Expecting Value – UK Value Investing Blog

Plastics Capital & Vertu (PLA, VTU)

Played out and playing out

Last time, I looked at Tesco & Dart Group - one company I like the look of but haven't bought, and one company I'm starting to like the look of less but hold having bought it many moons ago. Today, it's another company which has been with the portfolio since inception - the perennially under-the-radar Plastics Capital, and the more recent portfolio addition of Vertu Motors. Both companies released full-year results in my little hiatus, and thus now present me with a great reason to reacquaint myself with what's going on and decide whether I still think they're wise holdings.

Plastics Capital

I really liked Plastics Capital's business model when I 'bought' it way back in June 2011, and I still like it, though with more expressible reasoning now. I like Plastics Capital because they dominate a number of very niche industries, holding large market shares in things like plastic ball bearings, crease matrices (used in the production of cardboard boxes) and hose mandrels. These are ludicrously specific things, and by nature they lend themselves to a small group of small companies producing them. Like investing in the small cap space, I suspect a company investing in a small industry is likely to find more inefficiency and more potential for supernormal returns on capital. In some ways, you might even think of Plastics Capital as an investor itself - they're acquisitive, and their results say they want to continue to be acquisitive, buying more businesses in the same framework they already have.

Results are broadly in line with market expectations, judging by the relatively small price movement, and now place the group on a worst-case P/E of about 20, and a best-case P/E of about 14. The discrepancy arises from the amount of amortisation you feel it's appropriate to exclude from that figure; things like customer relationships, IP rights, trademarks and technology are all being amortised at different schedules, and investors should be cognisant of that before ever placing too much trust in a misleadingly certain headline profit figure.

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Tesco & Dart Group (TSCO, DTG)

Keeping up

First of all - I am still here! The eagle-eyed might have noticed that I've been looking for a job and finishing my exams in the last couple of months, so I took a break from blogging while I threw my attention at both of those endeavours as well as the proliferation of great sport on TV this summer. The assessment is, thankfully, completely finished; the former has been hugely aided by the blog, which has put me in touch with a number of great people (ongoing, I should note!), and the latter has been exceeding even its own high expectations, probably aided by the prompt departure of the England team, who left no lingering hope to be brutally extinguished in the knock-out stages.

I'm left facing a portfolio which I feel slightly out-of touch with, then, but also thoughts and ideas which I have had but haven't blogged about. I'll spend the next few posts rectifying those outstanding matters, then, with a relatively open run around of things I feel like discussing.

Tesco (TSCO)

Don't shoot me for starting with Tesco again. You'd be forgiven - or perhaps spot on - for thinking I have some sort of obsession with the retailing giant. I probably explained it best in my last post on the supermarkets:

I like the supermarkets. I like the supermarkets because they're the best example I can think of of capitalism in action. They're relentlessly profit driven machines in constant competition...

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Smiths News (NWS)

Part Two

This post leads directly on from yesterday's, in which I pontificated on the structure of the industry in which Smiths News operate. Like a veteran soap writer, I left on a tantalising cliffhanger - where does what was discussed leave the business? This is an investing blog, after all, so I suppose I should consider the financials and have a poke at thinking about the valuation of the company.

The basics

The way to value Smiths News, I think, is by viewing it as basically two different sides of the same coin - the mature and declining news segment, which still dominates overall business performance, and 'the rest' - faster growing with more growth opportunities. The group's rising revenue figures should be seen as a combination of these two disparate sides, and also as a consequence of consolidation in the industry (notably in 2010, where they effectively bailed out one of their failing competitor's contracts).  This sort of consolidation is unsurprising and normal in a declining industry - the economies I talked about previously become critical.

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Smiths News (NWS)

Staying relevant

Smiths News is an interesting company. It's an interesting company primarily for  the reason I always come out with - they do something ostensibly very simple. How can simple be interesting? I find simple interesting because companies doing straightforward tasks, by virtue of competition, have to do them well. Bunzl supply products (all sorts) to places and supply vending machines, but they are everywhere. That's a business we can all relate to - hell, if you can drive, it's a service you could set up and start providing yourself. Safestyle manufacture windows, market windows and install windows; clearly, this too is not rocket science. When you strip away a lot of the stuff which puts people off investing - the image of the banks' 200 page annual reports, full of bizarre terminology and impenetrable figures, I think understanding the businesses is the really enjoyable bit.

Smiths News, hinted at in the name, are distributors of newspapers and magazines. They also own Consortium, which anyone who went to school in the last 15 years (maybe more - I can only speak for myself!) might remember from rubbers, rulers and pencils, and Bertrams, a book distributor. Given that both Consortium and Bertrams were fairly recent acquisitions in the history of the group, it doesn't take too much thought to figure out what's going on here - Smiths News are diversifying. Why are they diversifying? It's an age-old story; a decline in their core market, and an attempt to apply expertise and processes from that core market to other sectors.

I'm looking at Smiths News again because their pre-close trading statement saw the group's share price price dip about 20%, and they currently sit a third off their high - for what seems to me to be a fairly innocuous forecast. The group saw performance in line with last year, itself a reasonable performance, though perhaps some of the disappointment comes from the faster-growing segment (Bertrams) performing poorly. I'm not hugely concerned with trying to figure out what the market was thinking or why it reacts in the way it does, but it seems fairly safe to say that growth was expected, and none was delivered.

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Tagged as: NWS, Smiths News 3 Comments


Some shuffling

The markets have been pretty volatile recently, and the year-to-date has been one of my longest periods of underperformance vs. the market for a couple of years. I use the term 'underperformance' loosely - it's more or less in line with the All-Share percentage wise, which isn't particularly worrying nor worthy of note. It is interesting, though, if you're a story person. We all are to some degree; whenever the market twists and turns people start talking about the 'fear' biting into the bull run, or conjure up images of that great unwieldy behemoth - market sentiment - swinging round at last. In that vein, one thing I can say I am very interested in is how my portfolio performs in different scenarios. An element of counter-cyclicality and relatively smaller losses when the market is tanking appeals to me as an investor, because I'm trained to believe that protecting downside risk is paramount, and that probabilities in the minds of market participants tend to be skewed to unduly penalise 'boring' shares.

Does my portfolio fit that nice, broad aim? Unsurprisingly, I don't think it's really possible to say. I'd like to think I have 3 years of data - I have been running the portfolio for nearly 3 years, now, but that's not really true. I would have 3 years of data if my strategy had stayed the same, and if I had not evolved as an investor; but there are companies I like the look of now that I never would have considered 3 years ago, and vice versa. Sure, there are broad similarities - so one can draw broad conclusions - but markets are noisy.

Really, I'm just saying what I always say, here - people aren't conditioned to understand the nature of results in an extremely high volatility environment like the market. The same was true when I played poker, another extremely high variance game. Solid, winning players could be down money over tens of thousands of hands - even though they made the correct decision in every scenario. Terrible players sometimes enjoyed the opposite effect. Naturally, the good player is left questioning himself, and the bad player thinks he's the next Phil Ivey.

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Tagged as: Empresaria, EMR No Comments

Safestyle (SFE)

A different flavour of IPO

It feels like a lot of companies have come to market recently. Poundland, Pets at Home and Boohoo.com hold very little appeal for me at current valuations - and the whole IPO process is one which immediately makes me a little suspicious, anyway. There is one company which caught my eye enough (just post IPO) to give them a proper read through, though. I was planning to write this post last week, but the imminent publication of their full year results for 2013 gave me enough of a reason to sit on my hands and twiddle my thumbs for a while longer. I now look at them with a round 33% more financial data (four years of results instead of three!). Quite the boon.

Many of my UK readers will, I suspect, have heard of Safestyle. I might go so far as to read your mind with regard to the first thought, which I suspect will be this; one of those adverts so annoying it becomes memorable.

For those who don't know them, they are a manufacturer/distributor of windows. They're the largest seller of replacement windows in the UK, which is a market worth about £2bn a year and which has a surprisingly fragmented structure; their market share sits at 7.9%, with Anglian and Everest (which I assume are the other two in the top three) pooling 20% between them. The rest is made up of smaller, regional players. Their positioning - if you couldn't tell from the advert - is distinctly at the value end of that spectrum. From anecdotal experience, Safestyle are significantly cheaper than their competitors. The scale of that cost difference - as well as the incentives at work in replacement windows (how long are you planning to stay in the house for? How much do you care about quality?) likely explain Safestyle's continually increasing market share; 4.4% in 2007 and 7.9% now. The value proposition to customers appears to be sticking.

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Tagged as: Safestyle, SFE 3 Comments