Wednesday, December 5, 2012

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.


  1. Very curious about your short feeling on FIF - so here's a belated addition to Richard's call for 'phrases that should be banned':

    "Can you give us any colour on that?"

    1. Madness. I wrote Finsbury Foods when I meant Premier Foods. I do that a lot: James Halstead/James Fisher; Norhgate/Northbridge; etc. My apologies! Nothing wrong with Finsbury.

      Premier Foods, on the other hand, looks to me like it owns business that are worth maybe 1,450 when contemplated after a couple of pints and 1,300 when sober. It owes 1277. That leaves equity with 25m or 11p a share in the latter scenario. And since the banks want their money and are seemingly pressuring mgmt to sell units fast, PFD may well get less than 1300 for those assets. If I were to speculate, I'd say PFD gets wiped out.

    2. Interesting. How did you come up with 1450? From my understanding bank debt should be labout 900 by now. Together with pension liabilities you have about 1160. And from what I can understand, PFD has already sold of about 370 in assets and fulfilled all requirements of the banking agreements of this March (as far as asset disposals are concerned). Leverage is still high (about 5x at an estimated EBITDA of 230). Now they have about 3,5 years to fix business and pay down debt with cash flow. They might generate about 300-350 in FCF until 2016. So in 2016 they'll have 800-850 of debt/pension and EBITDA of about 230 (no EBITDA growth). At a7xEBITDA equity will be worth 800 or 3.5/share. the big IF is: can they stay within their covenants?

    3. As of June:

      Trailing 12 month underlying operating profit = 90m. Discounting at 6% gives 1450.

      Bank debt & capital leases = 1318, Operating leases capitalized at 7x = 304, Pension liability = 272.

      So 1450 minus 1894 = -444

      That's not a happy situation.

      FCF above 55 can only come from disposals. The best case is that -- in this environment -- PFD finds a buyer that'll pay above intrinsic value for its brands. I don't think that a likely outcome.

      Still, shorting is a sucker's game and my short call was only half-serious: I think a lot of people are attracted by the portfolio of iconic brands and when the things get dicey there'll be a stampede for the exits.

    4. This sounds right to me:

      “And the refinancing comes at a material immediate cost and hefty deferred costs. Finally Premier will be under pressure to dispose of businesses representing around a quarter of its current Enterprise Value in near-fire sale conditions.”,_analyst_claims.html

    5. Operating profit - you have to add back goodwill amortization of 70 (from the top of my head) - that's the real operating profit
      If you calculate operating leases as debt, shouldn't you add lease payments back to profit?
      BTW bank debt should be around 900 by now (asset disposals)

      Regarding the refinancing: Your quote is outdated. They already complied with the banks' asset disposal conditions and sold 370 of assets (top of my head). So unless they trip their EBITDA/Interest or Debt/EBITDA covenants, no asset disposals are required.

      Still a lot to go wrong, the main risk is operational, they had a string of years of underinvestment in their brands and falling sales. So they might trip their covenants. However, the new CEO appear to know what he is doing.

      Maybe a short (not for me) but not a slam dunk

    6. Thanks for the reply. I added lease interest payments and amortization of acquired intangibles back to profit, as I always do. I hope you're right that the equity has a fighting chance. It'll be interesting to see what comes about. (Shorting, of course, is a sucker's game and I never short outside of a true arb situation.)

  2. An aside topic wise but very UK centric question: Do you have a view on the market for UK pubco's.

    I am not an investor. I'm an ex publican lobbying the government for removal of the beer tie. And I'm working on setting up a substantial mutually owned, sustainable, crowd funded pub company.

    My view is that pubco's are only making profits by sweating their assets which are mostly exhausted i.e. they are squeezing all their individual pubs so much that the pubs no longer make the profits they need to reinvest, repair and maintain the buildings and for the businesses to innovate - so while the pubco's are still making profits the pubs are failing in ever increasing numbers.

    A number of myths keep this situation going for the time being - the popular views among non publicans on why pubs are closing appears to be those promulgated by the British Beer and Pub Association (entirely funded by pubco's and family brewers) which is:

    Beer duty and the escalator is making the retail price of beer too expensive for punters
    There are too many pubs (which serves the pubco's need to sell off freeholds because there are no lessees coming into the market)
    Demographic change - people are using coffee shops now. This is true - there has been little innovation in pubs - see above - and they are not fit for purpose as they have been run down through the asset stripping process.

    There is more.

    Just interested to know if this is an area of interest to you - or other readers of these pages.

    Best Wishes

    1. Sorry to have taken so long to reply to this -- I somehow missed blogger's notifiction.

      In any case, I almost entirely agree with your synopsis of the pubco situation in the UK.

      Pubs, without exception, are earning 5-8% returns on capital and are having to use tremendous leverage in order to appear to bring down the cost of capital. They are mediocre, risky businesses.

      This has brought on the practice of sweating individual pub operators ( via Brulines and such) to the extent that, on the evidence, very many of them are unhappy enough that they leave. A stroll through publicans' discussion boards and litigation records is firm evidence of this, I think.

      From an investor's point of view, one would think that a reduction in the number of pubs would be a good thing: a reduction in overcapacity. But I think the evidence is that a number of demographic and fiscal factors -- you've mentioned coffee shops and taxes; I agree with you -- are conspiring to reduce demand faster than the reduction in supply.

      It seems to me that the health of the pub sector in.the UK depends on differentiation. Pubco's can only offer standardization. The only thing they bring to the table, therefore, happens to be a value-destroying characteristic.

      Relatedly, one sees a lot of enthusiasm for Vianet, the owner of brulines and iDraught. "Cheap at a PE ratio of", "tremendous growth opportunity", etc. Maybe so, but I doubt it. There is more than a trivial chance that regulatory, judicial, and legislative intervention -- inspired by unhappy pub tenants -- will seriously affect Vianet's business model.

      Thanks for the comment & question.

  3. Checking on this list six months on as a UK investor: Yes, Mr. Redspot, Sir.
    Thanks for posting. I'm looking forward to your next look at this market.


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