2.5m a year are manageable, whilst enjoying a 5% yield in the meantime. PJ summed it up perfectly imho, when he said Norcross was more like a Pension Scheme with a sideline in Manufacturing.
Alan,
"PJ summed it up perfectly imho, when he said Norcross was more like a Pension Scheme with a sideline in Manufacturing."
So true... but: Exactly the same was said of £BT-A but also that the value of copper in the ground exceeded that of reserve ores of Rio Tinto (LON:RIO) I held £BT.A until early 2015 (some from 1984) but have got out as the price of copper moved against the value of pension fund, or rather deficit of said fund and probably should have sold more when the dividend was cut in 2009.
I put Norcros (LON:NXR) on watch list on basis of Paul's comments earlier in the year. I have recently bought a wreck of a house. On the basis of comments at Screwfix, Plumbcentre and electricians, builders and plumbers my threshold to buy Norcros (LON:NXR) has steadily fallen. I agree with Paul's assessment of today's update and have just bought.
Regards, Seadoc
PS in regards to comments about middle management in public sector may I point out that I was front line, could and would have been paid very much more in the private sector and I had nothing to do with management, I fully deserve my pension and I thank all of you paying taxes for funding my modest needs in retirement.
I think Entu (UK) (LON:ENTU) took over a lot of loss making businesses which is always risky. I went off the management very early on, I think it was their half year results 2015 which they made out were in line but seemed to be a profit warning to me. Double glazing salesmen sprang to mind.
Paul and others - I spotted online that MySale (LON:MYSL) is planning to launch it's own womenswear label. I can't access the full article but thought it sounded interesting and worth flagging to readers. https://www.drapersonline.com/news/mysale-group-to-launch-in-house-womenswear-brand/7012863.article
Hi paraic,
Great, many thanks for flagging that interesting news re MySale (LON:MYSL) .
My view is that's exactly what they should be doing. They've built up the infrastructure to do online fashion retailing through their existing "flash sale" sites. But the big bucks are in high margin, own brand (as BOO has proven).
Thanks again for posting, very helpful, as I hadn't spotted it, and MYSL is one of my largest long positions.
Regards, Paul.
FREng, swings and roundabouts surely? Public sector workers are generally lower paid, especially white collar/skilled. This is compensated by higher job security and final salary pensions. The real issue you highlight is that many people in the private sector do not make adequate pension provision, especially in the early years. Plus of course, annuity rates are currently very low, although the option of drawdown also exists.
"Public sector workers tend to be older, more highly skilled, and better educated"
Patently drivel of course.
"The Institute for Fiscal Studies (IFS) sets out its methodology here, and the think-tank Policy Exchange has a go here. The different techniques mean they all come out with slightly different numbers, but many economists agree that there is usually a pay gap, with the public sector getting slightly more."
"Nevertheless, official statistics suggest that: public sector workers are on average tend to be better paid than their counterparts in the private sector; wage growth has been higher in the public sector since 2008"
http://blogs.channel4.com/factcheck/factcheck-public-sector-workers/18468
Public sector workers are more skilled, work shorter hours and earn more money than their private sector counterparts, according to a new analysis of the differences in pay out today.
https://www.theguardian.com/news/datablog/2012/mar...
Norcross will be costing in the coming political crisis in SA.
Cohort, splitting up a core structure is very much against the company's philosophy so they really must have tanked. People will be leaving (it says so between the lines). Expect an early retirement from the main board perhaps. I'll sit out the net 6 months and look again in April.
There must come a point where the increasing cost of imports will make it cheaper to start making the stuff ourselves. This can only be a good thing and will create jobs, tax revenues etc.
Yes that is absolutely true but it assumes that we have the skills to enable us to do so (Hinkley point Chinese and French knowhow) but also we have little natural resources apart from our well educated but expensive (relatively) labour force. So say a car is 30% plant and machinery, 30% steel, 10% plastic, 10% rubber and 20% labour, (these figures are made up I have no idea of the real breakdown) then 50% of the costs increase as our currency weakens.
I really dislike the idea of a company (country) relying on weakening exchange rates as way to grow, I would rather see innovation and productivity increases.
Of course this is very much my opinion and I am not an economist!
Hi Paul
I am not convinced that Norcros (LON:NXR) ' s pension deficit is a major drag on its valuation. A few weeks back Tesco reported a near doubling of their pension deficit which was already significantly large. But the share price jumped up some 10% on the day because they beat earnings expectations. In other words, the market simply shrugged aside the growing pension issue.
I don't know Norcros but could there be other factors at work, such as the S African connection, or confidence in the management, etc, that might explain why they remain unloved?
Just a thought,Paul,but since Entu must be important to Epwin too,is it not possible that the relationship/terms might be adjusted to enable Entu to survive ?
That thought just caused me to cash out of Epwin. If the relationship is untenable something will have to be renegotiated.
Plus in any case this doesn't seem the time to be holding shares that rely on the UK consumer.
Re pensions.
There's a curious imbalance when a public sector middle manager retires with a pension that a senior manager in the private sector would struggle to buy as an annuity.
Re: Transfer of pension schemes to spouse:
Mine from NHS and now CPI linked. Can I do better than CPI?, I thought so, still think so, so upped lump sum to 25% but.... if I die my wife will get half (actually 3/4 as son still in full time education) based on the original sum AND will inherit the extra lump sum. No brainer for me
Edit as a PS. On basis of that thought I have just put spare cash in SIPP in HGL into Norcros (LON:NXR). I could get much better price through HGL than on level 2, I guess someone with shares in Norcros (LON:NXR) and held in HGL has a different view, as always, one of us is right! Seadoc
I wonder if you are going to cover REDS results, seeing as you mentioned them quite recently...?
My own view is one of skepticism - although they have improved EBITDA (adjusted, of course), the revenue growth, or lack of it, seems a bit odd, especially considering they made an acquisition during the year... especially considering they state quite a few times how "strong" their business is.
Chilligg, you beat me to it!
I can't profess to being an expert on pensions accounting, but surely the age of pensioners in the Norcros scheme is embedded into the calculation of the scheme's liabilities, so just because the average age is 77, this doesn't necessarily mean that the problem falls away as pensioners die off?
The problem would only decrease if pensioners on average died earlier than the actuary assumed, but given that actuaries in general have persistently underestimated longevity, is the risk not to the downside if pensioners live longer than the actuaries expect?
Further to the NXR pension scheme, I actually see its relative maturity as a negative. What it means is that the deficit will need to be funded earlier than with an immature pension scheme.
When valuing a company with a pension scheme deficit, I do adjust the valuation for the full value of any deficit, less the associated deferred tax asset. But I also add back the amount of any deficit repayments to the P&L before applying my selected PE ratio. The aim is to get a valuation as though the company had a 100% funded pension scheme. If the pension scheme was large relative to the company, as per NXR, I would factor that into a lower PE multiplier to reflect the valuation risk from the pension scheme.
I think the issue, or maybe opportunity, is that there are lazy people like me who see a pension deficit issue and put their money elsewhere without bothering with the analysis.
When interest rates start to get back to normal there will be an opportunity for a re-rating but until then I think they will stay depressed.
Paul,
Thought provoking as always!
Re Norcros surely the actuaries estimate of the liabilities already incorporates the mortality profile of the pensioners? The risk is that longevity will keep creeping up and that has been driving some companies to sell their liabilities to insurers despite poor perceived value, to offload that risk.
Excellent points PJ0077 on Norcros. On the pension however I have comforted myself on the average age of the pensioners, actual and future, being quite high, so naturally the liability will start to decline quite significantly in time.
My main concern is the size of the South African business. From my (rather slight) knowledge of the political and economic situation of that country, it seems to be a powder keg. I will admit that it has been for some time but it seems to be getting slowly worse. I always felt that this was a significant driver of the low valuation
Long Norcros
Hi Housemartin
The average age of a Norcros (LON:NXR) pensioner is oft quoted as being 77 years old, implying that the company's pension liability will soon cease to be a major headache. I believe this is wrong for two reasons:
Hi PJ
Your points are well made. I took the 77 years average age from Paul's notes he gave to us on 20 June and assumed it was the average age of the pension beneficiaries rather than just the pensioners. With a weighted average defined obligation of 16 years, I felt my interpretation seemed reasonable and gave me some comfort on the distribution. However this was just that, my interpretation. My facility with statistics is very low, so I accept I could be way out of line.
Your point about spouse benefit I also took as being within the 16 years obligation.
Supporting your argument is that the scheme was not closed until 2013, so presumably most of the employees current at that time would be in the scheme. Unless employees at that time were distributed significantly to the older age range, my interpretation of the meaning of '16 years' above does not feel right.
Anyway I am not sure I have moved the conversation on much ! Average ages are going up about 12 weeks a year and interest rates have to go up sometime.
Hey Paul,
I thought your analysis on NXR was to the usual high standard. And although we see the numbers the same I've reached a different conclusion coz:-
- I looked at this a couple of months back when share price was £1.91 (now £1.45)
- I didn't buy then but was interested to see how it developed
- Issue for me is that it's unclear what impact will have on consumer buying behaviour (continue with DIY projects and bathroom upgrades? I'm more relaxed on new builds) nor impact inflation will have and finally cost of imports are set to rise
- FCF lowish at around £8m
- ROE good for the sector at 14.5% but there are higher returns in other sectors
- Pension liability is worrying altho you're more relaxed and I'm ok with it given their plans to reduce
All in all I think it's too much risk for me for now but will monitor
I believe there is every chance the UK will experience a domestic recession next year. There is the inflationary pressure that Paul talks about for retailers and for those that import goods and raw materials etc. as per purpleski's note above. Anecdotally, I have also been hearing of many delayed/cancelled contract decisions, especially in the finance sector and more worryingly, some smaller companies struggling to do business with EU counter parties.
My solution is to steer clear of domestic earnings and net importers and instead, focus on overseas (especially $) earnings. I have never really filtered for this before but there are a surprisingly large number of them, so why take the risk with internally focused companies where the risks are higher at this juncture? Paul's macro comments have really helped to crystalise my thinking on this. Of course, it remains to be seen if this will lead to a successful investment strategy over the next 15 months or so but I suspect "above forecast" results will be hard to ignore.
EDIT - I am also avoiding companies with high debt - again, there are a lot of low debt, cash generative companies to choose from, so why take the risk with geared companies if a recession/downturn does occur?
I would agree as you would guess. When you say:
"My solution is to steer clear of domestic earnings and net importers and instead, focus on overseas (especially $) earnings. I have never really filtered for this before but there are a surprisingly large number of them,"
Can you filter for this on Stockopedia or Sharepad or is it just a question of leg work as it were.
Michael
Legwork I'm afraid, although it's normally communicated in the results announcement, more so recently with companies explaining the impact or non-impact of Brexit. Sometimes a little more digging is required though.
Thx crazycoops. I thought you might say that!:-).
I am a bit busy at the moment for legwork so am going to use cash as my hedge mainly unless I fall upon one here or somewhere else.
You get a nice pie chart in SharePad showing the activity breakdown by region so it's easy to check on an individual company but I haven't seen a way to screen for foreign earnings. It would be very useful.
You can open a list like the FTSE 350 or AIM 100, or the results of a screen or filter that you have run on other criteria to narrow the field and then quickly scroll through the constituents looking at that activity breakdown
(BTW I have switched from ShareScope to SharePad and overall am happy with the switch)
Thanks John. BTW I don't get Sharepad. I have subscribed and to be honest I have not had the time to really get to grips with it but what does it do that Stockopedia doesn't and where would you start in terms of learning about what Sharepad can do?
Thx.
A purchase of shares in Norcros (LON:NXR) is basically the purchase of a Pension Fund management company .. one that owns a small consumer goods company.
The accounting Pension valuation as at 31/03/16 was:
Norcros used a 3.55% discount rate. Had they used the same discount rate as Trinity Mirror (2.8%), the deficit would have been exactly £100m i.e. similar to Paul's calculated £109m discount above.
So the outlook for the Norcros share price next year is not a function of how many taps & showers they sell.. but instead largely a function of what next year's discount rate will be. Good news for them is that the slump in GBP this year will lead to a pick up in inflation next year and higher bond yields.
Hi PJ,
Your description of Norcros is hyperbole, and not at all accurate, in my view!
If you talk to management, they see the pension fund issue for what it is - a fact of life, that is firmly under control. They pay £2.5m into it each year, and that's that. This compares with EBITDA of over £20m p.a.. They have plenty of surplus cashflow to both make acquisitions, and pay a 5% divi, on top of servicing the pension scheme. So this is nowhere near the scale of problem which you suggest.
The pension fund is likely to rapidly shrink in the coming years, due to pensioner age. Mgt really don't see it as a major problem at all. I discussed various options with management about selling off the pension fund in some way, but as they say that doesn't make any sense because any provider of such services would build in a huge profit margin. They cannot see the point in giving away money to any kind of firm which specialises in offering resolutions to such issues.
Going back to your post, why on earth would you deduct the entire pension deficit from the market cap, especially when bond yields are artificially low? That ignores the time value of money, and the likelihood that bond yields will (who knows when) rise. As you say, maybe the plunge in sterling could be helpful in driving up bond yields.
I could see the logic for deducting a percentage of the pension deficit (maybe 30-50% ish?) from the market cap. Or another way would be to make a deduction based on the NPV of the recovery payment of £2.5m p.a.?
Regards, Paul.
Sorry PJ, gave you a thumbs down by mistake. Very much a thumbs up.
Chris.
Hi Paul
I have to disagree (I know I risk thumbs down for doing that alone) with you on welcoming the decrease in Sterling over the past few months for several reasons:
- Devaluation of Sterling has never led to long term increases in UK competitiveness.
- Much of our exports are based on importing stuff (with that stuff denominated in $ or €) and then transforming it with relatively expensive labour and then re-exporting it. The stuff we import has already got more expensive and if inflation comes through because of higher prices due to the increase in the cost of importing stuff, then we will see wage inflation (also because of the likely tightening of the labour supply) relative to the rest of the world.
- The decrease in the value of the pound is not caused because the market thinks we need help with our exports but for the same reasons it sunk to parity against the Euro during the financial crisis (there was a possibility that the UK economy would be destroyed by the collapse of the U.K./global financial system) because the market does not think the prospects for the UK economy is that great.
I am no expert but this is what I have gleaned over the past weeks from my reading.
I am not sanguine about the prospects about the U.K. economy at all in the medium term but in the short term I suspect stock prices will go higher but what do I know!
Best wishes
Michael
Hi Purpleski,
Not at all, I welcome debate on issues covered in the report, whether you disagree or agree, either is fine!
I look at it this way. When something dramatic like the Brexit vote happens, what's the best way to persuade companies to stay in the UK? Answer - a devaluation of sterling. This has already more than offset the impact of any future tariffs (very unlikely anyway). Together with our very flexible labour markets, and low corporate taxes, this should all help keep manufacturers and others in the UK.
If countries like Spain, Greece & Portugal had been able to devalue, they wouldn't have seen anything like the huge falls in GDP which they experienced by having to deflate their economies instead.
Currency devaluation isn't a panacea, but it's the mechanism by which imbalances are resolved. So markets are doing exactly what they should be doing.
Regards, Paul.
Hi Paul
Thanks but do you not worry about the fact that we import so much (not least oil and food) and more that we export and the various negative impacts that will have on the wider economy, and therefore the profitability of UK companies?
Short term I am sure it will be positive (London shops and hotels have gone mental with tourists sine June I understand), I think it was under the Wilson devaluation in the 70's but look at the late 70's early 80's to see what can happen.
Oh well we will see, but meanwhile I am starting to trim some holdings.
Michael
Hi Michael,
"Devaluation of Sterling has never led to long term increases in UK competitiveness."
You are quite right: but devaluation does increase short term competitiveness and long term allows economies of different efficiencies to rub along together.
German and Swiss companies have had to deal with strong currencies for a long time and tend to successfully get on with it and not moan about it.
Until British companies adopt the same discipline of continuously and successfully making it better, faster, cheaper, our economy, trade deficit and currency will struggle.
But of course what we all really want to know is what the stock market will do - like you I fear to prophecy on that.
Bonitabeach
Has anyone got any thoughts towards small cap oil and gas companies that haven't taken part in the recent rally? £BP has taken off like a scalded cat based on Sterling weakness, but surely there are decent resource stocks out there that are still cheap, and that maybe haven't caught up yet?
Bowleven (LON:BLVN) is an oil stock I know that Paul covered with Paul Curtis before. It is cheap (below net cash), has an interest in proven reserves in Cameroon and has a free option on some un-prospected plays.
Ted Baker (LON:TED) interim figures are out today, which look good, I know it's not a small cap but it shows that some retailers are doing ok in challenging markets.
Agreed, I would be seriously interested in NXR if it were eligible for iht relief.
Have you any thoughts on NBrown BWNG which I dumped post Brexit? Market has rewarded their apparently lack-lustre report with a near 20% surge in sp.
Many thanks for your excellent insights.