Small Cap Value Report (6 Mar 2015) - AGA, CAMB, ATY, ZZZ

6th Mar '15 by Paul Scott

29 comments 20292 reads

Good morning! I note the very large movement in the Euro against sterling this year, so am having a think about how this might affect the companies in my portfolio (chart courtesy of IG).

The impact of a weaker Euro on UK shares seems to mainly be a case of profits from European subsidiaries translating into a lower sterling profit. Also it makes life more difficult for UK exporters into Europe, as either their selling price in Euros has to go up, or the profit margin has to shrink (or a bit of both).

UK importers however will be able to buy cheaper products from Europe - so that maybe will help supermarkets' margins? If readers can think of any other particular beneficiaries or victims of recent, large currency fluctuations, then do please add your comments in the comments below.

AGA Rangemaster (LON:AGA)

Share price: 103.5p
No. shares: 69.3m
Market Cap: £71.7m

Full year results for calendar 2014.

The highlight bullet points look encouraging;

However, none of that really matters a great deal, because AGA is really a giant pension fund, with a small business struggling to service it.

Pension deficit - here is the whole section of today's report on AGA's pension fund issue. Note the sheer size of the pension fund, which dwarfs the company. Plus note that the existing recovery payments will likely consume ALL the company's profits from 2016 onwards:

Remember that the accounting valuation of pension deficits produces much lower deficits than the actuarial method of valuation, so it's a tricky area for investors - the deficit showing on the company's balance sheet can just be the tip of a much larger iceberg.

Dividends - can't be paid, without the agreement of the pension fund trustees. Therefore that means there is no realistic prospect of shareholders receiving any divis for the foreseeable future.

My opinion - given the enormity of the pension scheme problem, and the knock-on impact of that meaning no divis are likely, then it makes me wonder what value (if any?) to put on the shares in this company? As things stand at the moment, the equity is worth very little I would say. So the only value is if you start making assumptions for what might happen when interest rates rise, and the pension deficit…

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Gostevie

6th Mar '15

Possibly a bit too large for Paul to report on but I was pleased with ITE Group's acquisition and placing announced this morning:

http://www.investegate.co.uk/ite-group-plc--ite-/rns/acquisition-and-placing/201503060700187188G/

New shares placed at a modest discount of 4.4% and a dilution for existing holders of just 2.9% to fund an interesting looking acquisition. An example of a 'good' placing I would suggest.

Disclosure: I hold shares in ITE.

kenobi

Ok, be gentle, I don't know much about bonds,

but they've had gilts for years, and now they're complaining that returns on gilts are low ? presumably the majority of the gilts were bought at much higher rates of return ? so surely their capital value has risen considerably and still they have a big deficit ? When interest rates go up, surely price of these glits will fall to set them at a suitable return ?? Shouldn't they then be getting out of gilts, that really can't go much higher and into either corporate bonds of blue chip companies or shares ? (shares are pretty high now so that's probably riskier) . These other assets will produce a higher return and shouldn't be so vunerable to falling in value if interests do go up ? and require a smaller base of capital to produce the returns they need to service the pension fund ?

Obviously there is something wrong with my logic, if someone could politely put me right, I'd appreciate it.

Are they legally obliged to hold the amount of gilts they currently own ?

K

cig

Problem with that idea is that what an insurer will want to take over the liability is likely a multiple of the actuarial deficit -- they do take a real risk if they get it wrong. Actuarial valuations include relatively optimistic (if not as much as some years ago) estimates of risky investment returns.

In this case the business is probably worth much less than that, so the liquidation value is probably deeply negative, therefore it can't be done. The status quo doesn't have an immediate liquidity problem, so the rational thing to do is to keep going until it gets markedly better (or worse). They could perhaps issue new shares and put the proceeds into the pension fund, until they reach something like the PE of 4 Paul recommends, so as to tap the irrational exuberance of current shareholders.

Future cash flows (the pension payments) are discounted using various bond rates, but they hold other things, that are expected, but not guaranteed, to grow faster. The procedure is an attempt to tame the risk they don't grow enough. A deficit means that they're above what the regulator considers acceptable risk.

If they owned only index linked gilts there would be a perfect match between assets and liabilities (net of longevity risk) and therefore the pension fund would be insensitive to rates. But they'd need a much bigger fund.

Ramridge

AGA Rangemaster (LON:AGA) Worsening pension fund deficits are indeed bad news not only for AGA but all companies currently showing pension fund holes. It is almost the case of a perfect storm. Gilts rates are lower than the previous assumption at the 2011 triennial actuarial valuation. Pensioners are living longer so a worsening longevity risk. Scheme assets are showing modest rises but nowhere near the damage caused on the liability side by the lower interest rates and higher longevity trend.
AGA's last triennial actuarial valuation, @ 31/12/2011, showed an actuarial deficit of £227.7m There are too many moving parts to say what it might be @ 31/12/2014. What we can say with reasonable confidence is that it will be worse than this figure.
The accounting deficit is a red herring. What really matters is what the triennial actuarial valuation carried out currently by consulting actuaries is likely to reveal later this year.
Regards, Ram

janebolacha

I believe this was the "solution" to the Telent/GEC-Marconi situation:

http://www.ft.com/intl/cms/s/0/77829602-6b42-11dc-863b-0000779fd2ac.html#axzz3TblMPdpI

but it took, it seems, a couple of years to sort it all out:

http://www.ft.com/intl/cms/s/0/5ebc01da-d931-11de-b2d5-00144feabdc0.html#axzz3TblMPdpI

Would the AGA business and brand be worth a premium sufficient to make a similar kind of solution possible? That's the question, I guess.

Rusty2

Re CAMB, I did hold them about 1 year ago but they were not doing anything so i sold them, They are almost back to the level they were last year so seem good value now. A few negatives: spread is quite wide and directors pay is excessive.

Compared to CFYN Camb may look expensive?

Reynart

Bear in mind that even if you can identify a target with a European supply base, they will probably have hedged their purchases forward for a year to 18 months. So it may be some time before the effect of lower rates filters through to improved margins.

Is not right hand drive an issue for UK car dealers anymore?

MichaelFBS

I understand that pension funds use gilt yields to calculate NPV of their liabilities but what I don't understand is why they use the current yield. I would have thought that using average yields over 10, 20 or even 30 years would make more sense? After all pension funds are very long term investments!

Secondly if you take the view that this company has no value because all the foreseeable profits belong to the pension fund why would anybody invest in it? Ha bro, Hargeave Hale and Standard Life all have large stakes; to what end? How can be good for their clients? To me it shows singularly poor judgement and just reinforces why I do it myself!!

Finally what would happen if the company was to go into liquidation for whatever reason. What would happen to the pension fund then?

I think many investors do not look at pension deficits, its only people like Paul who highlight these issues. I have seen many share tips, hardly any mention pension deficits. I think most think its a problem maybe in the future.

ExpectingValue

This Deschampneufs chap is great value. Thanks for highlighting it!

UK 10-year paper is yielding only 1.93% pa, which perhaps illustrates the problem for actuarial valuations. Mind you, it could be worse, in Germany the 10-year yield is only 0.35% pa!

http://www.pensionprotectionfund.org.uk may be the destination for orphan pension funds.

rhomboid1

UK franchise dealers are all supplied by manufacturer owned or tied UK sales operations, these take the currency risk/reward out of the dealers hands altogether. Only in the mid term to long term do currency issues impact on the relative price competitive position of individual Brands. Many manufacturers also hedge exposures in the short term so there is a lag effect as well , finally a sizeable portion of components are UK , US or RoW sourced even for European factories so that adds another layer of complexity.

CAMB does look cheap but I think Mark Lavery is more than fully remunerated

melody9999

Weaker Euro (and low oil prices) should help travel companies in 2 ways, First they generate revenue in sterling but buy hotel accom etc in Euros so lower costs. Second travellers will see better value in visiting European countries and specifically Spain and Greece which are very important destinations for these companies, .

jonesj

Yes but those cunning European car manufacturers also make RHD cars.
The top 3 selling foreign cars are Fiesta, Focus and Corsa.

Jardine

Snoozebox Holdings (LON:ZZZ) seem to be following a successful strategy of working with JV partners to secure locations for semi-permanent facilites, for instance last Autumn they partnered with the YHA to provide the new hostel at the Eden Project. Anyone doubting the appeal of their accommodation offer should take a look at Tripadvisor for the Eden Project YHA. I think the company have been surprised by the level of interest they've had for their version 1 units (shipping containers) as a semi-permanent facility, which could lead to them building more of them. So far uses have included the aforementioned hostel, accomodation for oil exploration in an offshore territory, accommodation at a training establishment and now emergency social housing.

Yes but at what price, I know years ago the same cars in Europe were much cheaper than here.

Maddox

9th Mar '15

Hi Gostevie, yep my thoughts too and it is a further diversification away from Russia - the Ukraine conflict unfortunately doesn't appear to be resolving itself any time soon. Regards, Maddox

Small Cap Value Report (6 Mar 2015) - AGA, CAMB, ATY, ZZZ

AGA Rangemaster (LON:AGA)

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Paul Scott

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