I have written in the past about how corporate restructuring's which lead to subsidiaries being de-merged can lead to good value opportunities. Today I thought I would touch on the opportunities afforded when Companies suffer a mishap. In these cases it is important to determine the cause, extent and likely cost of the mishap and try and decide if it will be a short term one off or something more lasting and damaging to the business and its reputation and prospects. You can then compare this to the price reaction to see if there is a value opportunity as a result.
A good example of a bad mishap which was actually self inflicted by the management and which had long lasting effects was when Gerald Ratner in a speech described one of his own products as "crap" - see a brief video and a more recent interview for more details if you are not familiar with this case. Obviously you would want to avoid a Company with this type of mishap!
A more recent example where the mishap was smaller, less damaging and ultimately not as costly was back in 2012 when Britvic (BVIC) had to recall some of their Fruit Shoot drinks due to a choking risk for children from a small part on the top. While this was potentially very damaging, it was handled very swiftly and dealt with well by the company and they were very up front about the costs. This type of recall is quite common in the food and drinks industry and the direct costs were fairly easy to calculate. Obviously the longer lasting damage to the product and the company were an unknown at the time and hence the market marked the share down quite heavily as you can see in the chart above. This afforded a great opportunity to pick up the shares and enjoy the recovery as the recall did not do any lasting damage.
The shares recovery was also helped along by their subsequent attempt to merge with A.G. Barr which failed due to monopoly considerations. However, the Company has continued to prosper since then and indeed reported some more good interim numbers today. In these they saw revenues up 4.7% with 3.9% from underlying growth and 0.8% from pricing. Margins increased by 0.6% to 9% helped by on going cost saving initiatives which are expected to deliver £30 million per annum by 2016. This led to earnings growth of 16.9% which is around the rate of growth that seems to be forecast for the full year. So probably no change to forecasts I guess as they have been rising gently recently and their indicated range for EBIT this year of £148 - £155 million seems to be reflected in consensus forecasts already. The dividend was increased by a useful 13% on last year, reflecting they say confidence in future prospects. Adjusted net debt fell to £479.4 million which compares to a market cap. of £1.8 billion and represents 2.6x EBITDA down from 2.9x all of which seems OK given the fairly steady nature of this one.
Overall, this one continues to deliver steady progress and has some good operating metrics. However the value is not as good as it was when the mishap happened and it seems fairly fully priced on approaching 17x and around a 3% yield so more of a hold than a strong buy I would say, although Mr. Market seems to be excited today as he has marked it up by 5% first thing on the back of this announcement, cheers.