Tivoli A/S: Punchy price, pleasant perks

Tivoli is a lovely place; unusually for one as poorly travelled as me, I’ve been there. It’s a little amusement park – though the phrase doesn’t really do it justice and they call it ‘Tivoli Gardens’ – in the middle of Copenhagen. If you ever get a chance, definitely pay it a visit – the entry price is a steal, the atmosphere is lovely, and there’s a big swing carousel which you can ride on that gives you a great view of the city.

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Rational AG: A tantalising reminder

Rational make the best commercial ovens in the world; 54% of all combi-steamers sold are made by Rational. They’re a picture of a solid German business; still owned 70% by insiders, paying a substantial dividend, and growing profitably year-on-year. You might think a company like this has a relentless focus on margins or returns, but that isn’t the case; Rational say their primary corporate objective is to ‘offer the greatest possible benefit to the people preparing hot food in the professional kitchens around the world’.

A lofty goal – ‘maximising customer benefit’ as the focus of the business – has flow-through effects to shareholder returns. There are benefits to hosting free training for all your customers, rolling out software updates for the ovens you provide, offering 24/7 technical support and providing the services of 300 trained chefs (who are also, unsurprisingly, also salesmen) to your clients, as well as offering them direct contact to the CEO if they’re not satisfied with the service provided.

Check out the 10 year performance graph:

Dividends are overrated

A couple of weeks ago an interesting article was posted on Stockopedia:

‘Dividends are more reliable than accounts’ 

This is a pretty bold statement and, having ruminated on it a bit, one I can’t help but disagree with. I started typing a comment by way of response on there, but having got a bit long, I figured I’d move it over here with a suitably gauntlet-laying title. My teachers always did say I was prone to exaggeration! Click through and read the article for yourself if you want to get it from the horse’s hooves, but I’ll attempt to summarise the author’s argument here as fairly as I can:

Active management is bad because it’s difficult to spot profit warnings coming, and difficult to discern future profitability. It is better to base investment decisions on a ‘fundamental measure, like dividends’.

On unreliability

The charge that accounts are unreliable is one that comes up quite often. I note one thing to start with; if you like investing in AIM-listed Chinese companies, or exciting little oil & gas plays, I sympathise with you – you might well find published accounts a decidedly questionable source of information. 

You can’t trust EBIT (AMZN/ASC)

The other day I was discussing with one of my colleagues the differences between tech valuations in the UK and in the US. There’s a good reason the real tech giants in the world are US companies, as far as I’m concerned, and you see a reflection of general investor sentiment in that respect when you look at the pricing of the stocks and the attitudes of management teams.

The simple fact is that US public equity investors seem to have more of a stomach for ongoing losses in exchange for top-line growth. Is this a good thing? Clearly, as a value investor, you wouldn’t expect me to say anything other than the usual spiel about racy tech stocks and their absurd valuations. One thing I do buy, though, is that the distinction between operating expenses (opex) and capital expenditures (capex) isn’t quite as solid as line as many investors seem to think.

Connect Group: Putting up a fight

I like Connect Group. I like Connect Group because it’s a solid, old-fashioned value investment; you’re buying it at 7.5x earnings (6.5x yesterday!), and you’re buying into what is basically a monopoly operating in a declining industry. Ok, technically they’re a duopoly, but the market is geographically split – so where they’re operate, they’re really the big dog. And being a monopoly in a declining industry is a pretty attractive place to be, since the lack of competition means you can derive great returns. Your competitors have left the market by force or by choice, and who’s going to spend the money competing with an incumbent in an industry on the way down?

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Housebuilders in the UK

What place does a housebuilder have in your portfolio?

As a value guy, I’m not really sure. If I were to take a stab at valuing a housebuilder, it would comprise of two elements. It’s sort of like valuing insurance companies, really:

a) Value the land on their book. This sounds trivial – we have accounting book values for a reason – but the actual sums are more complicated than that. Housebuilders have portfolios which faced differing degrees of impairment during the crisis, and the companies which had the financial strength to restart big land-buying programs in the depths of 2009/2010 – while everyone else was battening down the hatches and staving off the baying banks – have a portfolio of land which allows for higher margin building today. They also have differing quantities of land, which are best modelled by comparing their land bank (in number of plots) versus their last-year completions. This is like valuing an insurance company’s in-force book; you’re essentially asking yourself how well-written their previous policies were, or how well bought their previous land was, and how benign the environment will be for that profitability over the next few years.Inline image 1