A UK Portfolio

I have been through hundreds of UK stocks over the past year. The ones listed below are, in my view, the best value stocks in the UK today. If I were to hold a UK only portfolio, I'd hold these stocks at the weightings indicated. If I were to include a short position, I'd opt for Finsbury Premier Foods. I'd venture that portfolio outperforms the FTSE 350 by at least 20% over the next year. I'd also wager that, over two years, it outperforms, on an after-tax basis, any statistical strategy targeting UK stocks -- F-score, net net, valuentum, or whatever else. We'll revisit it next December and and do a post mortem. Share Sleuth, Expecting Value & Wexboy have written about one or more of these stocks, and their posts are well worth reading. As always, though, please do your own research. Disclosure: I have a position in Northgate.

Northgate plc -- Part 2

This is an investment idea that requires very little imagination. It is premised on four factors:

Northgate’s business is sound. Stepping back from the accounting presentation of the business helps to reveal the underlying mechanics of the business. The table below illustrates what happens on a cash basis in rolling 20 to 21 month periods. The key to performance is the utilization rate: 90% is good; 83% is what happens when a quarter of your vehicles are targeted to the Spanish construction industry when the bubble bursts. 

The company's maintenance capex requirement is less than its depreciation rate. Subtracting growth capex (i.e. expenditure for fleet size growth and expenditure on goodwill & acquired intangibles) from total capex reveals that maintenance capex is about 62% of depreciation.

True earnings are therefore higher than may be perceived from a quick glance at the financial statements. In fact, at the current price, Northgate’s equity is yielding 34% on trailing earnings and 35% on average earnings over the past ten years.

As growth is interrupted - momentarily, at least - free cash begins to flow.  In two years, Northgate’s debt has been reduced by 300 million. In another year it will be down to 200 million, an optimal level. The year after that, if the economic environment is as it is now, it can buy back 40% of its shares. Et cetera. 

Nothgate's value exceeds 700p

Disclosure: I am long Northgate

Portfolio Update

I have exited my position in Cegid. The absolute loss was small but the opportunity cost of holding it was high. My intrinsic value estimate hasn’t changed – I still believe that it is easily worth EUR25 to EUR28, but the truth is that I shouldn’t have bought it: it wasn’t cheap enough at 14.91, and there weren’t catalysts to force the issue. In the end, I lost patience with it.  

I am replacing it with Northgate Plc. I will add Northgate to the tracking portfolio when I have a full position.

Banque Tarneaud - Special Situation

Crédit du Nord has has extended an irrevocable offer to buy the 21.5% of the shares in Banque Tarneaud that it does not already own, at a price of EUR140.  The tender window closes in just under 3 months. Stragglers representing less than 5% of equity will be squeezed out at 140. The shares in question are currently quoted at 81.

Je remercie  Actions Ordinaires Entreprises Extraordinares pour l’idée.

Update: It turns out that the shares were halted on the eve of the tender and haven't traded since. That explains the rather large gap between price and value.

Disclosure: No position