Clearly, at the current share price Fletcher King (LSE:FLK) does not qualify as a NCAV share because its share has risen so far above NCAV.
The question now becomes whether its robust operating performance indicates that it is a ‘strong economic franchise with capable and high-integrity (shareholder orientated) managers’?
In other words it is less a Benjamin Graham share and more a Warren Buffett share. I have some doubts.
First, it has very limited customer captivity. It would find it difficult to raise prices above competitors simply based on the notion that it has extraordinary relationships, or reputation, or capabilities, or knowledge.
It has some edge over some competitors in these qualities, but these are not sufficiently strong to warrant the term ‘extraordinary resource’. I think that customers will switch agents if FK tried to raise margins too high.
Second, sense of duty to minority holders. I get the feeling that the senior team have some sense of fiduciary duty to all shareholders, but they manage to temper this with their urge to pay themselves very large bonuses in the good times. On the other hand remuneration does go down in recessions.
Which brings me to the third point - the cycle. This is a highly cyclical company because activity in commercial property is highly cyclical. Cyclical companies should not always be shunned, but they must come cheap.
Fourth, average return on capital employed through the cycle should be high to qualify as a strong franchise share. FK fails on this point because it holds so much of shareholders’ money unnecessarily.
It could easily return a couple of million pounds and double its ROCE because profits will be lowered by only £0.01m, but shareholders capital usage halves.
With net assets of £3.729m, ROCE is £0.368m/£3.729m = 9.9%
With £2m paid out to shareholders ROCE rises to £0.367m/£1.729m = 21.2%
An alternative is to use the spare cash to create more fee-generating-capital-gain-making SHIPS. Just don’t leave it producing a return of 0.5%!!!!
Tomorrow I conclude my analysis, and a decision on whether to buy