Category: Stock Ideas

  • 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…)

  • Quarto: Déjà vu all over again

    Disclosure: I have an interest in Quarto shares

    Quarto reported results today. For those wanting some background, I'll requote what I first said when I looked at the company:

    Quarto are in publishing, but with a few key differences from firms that may immediately spring to mind. The most important one is probably the type of books they are producing. Instead of focusing on fiction, a rather hit & miss affair that hopes to churn out a few bestsellers every year to compensate for some of the flops, Quarto have a varied portfolio of books with very narrow remits and niche audiences. Perhaps I could best illustrate this with their best selling book in 2010: ‘Complete Guide to Wiring’. By focusing on books for such small groups of people and keeping such a wide portfolio, Quarto remain fairly insulated from the more brutal swings in consumer spending.

    Over two thirds of the group's sales come from backlist - titles published in prior years. No title accounts for more than 1% of group revenues in any given year; last year, the biggest was around 0.6%, the second around 0.4%, and the tail develops after that. I repeat those facts as a sort of mantra when people ask about Quarto, because when I tell them it's a book publishing company I always get the same blank stare. Investors remember Quercus, which blew up after over-stretching itself after the success of Stieg Larsson. Investors remember Bloomsbury, which saw its revenues double and then drop by 33% in consecutive years thanks to Harry Potter. 

    I think it's undeniable that Quarto are fundamentally different. 

    QRT_RevEBIT (more…)

  • Hogg Robinson: Waiting for the Smoke to Clear

    Disclosure: I have an interest in Hogg Robinson shares

    Introduction

    I classify investments into ‘themes’ in my head. The theme explains why or how the market is mispricing a security. It might be that the asset is in a sector or geography which is particularly unattractive for whatever reason, but the company involved is more insulated than a casual glance would betray. It might be that the company has a number of very valuable assets which are obscured by fluff, by investment in the future (opex as capex), or by loss making divisions which drag down the group picture while allowing management a clear remedy, should they choose to take it. Either way, it helps me if I can see why smarter people than me might be unable to see the attractiveness of an asset.

    Hogg Robinson, thematically, fits in with Quarto in my mind. Every investment is different, but the premise is similar:

    The business is being attributed a very high cost of equity – similarly a very low P/E – because the market thinks that the business has a combination of declining cashflows from a dying business and substantial cash obligations. One of these factors alone is a cause for concern. Both, together, raise fundamental questions about the value of the equity.

    In Quarto’s case, their supposed millstone is the debt pile. In Hogg Robinson’s case there is also a touch of debt, but a much more sizeable pension deficit. In both cases, the black mark – QRT’s debt and HRG’s pension deficit – in combination with one’s inner reaction to the business they’re in – is prominent enough to turn the vast majority of investors off before getting to know the company.

    The market view

    To set up the mental model before we knock it down, then, here is what the market sees when it looks at Hogg Robinson:

    HRG_Revnue (more…)

  • Judges Scientific: A Textbook on Value Creation

    Disclosure: I have an interest in Judges Scientific shares  

    History

    Judges Scientific - in your author's humble opinion - is one of the best companies on AIM. How do we define 'best'?

    Here's the share price performance over the last 10 years, overlayed with the normalised diluted earnings-per-share. The first measure shows how the market perceives the company. The second shows their delivery in growing shareholder wealth in a more tangible way.

    JDG_SP_EPS

    As the caption at the bottom shows you, Judges has a phenomenal track record. I spend most of my waking hours looking for companies that compound wealth in this way, and I don't find many. Assuming that the history of the company has whetted your appetite, we'll go a step deeper. (more…)