Recent Posts

  • Northern Bear: Me and the market are not on the same page

    Disclosure: I have an interest in Northern Bear shares

    Trading update

    Northern Bear released a trading update today. It had three key notices:

    • Trading in the year to 31st March has been good - 'at least in line with the prior year'.
    • Chirmarn, the group's asbestos removal company, has had another bad year. It is loss making and drawing on group cash. As a consequence, it will be sold for £50k.
    • New bank facilities are in place, now for £3.5m, to replace the term loan expiring last week. These have a reduced interest rate (previously LIBOR+325bps) and a £1m overdraft facility. I think the group should be below £2m net debt at year end, so this does give significant flexibility.

    The fun thing about investing in a company like Northern Bear is that no-one really knows what the stock will or should do on a results announcement. Trading volumes are incredibly thin. There are no institutions driving liquidity. There are no broker notes to set expectations or guide participants, so there is no uniform consensus of what constitutes a 'surprise'. (more…)

  • Two must-reads, investors or not

    Two great documents that should be in every investor's reading pile were released this week. Actually, though, they're better than that - they should be in the pile of anyone interested in how businesses operate and think. (more…)

  • Go-Ahead: Eminently (un)investable?

    Run with me for a second. If you don't know who Go-Ahead are, don't look them up, and let me take you on a tour of the company.

    We'll start with the financials. Here is a cash flow profile of the company over the last ten years. The gold bar shows operating cash flow - cash coming into the company in the course of ordinary business. The grey bar shows investing cash flow - cash they've invested in growing the business, or at least maintaining the asset base. The black line shows the summation of the two, namely the cash profitability of the business before we start talking about capital structure issues (like interest and dividends):

    (more…)

  • Northern Bear: Not So Grizzly Now

    Disclosure: I have an interest in Northern Bear shares NTBR_Numbers Northern Bear is a small, northern English building services firm traded on AIM.

    To understand any business, you need to understand a little about the history. Northern Bear was, as was often the case in the good old days, cobbled together with flowing money and attractive public markets. Several construction-related groups joined forces to create a platform company, with the intention of buying further complementary businesses and scaling up the combined group. Isoler, Roof Truss, Springs Roofing and Wensley Roofing all joined forces to create Northern Bear, which floated in late 2006. Whether they would have made a success of their acquisition strategy is difficult to say, because they got a pretty short pop at it before the recession crashed the party. Debt-financed purchases were out. Anything construction related was definitely out. In some senses they weren't so dissimilar from Judges in that they planned to provide exits for small, owner-operated building services firms at attractive multiples for the group. A key difference is that they were rolling up a market which saw swingeing cuts in spending in 2008-2009, and thus necessitated a complete change of strategy. (more…)

  • Quarto: The End of the Beginning?

    Disclosure: I have an interest in Quarto shares

    Forgive me for the Churchill reference – but it does have some relevance for my illustrated book publishing friends at Quarto. That’s because, along with their 17th March final results announcement, Quarto noted that the two activists still on their board – after almost four years of involvement – will be standing down at the next AGM. The group has successfully passed through a phase of reassessment and considerable uncertainty, as the long-time CEO and founder of the company stepped aside on the activists’ behest and made way for a new leadership team.

    Quarto has reduced debt, sold off non-core assets, started several innovative new imprints and improved financial results. It was, I imagine, something of a tight-rope walk.

    The group still trades at less than 7.5x my run-rate cash flow estimate. I think they can generate around 13% of their market cap in freely available cash each year, with which management can choose to either pay down debt, distribute a dividend, or invest in acquisitions.

    My opinion here has not changed – this is too high a free cash flow yield for a high quality company. The market gives it little credit for the resilience of its business model and places undue emphasis on financial risks from a relatively high (though now substantially improved) debt position.

    Despite continued strong momentum in the shares over the last few years, the rating remains little changed – the improvement in price has mirrored underlying improvement in the company. There is further to go, and the slight loosening of the one-track strategy of debt reduction heralds, for me, the next chapter of the investment.  (more…)

  • Judges Scientific: Two Steps Forward

    Disclosure: I have an interest in Judges Scientific shares

    I last wrote about Judges Scientific about 6 months ago, in May. There, I laid out the case for why I think it is one of the best companies on AIM, and why I thought the price was undervaluing both the business as it stands and, more importantly, the potential for the management team to continue enriching shareholders through their well-worn acquisitive strategy.

    The day before that post, the price of Judges shares was £17.40. Today, the price stands at £15. In this post I will walk through what has happened in the interim, along with an updated valuation. The short summary is that the group has reported good news on order book, the best leading indicator of sales we have, and has proven that the latest acquisition they have completed was still as accretive as in previous years. It is thus both cheaper and more valuable.

    A quick recap of the elevator pitch: the company buys small, niche scientific instruments businesses as they come to the end of their private lives. They then let these companies run with a great deal of autonomy, with the central hub's main purpose being capital allocator for future deals. This is interesting for three reasons:

    • The UK has a large number of small scientific instruments companies due to the existence of world-class education institutions. Smart people find a niche that needs to be satisfied, and start a business to satisfy it.
    • Said businesses have superb characteristics - exceptionally high margins (Judges runs at 20%+ on a consolidated level), low incremental capital employed - and hence excellent cash flow profiles, and tailwinds from increasing global research and education spending (China is a big boost to this). They typically export the majority of their revenues and have limited meaningful competition.
    • Judges is small enough to buy the small ones and still have them move the needle. They can hence provide a home for excellent businesses while still being picky about price.
    (more…)