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Highcroft Investments (LSE:HCFT), whose shares I bought recently at £8.75, has simple business model. So simple that it only requires six and half employees to run the £45m company. It buys and holds commercial buildings, mostly warehouses and retail warehouse, and rents them out. It occasionally sells a unit, usually when the property no longer fits the direction the managers want to go, e.g. in the last five years high street retail and residential have been sold off and small warehouses replaced with larger ones. In most years it buys an extra one or two units as cash accumulates and capital values of the existing portfolio rises.
Currently it has 22 properties with 30 tenants spread over 868,000 sq ft. Its units are 99% occupied; and that has been achieved after one of the worst ever periods for commercial property owners. Rent collection was 94% of that due in 2020. In documents the directors emphasise their shareholder orientation. For example, the 2020 annual report stated: “Our strategy: Highcroft aims to deliver sustainable long-term income and capital growth for its shareholders through accretive asset management initiatives and recycling of capital in its regionally based property portfolio… …Our actions are centred on our shareholders; investments are considered in order to execute our strategy and increase shareholder value.” Stated objective: “To generate secure and sustainable income growth to drive a progressive dividend, which, when coupled together with capital value growth, will deliver strong total shareholder returns.” It has the following the following strategic priorities:
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Financial distress investigation using Piotroski factor analysis
Joseph Piotroski published a landmark academic paper in 2000 showing that nine accounting variables can be used to give an edge in investing in value shares because they allow a sifting out of those shares with high probability of trouble, and those which, while also having low share prices relative to the value criteria, do not show much indication of difficulty. (Earlier Newsletters outlining Piotroski’s work: 5th Feb 2015, 9th Feb 2015) Profitability factors If the firm is profitable and produces positive cash flow it has a capacity to generate funds internally. Furthermore, a positive earnings trend suggests an improvement in the firm’s ability to generate positive future cash flows.
4. Cash flow is greater than profit (so profits are not driven primarily by positive accruals, which may be ‘managed’). This is the case for Highcroft so another point is scored. Leverage, liquidity, and source of funds Measuring changes in capital structure (debt:equity ratio) and the firm’s ability to meet future debt service obligations 5. Change in leverage over one year. Has the firm’s long-term debt reduced relative to its average total assets? In 2019 the figure is £22.2m/£88.2m = 25%. In 2020: £27.2m/£88.2m = 31%. The gearing level has worsened so no Piotroski point. Note however that in both years the debt relative to asset ratio was low for a property company. 6. Has the firm’s current ratio (current assets divided by current liabilities) improved over the past year? The ratio in 2019 was £2.7m/£6.5m = 0.4..........To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Yesterday’s newsletter explained that Highcroft’s (LSE:HCFT) net current asset value is 25% above its current market price. This was one factor prompting me to buy its shares at £8.75. Today I look at another enticing feature of the company: it’s solid earnings and dividends flow to shareholders over the past decade. This history and the firm’s quality property assets encourages me to think that there is a reasonably high probability that good returns will be made by shareholders in the future.
Key numbers on earnings, dividends and net assets .....Dividends per share over the ten years total £4.15 a large payout on a share trading at £8.75. And yet in the same period the directors have grown net rental income by an average of 12.9% per year (from £1.83m to £5.46m) and net asset value by 4.9% per year (from £7.20 to £11.04). So, it seems that a good dividend yield (currently 6.5%) can be accompanied by a growth in regular profits from income producing properties and growth in the asset base. The earnings per share measure excluding gains/losses in property values rose from 40.1p to 67.7p, an average percentage gain of 6%, over the decade. If we assume that future annual dividends do not rise from the 57p received last year then investors benefit from a 6.5% regular dividend. If ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 I’ve bought into the nice steady, safe and secure - in relative terms for an equity investor - business of Highcroft Investments (LSE:HCFT) at £8.75 for my net current asset value portfolio. It buys commercial property, mostly large warehouses, retail warehouses or offices, and rents them out to the likes of Booker, British Airways, Parcel Force and the BBC.
It pays shareholders 90% of net property (rental) income in dividends because it is a Real Estate Investment Trust (The tax benefits of REIT are explained at the end of the newsletter). For 2020 Highcroft had a net property income of £3.5m or 67.7p per share and paid out to shareholders £2.95m or 57p per share. Dividend yield is 57p/875p = 6.5%. The market capitalisation is £45.3m (£8.75 x 5.18m shares). However, my calculation of net current asset value (including all property) is £56.78m or £10.96 per share. The gap between NCAV and price plus the substantial proven annual income and dividend flow allow me to feel comfortable that there is a good margin of safety (income and dividend history are discussed in the next newsletter). Net current asset value, NCAV If I was to stick strictly to Ben Graham’s definition of NCAV I would only look at those assets officially designated as “current” and then deduct one-fifth of receivables. This gives only £7.9m. However, Highcroft regularly trades its properties so, even though they are technically non-current assets, I’m going to include them here in my intrinsic value estimation. ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Having bought N Brown (LSE:BWNG) shares in 2018 and 2019 in the hope of a restoration of earnings to more than 20p I’ve now sold in despair at the capability of the managerial team to lift the company, having lost over half my money (bought at £1.42 and £1.30, sold £0.557).
This is a company focused on online retailing. It has been through a period when online retailing boomed. And yet earnings are down to virtually nothing and dividends have been eliminated. The best the directors can come up with for 2022 is that revenue growth will be in the range 1-4% Earnings and dividends Pence per share Earnings (statutory) Earnings (adjusted) Dividends 2021 2.63 7.89 0 2020 9.63 16.37 2.83 2019 -20.5 21.38 7.10 2018 4.41 23.06 14.23 2017 15.67 22.74 14.23 2016 19.23 24.02 14.23 2015 18.15 24.61 14.23 2014 27.09 27.74 14.23 2013 28.51 28.04 13.68 2012 29.28 28.84 13.03 2011 26.04 26.88 12.41 2010 22.83 24.77 10.79 2009 22.88 21.96 9.19 2008 21.16 20.27 9.06When I bought in 2018 dividend yield was 14.23p/142p = 10.2%. It was exceptionally high and so I would have been content if the dividend, say, halved. Instead, it has fallen to zero. Over the ten years 2008-17 average earnings per share “statutory” were 21.4p. Thus the cyclically adjusted price earnings ratio when I first bought was 142p/21.4p = 6.6, less than half the market. And the company displayed a reasonable degree of financial stability with a Piotroski score of 5 out of 9. The business model of selling £600m+ of clothes and enticing half of those purchases to be on ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Following a strict value investing approach I sold a lot of shares before and during the first Covid wave (I recommend investors read The Economist if you want to make educated guesses about the future – it was telling me about Covid in China very early in 2020). The pile of cash was useful later in 2020 and 2021. The shares bought in the last year or so have, on average, risen by over 52%. I’ve been fortunate.
A list of all the shares I bought in the crisis (newsletters published at the time of each purchase set out my rationale for buying) CompanyPurchase date Purchase price Divs to 30 June 2021 Price 30 June 2021 Return to 30 June 2021 Smiths News (Connect Group)18.3.20 £0.151 zero £0.444 194% Character5.6.20 £2.52 5p £6.85 174% McCarthy & Stone1.10.20 £0.718 0 Sold Dec 2020 £1.185 65% Capital & Counties Properties6.11.20 £1.032 0 £1.608 58% Dewhurst “A”11.11.20 £5.94 9.25p £6.50 11% MS International16.12.20 £1.292 1.75p £2.04 59% Wynnstay29.12.20 £3.405 10p £4.84 45% Lloyds Bank12.3.21 £0.4169 0.57p £0.468 14% J Smart18.3.21 & 24.3.21 £1.253 0.95p £1.22 -2% Fletcher KingFeb 2020 – May 2021 £0.3265 0.5p £0.36 12% Orchard Funding7.6.21 £0.568 zero £0.59 4% Caffyns22.6.21 £4.65 zero £4.00 -14% AVERAGE 52%Longer run performance Eight years ago that I resigned a tenured professorship to concentrate on investment. Back then the FTSE 100 was around 6,600. It is now 7,100 – a slow rise. But there have been dividends of around 3-4% per year. I believe the numbers in the tables below show that I have outperformed, which is quite a relief given the salary and security sacrifice I made eight years ago. The tables display the results (so far) of all the shares bought for the portfolios I’ve been writing about in my Newsletters. The comments I made at the time explaining the rationale for each investment are available for you to read in older newsletters - there is nowhere for me to hide from my appraisals I made three, four or seven years ago – all the errors of omission and commission are there in broad daylight. I present the returns after taking the hit on broker costs, stamp duty and bid/offer spread. (Some of you have joined us recently so, in case you are not familiar with them, I briefly describe the criteria for my portfolios following the portfolio performance tables.) The 2013 Net Current Asset Value, NCAV, portfolio CompanyPurchase date Purchase price Divs to 30 June 2021 Price 30 June 2021 Return to 30 June 2021 French Con.25.7.13 £0.3047 zero Sold July 2015 £0.4378 44% Caledonian T25.7.13 £0.70 zero Sold April 2020 for £1.391 99% Fletcher King6.8.13 £0.30 14.25p Sold June 2016 for 46p 101% Northamber22.8.13 £0.287 1.6p Sold Oct 2016 £0.303 11% Titon5.9.13 £0.379 6.5p Sold May 2016 £1.06 197% Mallett12.11.13 £0.7682 12.7p Sold Nov 2014 £0.60 -5% AVERAGE 75%The 2014 NCAV portfolio CompanyPurchase date Purchase price Divs to 30 June 2021 Price 30 June 2021 Return to 30 June 2021 Holders Tech10.10.14 & 3.11.14 £0.47 1p Sold March 2017 £0.33 -28% Airea4.11.14 £0.1195 0.9p Sold Sept 2016 £0.309 166% Northamber17.11.14 £0.4265 0.7p Sold Oct 2016 £0.303 -27% Caledonian T30.12.14 £1.39 zero Sold April 2020 £1.391 0 AVERAGE 28%The 2015 NCAV portfolio CompanyPurchase date Purchase price Divs to 30 June 2021 Price 30 June 2021 Return to 30 June 2021 PV Crystalox15.1.15 £0.122 zero Sold Dec 2016 £0.237 94% Arden Partners1.9.15 £0.422 1p Sold May 2018 £0.364 -11% Northamber4.9.15 £0.443 0.4p Sold Dec 2016 £0.303 -31% AVERAGE 17%The Buffett-style portfolio This type of share is rarer than the others, and so I combine all years. CompanyPurchase date Purchase price Divs to 30 June 2021 Price 30 June 2021 Return to 30 June 2021 Dewhurst9.4.14 £3.18 70.5p Sold February 2020 £7.217 149% MS International9.10.19 £1.723 5.25p £2.04 21% Character20.1.20 & 5.6.20 £2.811 13p £6.85 148% Dewhurst11.11.20 £5.94 9.25p £6.50 11% MS International16.12.20 £1.292 1.75p £2.04 59% AVERAGE 78%(I bought some more of Dewhurst in June 2014 at £3.11, December 2014 at £3.75, November 2017 at £5.46, February 2019 at £5.54 and April 2019 at £5.64. These were sold Feb 2020). Modified price earnings ratio portfolio 2015/16 ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Caffyns (LSE:CFYN) has been a family-dominated firm for over 150 years, despite it now being a Premium Listed company on the LSE. The family have been accused by a bulletin board writer of running a corporate board of directors which “is grossly self-indulgent”.
I need to start the process of assessing whether this is true to the point of being seriously detrimental to minority shareholder interests, a group to which I now belong. The family do not control through ownership of more than 50% of the ordinary shares, of which there are 2.695m in issue. They control the firm through their holding of all the 2m 6% Cumulative Second Preference Shares, which each have the same voting rights as the ordinary shares (one vote per share), except in a few special situations related to the Premium Listing provisions, such as voting to leave the LSE (the prefs lose the right to vote). In addition, Caffyn family members not sitting on the board own around 16% of the ordinary shares. Sarah Caffyn, who is a board member, has 46,232 (1.7%) ordinaries and Simon Caffyn, CEO, has 76,988 (2.9%). Also, the Caffyns’ Pension Fund holds 4.66% of the ordinaries. (There are some other preference shares held by the family but they do not carry votes and are not relevant to the power dynamics of the firm). Evidence for the self-indulgence charge We’ll start with the money paid to shareholders, staff and directors over several years. £mDividends + cost of buying the company’s shares Staff pay (including directors) Issue of shares for SAYE Directors’ emoluments 20210 13.6 0.003 0.59 20200.61 13.7 0 0.66 20190.61 13.7 0 0.74 20180.61 13.1 0 0.63 20170.61 + 0.9 15.0 0.3 0.81 20160.60 + 0 15.7 0 0.88 20150.56 + 0 14.8 0.005 0.86 20140.36 + 0.39 14.5 0.3 1.153 20130.33 + 0 14.2 0 0.91 20120.34 + 0.1 15.0 0 0.83Clearly, the directors have taken more cash than the shareholders have received, and £590,000 in director’s pay seems a lot for a £12.5m company. But, I suppose, at least director remuneration has fallen from the heights of 2014. The question we need to ask is whether……………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 In earlier newsletters we established that Caffyns’ (LSE:CFYN) net current asset value is between double or treble the current market capitalisation (assuming properties are current assets and there is no need to write down the value of its stock of cars for sale). We’ve also seen a big improvement on the balance sheet, financial distress risk and potential to pay off almost all bank debt with a single asset sale. Today we turn to its profit history.
Profit after tax and earnings per share 2012 - 2021 Reported profit after tax (including the “non-underlying” negatives and positives) £‘000 Earnings per share 2021 1,424 52.4p 2020 -252 -9.4p 2019 -566 -21p 2018 1,030 38.2p 2017 5,123 186.3p 2016 2,487 90.1p 2015 9,255 335.5p 2014 1,411 51p 2013 1,289 46.6p 2012 1,416 51p Average earnings per share 82.1pThe cyclically adjusted price earnings ratio at my buying price of £4.65 is 465p/82.1p = 5.7. But we need to scrutinise the components of the earnings. For example, the 2015 result deserves a special mention: most of that £9.255m profit was a result of pension rules changing (so that future pensions could rise by only the RPI rather than the CPI) – it is a true one-off. The 2019 earnings number was greatly affected by impairment charges on two properties (£945,000). Also there was a negative £572,000 exceptional charge mostly caused by a one-off expense for equalising pensions (a countrywide imposition on companies). If I correct for these distortions, remove true exceptional items and take away the profits made on property I arrive at earnings coming solely from the operating business (including rent collected on properties). Method 2. Stripping out the one-off elements and separating the operating income from the property development capital gains. Year end (in March) Profit from selling cars and rent, £000s Earnings per share from selling cars and rent 2021 1,571 58.3p 2020 -252 -9.4p 2019 952 35.3p 2018 1,030 38.2p 2017 1,284 46.7p 2016 2,525………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 I’ll use Piotroski’s nine variables to get an overview of financial distress risk at March 2021.
2. Does the company produce positive cash flow from operations? Caffyns generated £4.6m of operating cash flows before movements in working capital, thus a Piotroski point is gained. 3. Has return on assets improved? A profit in 2021 following a loss in 2020 means an improvement. Third Piotroski point. 4. Is cash flow greater than profits? Yes. Fourth point scored. 5. Has the ratio of long-term debt to average total assets during the year diminished? For 2020: £11.8m/£94.7m = 12.46% For 2021: £12.2m/£95.5m = 12.77%. No Piotroski point. 6. Has the current ratio improved? Current ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Superficially, there is an impressive gap between the company’s market capitalisation, £12.5m, and property assets of £54.7m. But before getting carried away we need to consider whether the company is vulnerable to failure because of its debt levels and covenants on those loans.
Net bank borrowings fell between 31st March 2020 and 31st March 2021 from £16.1m to £10.3m, so that is encouraging. The makeup is £5.7m of cash and £16m of borrowing. Debt facilities have been agreed with HSBC and VW Bank:
Debt outstanding at March yearends 2021 - 2018 £m 2021 2020 2019 2018 Current 3.9 8.9 4.9 1.4 Non-current 12.2 8.7 12.6 13.1 Total debt 16.1 17.6 17.5 14.5 Less cash -5.7 -1.5 -3.9 -2.2 Net debt 10.3 16.1 13.6 12.3Preliminary results to 31st March 2021: “This substantial reduction [in bank debt over the year] reflected the strengthened controls over working capital and cost savings implemented during the year, as well as the significant covid-19 support received by the Company from the Coronavirus Job Retention Scheme and the business rates holiday.” Covenants The VW term loan and the HSBC debt, are subject to covenants tested with respect to:
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Prof. Glen Arnold
I'm a full-time investor running my portfolio from peaceful Leicestershire countryside. I also happen to be UK´s best selling investment book author and a Financial Times Best selling author. Originally, I wrote all my ideas out in full on this website. Now that ADVFN publish them they are entitled to display the full version for six months – you can see them here. Thus can I only post the first few paragraphs here for anything younger than six months.
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