The kick for Camellia came from Richard Beddard, so thanks to him for that. I unashamedly like to run around the blogs and see if anyone else is talking about anything I might be interested in – investing is all about aggregating and processing information, after all, and my fellow bloggers are a great source of it – and Camellia is one of those which I hadn’t seen before. That’s a little strange, since I would’ve thought with its characteristics I would’ve seen it on some screens somewhere, but there’s a lesson for you – nothing beats some bottom-up research, or just trying to see as many different companies as possible!
A dubious crown
Camellia, then, is a fairly large (in asset terms) business with their finger in rather a few different pies. Predominantly, though, their business is agriculture – the growing of tea is their biggest cash cow. Let me stop here, though, while it sounds relatively normal – Camellia is one of the strangest businesses I’ve looked at, from a number of different perspectives. Let me start with the most obvious: why does a business which has £236m of net assets tied up in agriculture, and very profitably so, also feel the need to operate businesses in engineering, food storage and distribution and even – most peculiarly – a bank?
I suspect Camellia’s management would say that’s an unfair question, and answering it probably says a lot about what you think a PLC should be. Why not have all these businesses together? After all, a company’s obligation is primarily to its investors – to earn a decent rate of return. It’s fairly clear by reading Camellia’s reports and website that they have an unerringly long-term focus, so perhaps that’s simply the be-all and end-all. Only it’s not – Camellia is a business of a different breed from most I look at. Check out their ‘about’ page on their website, linked here. Here are a few choice tidbits for those of the unclicking variety:
We see ourselves more as custodians or trustees rather than owners, that is, we do not see these assets as objects or commodities or bits of paper that can be traded, but rather, as living entities from which, if properly managed, we might earn an attractive return on our investment.
Camellia Plc is an amalgam of numerous once quoted public companies, many of whose histories go back to a time when the East India Company was forced by Parliament, some 150 years ago
And, as if to finish off that rather grand background, I’ve attached a picture of their head office taken from their website. It is, I’m sure you’ll agree, quite a head office.
It is a fascinating business, and I’m glad I came across it. That fascination doesn’t mean the key question underlying it all goes away in my head, though; should all these businesses really be together? For me, businesses should stand under one roof when there are clear operational synergies – reasons why one segment of the business benefits the other in a way which makes both of them better off. This isn’t just efficient for the business, but it’s economically efficient too – if all companies become larger and more specialised, the theory goes, the economy is better off as a whole. It might be a little textbook, but it’s a concept I agree with. I think the market does, too; there’s a reason companies like Camellia are so rare and it’s because most companies are relentlessly profit focused and subject to the whims of investors and banks. Camellia, for their part, avoid both of these problems quite neatly. For the latter; Camellia have very little debt and a huge amount of net assets. Their balance sheet looks absolutely bullet proof. For the former – on the subject of those buccaneering pirate investors who like to, if you’re a cynic, break up businesses like Camellia for short-term profits, they’re not a problem either. The company is majority owned by Camellia Holding AG, which seems to all lead back to a Bermudan foundation which gives to ‘charitable, educational and humanitarian causes’. There’s no room for agitating for change here, and there’s where the long term focus comes from – obviously they plan to be around for another few centuries.
I suspect this whole state of affairs, along with the very unusual nature of the business and how it operates, goes to explain the valuation. I think, by a number of metrics, the company looks cheap – the question is really how much of a discount (if, indeed, any at all) you want to apply for being a junior partner in a company with a structure like this. By means of explanation for my scepticism, take a look at the ‘return on segmental assets’ section of Camellia’s annual reports, stretching back a few years. This compares the trading profit of a particular division with its net assets.
7 years is clearly too short a timespan to make any sort of judgement, but when I already have doubts about the food storage and banking businesses, it doesn’t help to see average returns at not far north of zero. Engineering, for its part, at least earnt strong returns at one point.
There’s lots to say about the agriculture business, and particularly about valuing it; the way biological assets work mean there’s some interesting accounting nuances, and you get into sort of a cyclical argument with the way that, similarly to goodwill, biological assets can be valued at their future cashflows discounted. Luckily for us, in Camellia’s case they’re discounted with quite aggressive discount rates (perhaps justifiably so given where they are in the world and what they do).
I think the last two years have been particularly good for Camellia, though, and as such I think P/E metrics flatter their prospects. The way their assets work also means that book value will be bumped up by good operational performances, which somewhat compounds the problem. I can’t help but feel, given the way Camellia is run, something of a small discount to net assets is warranted, and in that vein I’m not hugely attracted by the company as an investment. More philosophically, though, it does make me wonder about where businesses create value in the world, what they can do, and to what extent a ‘long-term focus’ – something I like hearing – becomes dauntingly off-putting.
Well worth a look, if you’re more used to the garden variety of listed stock.