You may not have heard of this stock or recognize the name as it is one of those Companies that has changed its name to try and reinvent itself and its image. The stock is now called Connect which sounds like an exciting tech or electronic stock but is in fact what used to be Smiths News the newspaper and magazine wholesaler / distributor. As you can see from the chart below it has had something of a roller coaster ride in recent times.
So what's the story here and why do I think it is a good value idea? Well firstly they are in the process of diversifying their business by using the cash flow from the news side to buy into and develop other divisions such as books and educational supplies. They aim to have less than 50% of their business in the news side within a couple of years. They have also managed to secure over 50% of the news business with contracts out to 2019 providing some visibility in what is otherwise a declining business.
The balance sheet is geared and a bit weird as they have a big negative £280.1 million balance in other assets which according to the report and accounts: "relates to reserves created following the capital reorganisation undertaken as part of the demerger of WH Smith PLC in 2006.The balance represented the difference between the share capital and reserves of the Group restated on a pro-forma basis as at 31 August 2004 and the previously reported share capital." Otherwise the net debt is not too high at between 1 to 1.5x EBITDA versus a 2.5x covenant, interest cover is 13.9x versus a 3x covenant and fixed charge coverage was 5.3x versus 2x covenant. Finally their Pension deficit seems to be around £56.9 million (Source: Annual Report).
The shares also stand on a relatively low rating of 7.4x P/E with a 2x covered 6.5% yield probably reflecting investors scepticism about the sustainability of the business in the long term. However this is despite the fact that they have managed to move earnings and dividends ahead modestly in the last few years. Looking at the chart above it looks like the shares are finding support around the 150 pence level having sold off aggressively since the start of the year on no great change to the outlook. With final results due next month including a chunky final dividend a return to the 180 pence level to close the gap on the chart might afford a decent trading profit if you did not want to hold it for the long run.
I am also encouraged by their disclosures about major shareholder list which includes some good value houses such Aberforth Partners and Silchester Investments. You can get a copy of their report and accounts and other information about the group at their investor relations site and they also provide a useful corporate overview which you can connect to by clicking the image below if you don't hate this idea too much.
In a trading update today Aberdeen confirmed that their assets under management (AUM) had increased by 3% to £331.2 billion in the two months to the end of August 2014. This did however mostly reflect higher market levels as outflows continued albeit at a reduced rate. However,falls in markets since then may bring assets back down again to their June level by the end of their year to September 2014. But they did point out that the mix of business won and lost was likely to benefit margins.
Otherwise they say the on going integration of the Scottish Widows operations continues to progress on schedule and as expected. This has helped to broaden their business and the savings and synergies coming out of it should help to offset the more difficult times they have been having in their equities and emerging markets activities. Otherwise they said:
"Overall, performance remains robust and short-term equity performance has improved steadily in recent months. In particular, global equity performance has recovered strongly as sentiment towards emerging markets and Asia, in which our funds are overweight, has improved. Nevertheless, our focus remains on our bottom up, fundamental style of investing for the longer term."
See the full statement for full details.
Summary and Conclusion
A steady as she goes type of update from Aberdeen today, which is good and as the shares have drifted back recently to oversold levels (see Chart below) and they look reasonable value on around 13x with a 4.4% yield for the current year. They have the benefit of integration savings etc. and a more broadly based business going forward but as ever they will be geared into market movements, They should however continue to potentially benefit from investors seeking better returns in a low interest rate environment and as such like others in the sector look like a good way of benefiting from this trend.
...is a book by John Lee which was published last year. As I finally got around to reading it recently and it is the weekend, I thought I would do a quick review for you.
The Author - if you are not familiar with him is a former MP and now a Lord as well as a long time investor who has also written regularly over 14 years in a column for the Financial Times. He also gained some notoriety when he disclosed in his column that his PEP/ISA's had grown to be worth over £1 million by 2003 from contributions of £126,200 since PEP's were first introduced in 1987. While he acknowledged that his status as a financial writer probably made it easier for him to arrange meetings with companies, he is also a big fan of going to Annual General Meetings to read the body language of the board etc.
The Content - is quite interesting but I have to say it is quite a slim volume at 141 pages and much of the content is reprints of his columns from the FT over the years with a few short update comments. I also found that some of the anecdotes therefore got repeated as a result.
He generally favours small cap stocks with strong balance sheets and tries to buy these on low valuation (sub 10x P/E backed up with a decent yield). He then also advocates patience and long term holdings to allow the magic of compounding to work and also to enjoy re-ratings if the company delivers and comes to the attention of a wider audience. He has also been keen on family owned / run businesses and property or asset backed companies too. His Twelve guiding principles can be summarised as follows:
1. Buy cheap stocks with yields and at a discount to assets if possible.
2. Ignore overall market levels and macro economics, focus on your stocks prospects.
3. Be prepared to hold a position for a minimum of five years.
4. Understand the businesses that you invest in.
5. Ignore minor price moves as value will out in the long term.
6. Seek established businesses with a record of profitability and paying dividends and avoid start ups, bio techs and Oil E&P stocks.
7. Look for recent positive statements from Chairman / CEO's.
8. Seek conservative, cash rich or lowly indebted companies.
9. Ensure directors have a decent stake and a clean reputation.
10. Look for stability in the board and advisers.
11. Face up to poor decisions - he has come to use a 20% stop loss after admitting some of his earlier mistakes.
12. Run your winners don't try to be too clever by trading out and hoping to get back in.
Summary & Conclusion:
I found it an entertaining read as his philosophy is quite similar to my own and I have also invested successfully in a number of the stocks he mentions or is this confirmation bias on my part? He makes the point that to be a successful investor, like other things in life, you need to be dedicated to it and passionate about it. If you are not then you should probably invest in trackers or pay for an actively managed fund or account.
It is all quite sensible advice although he does acknowledge that it is probably harder today to find the sort of opportunities he has availed himself of over the years. However, with today's increased ISA allowance, if you can afford to save that sort of money each year then you too could make a million slowly if you have the patience, the inclination and some luck too. if you want to get a copy you can see more details at Amazon by clicking the image above, although other book shops and sites are available. Or if you want to save some money to invest in an ISA then I would recommend getting it from you local library if you can. Or get it for free by signing up for a one month free trial of Amazon's - Kindle Unlimited.
There is an old saying form Yorkshire I believe which goes where there's muck there's brass. Well it so happens today that we have had profits warning from waste group Shanks (SKS) and bank note printer and security group De La Rue (DLAR). Shanks expect to be about 15% below expectations while De La Rue are indicating a 25% profits shortfall.
It seems we are seeing a few more profits warnings, but these seem to be specific to these particular businesses so not necessarily any read through to other stocks. These are not stocks I am in or would necessarily recommend although I did look at De La Rue earlier in the year when I concluded it was potentially interesting but was not for me at the time. Today's profits warning has certainly taken the shine off it further but it might be worth a second look once the dust has settled to see if there is some value, but I note they have also cut the dividend too which is not good in my book.
Otherwise PayPoint (PAY), which I looked at in the earlier note on De La Rue, still looks a more interesting, modern alternative that continues to trade OK, albeit that it is more expensive.
...as a Non Executive Director from 1 January 2015. He will succeed Sir Christopher Gent as Non-Executive Chairman with effect from 1 September 2015, or at an earlier date if released from other commitments. So what you may be thinking, well just in case you missed it, I wrote about this back in the summer and what it might ultimately mean for GSK's dividend in the medium term.