The twin crises of Covid and the 2022 recession have caused me to go into and out of this company twice in the last four years – and last week I bought in for the third time.
I previously held J Smart’s (LSE:SMJ) shares from January 2019, bought at £1.13, until April 2020 when they were sold at £1.102 as my fear of deep Covid recession made me very cautious and I sought cash. I was very pleased to be able to buy back in at a good price in March 2021 after the risk of deep Covid recession had diminished. Then I bought at 125.3p for my NCAV portfolio. Market capitalisation was 42.4 shares x £1.253 = £53m. But I estimated its NCAV at £96m. I was impressed by its consistent profitability and very low-risk balance sheet, with plenty of solid assets. But worried by the rising risk of high inflation, followed by central banks upping interest rates and a potential recession I sold again at £1.575 in February 2022. Now I’m more optimistic and starting to peer through the macroeconomic murk ahead, looking through the next few bumpy months, to the possibility of growing economy (this may or may not happen, but the odds of a positive outcome improve with each downward movement in energy prices). So, hoping for third time lucky to secure a long-term position, I’ve bought into the company again at £1.66 per share. The market capitalisation of J Smart is higher today than it was in 2021 at £67.6m (£1.66 x 40.7m shares) but the rise in NCAV has been impressive; it is now £121m. It has £32m of cash, offset by an outstanding overdraft of £11m, thus it has about £21m of surplus cash. J Smart’s directors usually ensure that the company has plenty of cash on hand, but the current level was boosted by their prescient selling of three industrial units just before the current economic downturn. They were sold for a total of £24m early in 2022, making a profit above previous book value of £6m - clever stuff. The directors have a history of selling property before downturns, having grown up in a family of property developers. The offices and industrial units remaining in the portfolio are worth £78m and are almost all let. And there is another £12.5m currently under construction or in the form of land awaiting spades in the ground. On the negative side is that the fact that the recession has already hit, with directors expecting both property values and yields to fall. What we don’t know is how far down warehousing, etc., will decline. But it’s reassuring that any fall would have to be as dramatic to cause any serious concern because as much as £62m loss is needed to reduce the current favourable gap between NCAV and MCap to zero. The key directors, members of the founding family, have shown remarkably good character by frequently waiving their dividend, by taking only modest remuneration, and by deciding that the company should repurchase around large amounts of its shares each year. The three businesses The directors see the company as having two divisions. The first holds property which is then rented and sometimes traded, the second permanently employs scores of tradesmen skilled in building houses, offices and industrial units for external organisations such as housing associations and councils. To gain greater clarity I prefer to split the company into three by drawing out from the two divisions mentioned above the cash, shares and land not directly supporting either the property portfolio nor the construction business.
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The market has been having a hard time of it; this year the FTSE250 index of medium-sized companies has fallen 19%. I figured back in February that the economy and the share markets were headed for tough times and so sold a number of holdings, leaving 40% of my portfolio in cash ready to deploy when Mr Market’s fear became really manifest.
Having a significant amount of cash helped the portfolio maintain value, but what gave it a real boost was that the few shares I held onto generally moved up, some by a significant margin. Smiths News’ shares rose by 22% in the last twelve months – a nice rise before accounting for its significant dividend: 2.75p to be paid on 9th Feb 2023 following the interim of 1.4p back in July. Total dividends in 2022 amount to 11% of the year-start share price of 37.6p. bp rose from 400p on 26th January (buying date) to 477p today, a 19% return before a very welcome dividend of 4.7%. The markets are now starting to get to the point where attractive valuations are coming into view, so I’m starting to deploy my cash again. Coping with two major economic crisis, first Covid then inflation/recession Back in early 2020 I followed a strict caution-first value investing approach at the beginning of the Covid-19 crisis and, similar to Feb 2022, went to 40% cash. This pile of cash was very useful later in 2020 and 2021. The shares bought in those years have generally risen nicely – see first table. Most of the money I handle is invested in solid shares such as Character Group and Dewhurst which are equipped to withstand a recession. Now I’m starting to dig into the cash pile as I come across deep value shares in this period of economic flux. Orchard Funding Group and Tandem are recent investments. A list of all the shares I bought in the Covid-19 crisis and subsequently (Newsletters published at the time of each purchase set out my rationale for buying) CompanyPurchase date Purchase price Divs to 31 Dec 2022 Price 31 Dec 2022 Return to 31 Dec 2022 Smiths News (Connect Group)18.3.20 £0.151 2.55p £0.462 223% Character5.6.20 £2.52 27p £4.25 79% McCarthy & Stone1.10.20 £0.718 0 Sold 7 Dec 2020 £1.185 65% Capital & Counties Properties6.11.20 £1.032 0 Sold 19 Aug 2021 £1.743 69% Dewhurst “A”11.11.20 £5.94 27.75p £6.00 6% MS International16.12.20 £1.292 10p Sold 20th Sept 2021 – 7th June 2022. £2.488 100% Wynnstay29.12.20 £3.405 15p Sold 24Mar 2021 – 3 Feb 2022 £5.58 68% Lloyds Bank12.3.21 £0.4169 3.37p £0.4569 18% J Smart18.3.21 & 24.3.21 £1.253 3.22p Sold 7 Feb 2022 £1.575 28% Fletcher KingFeb 2020 – May 2021 £0.3265 0.5p Sold Sept 2021 – Feb 2022 £0.40 24% Orchard Funding7.6.21 £0.568 4p £0.46 -12% Caffyns22.6.21 £4.65 22.5p £4.50 2% Highcroft22.7.21 £8.75 78p £9.10 13% Town Centre Sec10.8.21 £1.426 1.75p Sold 2 Feb 2022 £1.581 12% bp26.1.22 £4.006 18.7237p £4.7685 24% Orchard Funding7.12.22 £0.48 0 £0.46 -4% Tandem2.12.22 £2.8221 0 £2.50 -11% AVERAGE 41%Longer run performance Nine and a half years ago that I left a tenured professorship to concentrate on investment. Back then the FTSE 100 was around 6,600. It is now 7,452 – a slow rise. In addition, there have been dividends of around 3% per year. The FTSE 250 index has moved from around 15,000 to 18,853. 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 all those years ago. The tables display the results (so far) of all the purchases 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 31 Dec 2022 Price 31 Dec 2022 Return to 31 Dec 2022 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 31 Dec 2022 Price 31 Dec 2022 Return to 31 Dec 2022 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 31 Dec 2022 Price 31 Dec 2022 Return to 31 Dec 2022 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 31 Dec 2022 Price 31 Dec 2022 Return to 31 Dec 2022 Dewhurst9.4.14 £3.18 70.5p Sold February 2020 £7.217 149% MS International9.10.19 £1.723 13.50p Sold 20th Sept 2021 – 7th June 2022. £2.488 52% Character20.1.20 & 5.6.20 £2.811 35p £4.25 64% Dewhurst11.11.20 £5.94 27.75p £6.00 6% MS International16.12.20 £1.292 10p Sold 20th Sept 2021 – 7th Sept 2022. £2.488 100% AVERAGE 74%(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 CompanyPurchase date Purchase price Divs to 31 Dec 2022 Price 31 Dec 2022 Return to 31 Dec 2022 Haynes11.2.15 £1.159 33.5p Sold 2.10.19 £2.9175 181% AGA11.3.15 £1.002 zero Taken over June 2015 £1.456 45% Hogg Robinson10.4.15 £0.4709 2.37p Sold June 2016 £0.656 44% MS International3.7.15 £1.86 46p Sold 20th Sept 2021 – 7th June 2022. £2.488 58% BHP Billiton24.9.15 £10.43 127p Sold May 2018 £16.90 74% TClarke5.11.15 £0.7916 13.61p Sold Feb 2020 £1.1215 59% Premier Farnell8.4.16 £1.222 3.6p Taken over 20.6.16 £1.632 36% AVERAGE 71%The AGA holding was doubled 30 April 2015 at a price of £0.9466. Modified price earnings ratio portfolio 2017 CompanyPurchase date Purchase price Divs to 31 Dec 2022 Price 31 Dec 2022 Return to 31 Dec 2022 Braemar28.6.17 £2.848 20p Sold June 2018 £2.639 0% Caffyns10.8.17 £5.012 52.5p Sold July 2020 £2.389 -42% Connect/Smiths News27.9.17 £1.046 13.35p £0.462 -43% MS International14.11.17 £1.84 30p Sold 20th Sept 2021 – 7th June 2022. £2.488 52% AVERAGE -8%The 2017/18/19 NCAV portfolio Purchase date Purchase price Divs to 31 Dec 2022 Price 31 Dec 2022 Return to 31 Dec 2022 Caledonian Trust7.11.17 £1.23 zero Sold April 2020 £1.391 13% J Smart30.1.19 £1.13 4.14p Sold Mar/Apr 2020 £1.101 1% Northamber6.12.19 £0.504 0.3p Sold Mar 2020 £0.5717 14% AVERAGE 9%More Caledonian Trust shares bought in February 2019 at £2.29. More J Smart bought 30.4.19 at £1.16 The 2018/2019 modified price-earnings ratio portfolio Purchase date Purchase price Divs to 31 Dec 2022 Price 31 Dec 2022 Return to 31 Dec 2022 Connect/Smiths News14.6.18 £0.285 6.65p £0.462 85% N Brown17.8.18 £1.42 9.93p Sold Sept 2021 £0.557 -54% Spaceandpeople31.10.18 £0.224 0.5p Sold Dec 2020 £0.128 -43% Tandem2.4.19 £1.59 9.49p Sold Aug 2020 £3.707 139% MS International6.6.19 £2.22 20p Sold 20th Sept 2021 – 7th June 2022. £2.488 21% Character25.10.19 £3.506 40p £4.25 33% AVERAGE 30%More Connect Group shares bought in February 2019 at 40.86p, March 2019 at 38.29p and May 2019 at 39p. More N Brown bought May 2019 at £1.30. The 2020/21/22 modified price-earnings ratio portfolio Purchase date Purchase price Divs to 31 Dec 2022 Price 31 Dec 2022 Return to 31 Dec 2022 Wynnstay7.1.20 & 29.12.20 £3.33 29p Sold 24Mar 2021 – 3 Feb 2022 £5.58 76% Daejan5.2.20 £52.90 zero Sold 21 Feb 2020 £79.41 50% Connect/Smiths News18.3.20 £0.151 2.55p £0.462 223% Lloyds Bank12.3.21 £0.4169 3.37p £0.4569 18% bp26.1.22 £4.006 18.7237p £4.7685 24% Tandem2.12.22 £2.8221 0 £2.50 -11% AVERAGE 63%The 2020/21 NCAV portfolio Purchase date Purchase price Divs to 31 Dec 2022 Price 31 Dec 2022 Return to 31 Dec 2022 McCarthy & Stone1.10.20 £0.718 0 Sold Dec 2020 118.5p 65% Capital & Counties Properties6.11.20 £1.032 0 Sold 19 Aug 2021 £1.743 69% J Smart18.3.21 & 24.3.21 £1.253 3.22p Sold 7 Feb 2022 £1.575 28% Fletcher KingFeb 20 – May 2021 £0.3265 0.5p Sold Sept 2021 – Feb 2022 £0.40 24% Orchard Funding7.6.21 £0.568 4p £0.46 -12% Caffyns22.6.21 £4.65 22.5p £4.50 2% Highcroft22.7.21 £8.75 78p £9.10 13% Town Centre Securities10.8.21 £1.426 1.75p Sold 2 Feb 2022 £1.581 12% AVERAGE 25%Bought more Orchard Funding 7.12.22 at 48p The return reversal portfolio Purchase date Purchase price Divs to 31 Dec 2022 Price 31 Dec 2022 Return to 31 Dec 2022 Havelock Europa20.5.15 £0.14609 zero Sold Dec 2016 £0.0915 -37% AVERAGE -37%Brief description of criteria for the portfolios Shares are allocated to portfolios designed around ideas flowing from research conducted when my PhD students and I asked the question “what works in investment?” These investigations were often inspired by the ideas of great investors such as Benjamin Graham. More detail on these ideas is presented in earlier posts (if you put key words into the search box those Newsletters will appear). Net current asset value, NCAV, criteria
Return reversal
I’ll consider Orchard Funding’s financial stability by firstly looking at its vulnerability to financial distress and secondly it propensity to generate cash year by year.
Piotroski analysis In 2000 Joseph Piotroski published research looking into the question of whether you could take a bunch of value shares and then separate out the strong from the weak using accounting ratios and measures. The nine factors, taken as a whole, indicate where a company is along the spectrum, ranging from showing great improvements to its financial position at one end to exhibiting increasing financial distress at the other. Profitability factors If the firm is profitable and produces positive cash flow it has a capacity to generate funds internally. A positive earnings trend suggests an improvement in the firm’s ability to generate positive future cash flows.
Measuring changes in capital structure (debt:equity ratio) and firm’s ability to meet future debt service obligations.
Orchard Funding (LSE:ORCH), whose shares I bought last week at 48p, is a small player in an industry dominated by two giants. Nevertheless, it has been profitable in each of the last eleven years. Indeed, it has grown profit steadily (except for the Covid years), so there must be some degree of protection from the big boys bullying the firm out of its markets.
Bexhill Ravi Takhar, CEO and 53.66% shareholder, took control of a small company in 2002. A subsidiary, Bexhill, was created that year to target clients of insurance brokers by lending to them for up to 10 months. Monthly repayments meant that the money returned to Bexhill pretty quickly. By 2014 Bexhill had about 100 broker clients who helped arrange loans for policyholders so that they could pay their insurance policy premiums upfront. Annual advances were about £30m (at any one time only £10m - £15m was outstanding) which generated revenue (interest) of £1.8m. Profit after tax was £0.87m. Orchard Funding Limited The second strand to the company’s lending was conducted through Orchard Funding Limited. From a standing start in 2010, by 2014 this subsidiary was lending money to clients of 400 accountancy practises. In early 2015 its loan book stood at £8m having lent about £16m over the previous 12 months. Annual revenues (interest) were £1.17m and profit after tax £0.15m. It had 2,236 borrower agreements, with an average loan value of about £4,000. Floating on the stock exchange On joining AIM in 2015, in which it raised £10m gross, or £8.7m after financial advisers had taken their cut, the directors were able to proudly state that the business model was so good that there had been “no arrears or losses on the lending book of the Group over the last seven years” (Admission document). We’ll look at the reasons behind this impressive statement by a lender later. There were then only 11 members of staff so operating costs were low. Even today there are only 20. A good net interest margin, low operating costs and low/no default meant that the business was cash generative, leading directors to declare a high ambition for dividends: “As the Group is cash generative it is the Directors intention to implement a progressive dividend strategy” (Admission document). Technology Staff numbers could be kept low because it had been improving its processing platform for loan proposals, with feedback from daily use. By 2015 it was used on 100 insurance brokers’ and 400 accountancy firms’ computers, processing each year transactions for over 3,000 borrowers. Delivered via the internet it incorporates all the systems, procedures and documentation required by an insurance broker or an accountancy firm to introduce its clients to the Group and conduct a finance business. It also manages all the agreements, calculates funding requirements and performs all day-to-day accounting and administrative tasks of the Group. “As well as supporting our own business, Lend XP is now used by all of our finance company clients. Lend XP enables us to integrate effectively and efficiently with 3rd party IT systems and has continued to increase our operational efficiency and our ability to conduct business with introducers, for whom IT integration is a pre-condition to doing business. IT development clearly has a cost and we therefore continue to invest in this fundamental part of our business…In house IT enables us to efficiently launch products into new markets without significant infra-structure costs. This year our IT has enabled us to lend into the Hire Purchase market quickly and on a cost-effective basis. (2021 Report) LendXP automatically generates paperwork for end user customers, manages direct debits to collect money and tracks all client transactions. Partners (brokers, accountants, etc.) are not charged to use LendXP. Orchard recently made a couple of small equity investments into an “Open Banking” platform company called Open B Gateway Limited, a supplier of a computer-based system which allows instant analysis of potential borrowers’ bank statements – these statements are now available for financial firms to analyse (given client permission is granted). Being able to immediately judge past financial behaviour of client borrowers allows better underwriting decisions. Orchard Funding owns 30% of Open B Gateway. Growth On flotation the directors said their aim was to double the size of the lending from its annual £46m. They were going to do this by (a) increasing the number of insurance broker and professional firm clients, (b) increasing the volume of business from existing brokers and accountancy firms. Some of the extra £8.7m raised in the float was useful for handing out to brokers and accountancy firms as commission when they persuaded a client to take credit. Money was also useful for reducing Orchard’s financial risk. Managers have been successful in growing volumes of loans to £80m in 2022, but the number of insurance broker partners remains around 100 and the number of accounting firm partners is still around 400. Size of market While the general insurance market is about £50bn per year only about one-third (FCA) of policyholders choose to buy on credit. The potential of the accountancy fee fi . In the last newsletter I drew attention to Orchard Funding’s (LSE:ORCH) net current asset value, NCAV, per share, at 77p, being appreciably more than its share price of 48p. This was a good starting point for increasing my holding for my net current value portfolio. Other factors, mostly on the qualitative side, also came into play - to be discussed in future newsletters.
First I’ll show how Orchard might have fitted into my Modified cyclically adjusted price earnings ratio portfolio as well as the NCAV. As you can see in the table below for the last nine years Orchard has produced impressive earnings per share numbers for a share valued by Mr Market at 48p (with 21.35m shares in issue that’s a market capitalisation of £10.2m). The average is 6.5p Thus the cyclically adjusted price earnings ratio is 48p/6.5p = 7.4, about one-half of that for the UK market. My, admittedly thin, reasoning for allocating to the NCAV portfolio is merely that I only have nine years of data for earnings rather than the more conventional ten used for a CAPE ratio calculation. It really doesn’t matter which portfolio it goes into; simply that it is a deep value investment likely to provide a good return. Having the reinforcement of fitting not just one but two strict criterion is comforting. It’s also comforting to see such a high proportion of earnings flowing to shareholders in the form of dividends. The business is cash generative, growing steadily (until Covid-19) at a rate which doesn’t absorb a high proportion of the money it makes. The directors, including the 53.3% holder, prefer to reward shareholders regularly – his dividends amount to more than a third of a million each year – rather than splurge on rapid expansion and speculative ventures............ I’ve more than tripled my holding in Orchard Funding (LSE:ORCH) at 48p because its net current asset value is 77p and it is financially and operationally stable with a loyal customer base and low-risk business model, as well as having a highly experienced and capable managerial team. It also produces a reliable 3p dividend each year supplying an attractive 6.25% dividend yield.
Given the quality of the customer offering and the potential to tap adjacent markets it is likely that the dividend will grow nicely from here. Since 2014 annual earnings per share have averaged 6.5p putting the shares on a cyclically adjusted price earnings ratio of 7.4, almost half the market average. Even in the year ending 31st July 2020, one affected by Covid, earnings per share came out at 5.96p. In the worst year, the one ending 31st July 2021, they were still a creditable 3.91p. Now they have bounced back, all the way to 7.11p. The resilience displayed in the Covid slump was the second time the business model was tested by events beyond the firm’s control having sailed through the Global Financial Crisis in good shape. The business The company in its modern form was built by former investment banker Ravi Takhar following his acquisition of 100% of the equity in 2002. He now owns 53.66% after the sale of £10m of new shares to other investors when it joined the AIM market in 2015. The business model is simple: around the country are thousands of insurance brokers whose clients often do not want to pay say a £2,000 annual insurance premium all in one go at the start of the policy. Orchard Funding, through its Bexhill subsidiary, offers brokers and their clients a deal. It will pay the premium and, in return the client will make say 10 monthly payments to Bexhill. The amount paid each month is slightly more than one-tenth of the premium to allow for an effective interest charge. Typically, Orchard will fund one half of its outstanding loans to customers with its own money and one half will come from an annually arranged loan facility from NatWest or Toyota. It also raised £3.9m this year from a Retail Bond issue this year, paying 6.25%. Even paying an average of 3.57% on the funding it borrows (which includes bank fees etc.) Orchard can make a good profit because it charges APRs much higher than that. The insurance broker is happy because the ultimate customer is p.... The market has been having a hard time of it; this year the FTSE250 index of medium-sized companies has fallen 28%. I figured back in February that the economy and the share markets were headed for tough times and so sold a number of holdings, leaving 40% of my portfolio in cash ready to deploy when Mr Market’s fear became really manifest. We still haven’t got to the “teenager I a harem” moment yet, where everywhere you look there are attractions enough to make you goggle-eyed. There is still too much optimism out there for that. But some companies are starting to look attractive even if a deep recession is on the cards. So I’m getting ready to go back in – probably at the moment when most “investors” will be rushing for the exits. Back in early 2020 I followed a strict caution-first value investing approach at the beginning of the Covid-19 crisis and similarly went to 40% cash. This pile of cash was very useful later in 2020 and 2021. The shares bought in those years have generally risen nicely – see first table. The remainder of the money I handle, following diversification by investing in property abroad to give our family more options in a Putin-crazed world, is invested 60% in solid shares such as Smiths News and Dewhurst which are equipped to withstand a recession and 40% in cash looking for a home in deep value shares in a period of extreme flux after the market capitulation. The capitulation draws ever closer: a moment when, shocked by severe downward moves in investments, people sell even their best-loved shares “just to hang onto something of our savings in a form which is safe, that is in cash”. They lose the hope that by hanging onto shares they can recoup losses. A list of all the shares I bought in the Covid-19 crisis (Newsletters published at the time of each purchase set out my rationale for buying) Company Purchase date Purchase price Divs to 30 Sept 2022 Price 30 Sept 2022 Return to 30 Sept 2022 Smiths News (Connect Group) 18.3.20 £0.151 2.55p £0.317 127% Character 5.6.20 £2.52 27p £4.90 106% McCarthy & Stone 1.10.20 £0.718 0 Sold 7 Dec 2020 £1.185 65% Capital & Counties Properties 6.11.20 £1.032 0 Sold 19 Aug 2021 £1.743 69% Dewhurst “A” 11.11.20 £5.94 27.75p £5.30 -6% MS International 16.12.20 £1.292 10p Sold 20th Sept 2021 – 7th June 2022. £2.488 100% Wynnstay 29.12.20 £3.405 15p Sold 24Mar 2021 – 3 Feb 2022 £5.58 68% Lloyds Bank 12.3.21 £0.4169 3.37p £0.4167 8% J Smart 18.3.21 & 24.3.21 £1.253 3.22p Sold 7 Feb 2022 £1.575 28% Fletcher King Feb 2020 – May 2021 £0.3265 0.5p Sold Sept 2021 – Feb 2022 £0.40 24% Orchard Funding 7.6.21 £0.568 4p £0.46 -12% Caffyns 22.6.21 £4.65 22.5p £5.00 12% Highcroft 22.7.21 £8.75 55p £9.50 15% Town Centre Sec 10.8.21 £1.426 1.75p Sold 2 Feb 2022 £1.581 12% bp 26.1.22 £4.006 13.7835p £4.336 12% AVERAGE 42% Longer run performance Nine years ago that I left a tenured professorship to concentrate on investment. Back then the FTSE 100 was around 6,600. It is now 6,860 – a slow rise. In addition, there have been dividends of around 3% per year. The FTSE 250 index has gone from around 15,000 to 17,100. 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 nine years ago. The tables display the results (so far) of all the purchases 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 Company Purchase date Purchase price Divs to 30 Sept 2022 Price 30 Sept 2022 Return to 30 Sept 2022 French Con. 25.7.13 £0.3047 zero Sold July 2015 £0.4378 44% Caledonian T 25.7.13 £0.70 zero Sold April 2020 for £1.391 99% Fletcher King 6.8.13 £0.30 14.25p Sold June 2016 for 46p 101% Northamber 22.8.13 £0.287 1.6p Sold Oct 2016 £0.303 11% Titon 5.9.13 £0.379 6.5p Sold May 2016 £1.06 197% Mallett 12.11.13 £0.7682 12.7p Sold Nov 2014 £0.60 -5% AVERAGE 75% The 2014 NCAV portfolio Company Purchase date Purchase price Divs to 30 Sept 2022 Price 30 Sept 2022 Return to 30 Sept 2022 Holders Tech 10.10.14 & 3.11.14 £0.47 1p Sold March 2017 £0.33 -28% Airea 4.11.14 £0.1195 0.9p Sold Sept 2016 £0.309 166% Northamber 17.11.14 £0.4265 0.7p Sold Oct 2016 £0.303 -27% Caledonian T 30.12.14 £1.39 zero Sold April 2020 £1.391 0 AVERAGE 28% The 2015 NCAV portfolio Company Purchase date Purchase price Divs to 30 Sept 2022 Price 30 Sept 2022 Return to 30 Sept 2022 PV Crystalox 15.1.15 £0.122 zero Sold Dec 2016 £0.237 94% Arden Partners 1.9.15 £0.422 1p Sold May 2018 £0.364 -11% Northamber 4.9.15 £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. Company Purchase date Purchase price Divs to 30 Sept 2022 Price 30 Sept 2022 Return to 30 Sept 2022 Dewhurst 9.4.14 £3.18 70.5p Sold February 2020 £7.217 149% MS International 9.10.19 £1.723 13.50p Sold 20th Sept 2021 – 7th June 2022. £2.488 52% Character 20.1.20 & 5.6.20 £2.811 35p £4.90 87% Dewhurst 11.11.20 £5.94 27.75p £5.30 -6% MS International 16.12.20 £1.292 10p Sold 20th Sept 2021 – 7th Sept 2022. £2.488 100% AVERAGE 76% (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 Company Purchase date Purchase price Divs to 30 Sept 2022 Price 30 Sept 2022 Return to 30 Sept 2022 Haynes 11.2.15 £1.159 33.5p Sold 2.10.19 £2.9175 181% AGA 11.3.15 £1.002 zero Taken over June 2015 £1.456 45% Hogg Robinson 10.4.15 £0.4709 2.37p Sold June 2016 £0.656 44% MS International 3.7.15 £1.86 46p Sold 20th Sept 2021 – 7th June 2022. £2.488 58% BHP Billiton 24.9.15 £10.43 127p Sold May 2018 £16.90 74% TClarke 5.11.15 £0.7916 13.61p Sold Feb 2020 £1.1215 59% Premier Farnell 8.4.16 £1.222 3.6p Taken over 20.6.16 £1.632 36% AVERAGE 71% The AGA holding was doubled 30 April 2015 at a price of £0.9466. Modified price earnings ratio portfolio 2017 Company Purchase date Purchase price Divs to 30 Sept 2022 Price 30 Sept 2022 Return to 30 Sept 2022 Braemar 28.6.17 £2.848 20p Sold June 2018 £2.639 0% Caffyns 10.8.17 £5.012 52.5p Sold July 2020 £2.389 -42% Connect/Smiths News 27.9.17 £1.046 13.35p £0.317 -57% MS International 14.11.17 £1.84 30p Sold 20th Sept 2021 – 7th June 2022. £2.488 52% AVERAGE -12% The 2017/18/19 NCAV portfolio Purchase date Purchase price Divs to 30 Sept 2022 Price 30 Sept 2022 Return to 30 Sept 2022 Caledonian Trust 7.11.17 £1.23 zero Sold April 2020 £1.391 13% J Smart 30.1.19 £1.13 4.14p Sold Mar/Apr 2020 £1.101 1% Northamber 6.12.19 £0.504 0.3p Sold Mar 2020 £0.5717 14% AVERAGE 9% More Caledonian Trust shares bought in February 2019 at £2.29. More J Smart bought 30.4.19 at £1.16 The 2018/2019 modified price-earnings ratio portfolio Purchase date Purchase price Divs to 30 Sept 2022 Price 30 Sept 2022 Return to 30 Sept 2022 Connect/Smiths News 14.6.18 £0.285 6.65p £0.317 35% N Brown 17.8.18 £1.42 9.93p Sold Sept 2021 £0.557 -54% Spaceandpeople 31.10.18 £0.224 0.5p Sold Dec 2020 £0.128 -43% Tandem 2.4.19 £1.59 9.49p Sold Aug 2020 £3.707 139% MS International 6.6.19 £2.22 20p Sold 20th Sept 2021 – 7th June 2022. £2.488 21% Character 25.10.19 £3.506 40p £4.90 54% AVERAGE 25% More Connect Group shares bought in February 2019 at 40.86p, March 2019 at 38.29p and May 2019 at 39p. More N Brown bought May 2019 at £1.30. The 2020/21/22 modified price-earnings ratio portfolio Purchase date Purchase price Divs to 30 Sept 2022 Price 30 Sept 2022 Return to 30 Sept 2022 Wynnstay 7.1.20 & 29.12.20 £3.33 29p Sold 24Mar 2021 – 3 Feb 2022 £5.58 76% Daejan 5.2.20 £52.90 zero Sold 21 Feb 2020 £79.41 50% Connect/Smiths News 18.3.20 £0.151 2.55p £0.317 127% Lloyds Bank 12.3.21 £0.4169 3.37p £0.4167 8% bp 26.1.22 £4.006 13.7835p £4.336 12% AVERAGE 55% The 2020/21 NCAV portfolio Purchase date Purchase price Divs to 30 Sept 2022 Price 30 Sept 2022 Return to 30 Sept 2022 McCarthy & Stone 1.10.20 £0.718 0 Sold Dec 2020 118.5p 65% Capital & Counties Properties 6.11.20 £1.032 0 Sold 19 Aug 2021 £1.743 69% J Smart 18.3.21 & 24.3.21 £1.253 3.22p Sold 7 Feb 2022 £1.575 28% Fletcher King Feb 20 – May 2021 £0.3265 0.5p Sold Sept 2021 – Feb 2022 £0.40 24% Orchard Funding 7.6.21 £0.568 4p £0.46 -12% Caffyns 22.6.21 £4.65 22.5p £5.00 12% Highcroft 22.7.21 £8.75 55p £9.50 15% Town Centre Securities 10.8.21 £1.426 1.75p Sold 2 Feb 2022 £1.581 12% AVERAGE 27% The return reversal portfolio Purchase date Purchase price Divs to 30 Sept 2022 Price 30 Sept 2022 Return to 30 Sept 2022 Havelock Europa 20.5.15 £0.14609 zero Sold Dec 2016 £0.0915 -37% AVERAGE -37% Brief description of criteria for the portfolios Shares are allocated to portfolios designed around ideas flowing from research conducted when my PhD students and I asked the question “what works in investment?” These investigations were often inspired by the ideas of great investors such as Benjamin Graham. More detail on these ideas is presented in earlier posts (if you put key words into the search box those Newsletters will appear). Net current asset value, NCAV, criteria
Return reversal
I have not yet met the directors so for now I’ll provide some basic factual information. The team of directors which led the business in its journey from a mixed asset commercial property company to being purely a retail landlord at a time of halving in value of many retail square metres were ousted from the company in 2020. The new chair is Robert Noel and the new CEO is Rita-Rose Gagné. There is also a new CFO, Himanshu Raja, appointed last year.
The non-executive director side of the table has also been supplemented with Des de Beer (a billionaire) joining the Board as in June 2020 and Habib Annous in May 2021. Rita-Rose Gagné, CEO She has worked in property markets across the world and her expertise spans across various asset classes and mixed-use assets, including residential, retail, office and logistics. Prior to Hammerson, she held various executive roles at the global real estate company, Ivanhoé Cambridge, where she was responsible for a $7.6bn portfolio of property. Remuneration £2.1m. Maximum remuneration £3.1m. Shareholdings 306,748 plus uninvested scheme interests of 8.9m Robert Noel, Chair A property industry veteran of over 30 years. Formerly CEO at Land Securities Group plc from 2012 until March 2020. Noel was also Property Director at Great Portland Estates from 2002 to 2009. From 1992 to 2002 he was a Director of Nelson Bakewell, the property services group. Remuneration £304,000. Shareholding 0.9m. Himanshu Raja, CFO Appointed 2021. He has extensive experience in business transformation and debt and equity markets. He was most recently CFO at Countrywide from 2017 until 2021. Countrywide had huge debts and Raja played a role steering it through to its eventual acquisition by Connells. Prior to that he served as CFO at G4S plc where he was responsible for finance, treasury, tax, investor relations, M&A, IT and procurement. Previously, Himanshu was CFO of Misys and Logica, where he led the sale of the group to CGI in a £2.1bn transaction. Remuneration £0.65m. Maximum remuneration £1.7m. Shareholding 211,060 plus uninvested scheme interests of 0.94m. Pierre Bouchut, NED Appointed 2015. Formerly CEO of C...... First let me say that I’m not convinced that online shopping will take over the world and people will cease travelling to shopping centres. Online might take a bit more of retail spend, but there are real barriers for them. People like to try on clothes, touch and feel other items they might buy, compare prices and quality from a number of shops in an afternoon. And they like to intersperse shopping with chats over food/drink or leisure activities such as cinema and going up climbing walls.
Even those retailers that fully “get it” when it comes to online know that physical retail is often a critical part of omnichannel fulfilment and brand experience. Fashion retailers used to take around one half of Hammerson’s (LSE:HMSO) space, but that has evolved so that now less than one-third of new lets are fashion. In the 1990s food and beverage was 5% of the tenant base; these days its more like 20%. And increasingly gyms and wellbeing service providers are occupying units. While the death of Debenhams and Top Shop get the headlines less noticed is the steady growth of the likes of NEXT which often take the space vacated by lesser retailers albeit at lower rents, e.g. ex-Debenhams space in Reading and Croydon run by Hammerson has been taken by NEXT. Alternative uses We must not be Polyannaish here though. Setting aside the luxury brand occupied space at Value Retail Villages, we are seeing overall a large reduction in demand from retailers and others for square metreage at Hammerson’s flagship malls. Because demand is down rents have been reduced along with better terms granted. A solution being pursued is to reduce the supply of the number of units being offered to retailers. The directors of Hammerson refer to this as “densification”. I think this means they concentrate the retail shops in part of the mall; and then use the released space to collect rent from various service providers, or to build and sell property such as flats built in and on top of old stores. Whereas it used to be the case that 95% would be retail, these days we’re looking at 50% being other things, such as:
In 2017 Hammerson (LSE:HMSO) made a profit. Then it went through four horrible years when positive income from rent was swamped by massive revaluation losses. But the first six months of 2022 showed only £10m of valuation losses after allowing for the £33m uplift at Value Retail (Hammerson’s share), and so the Group was able to report a small profit....
...For the first time since 2017 net assets increased in early 2022 to £2.87bn. Debt, or potential debt, now consists of:
A €700m eurobond illustrates Hammerson’s low interest rates. If the company meets green targets it pays a 1.75% coupon until maturity in 2027. But that coupon is linked to the achievement of two Sustainability Performance Targets: 60% reduction in Scope 1 and 2 and selected Scope 3 Greenhouse gas emissions under the Group’s direct control and 50% reduction in Scope 3 emissions (which relate to space operated by brands within its destinations) both against the Group’s 2019 baseline. If these targets are not met, an additional margin will be payable of 0.375% per annum for the last year of the bond from June 2026 to the June 2027 maturity date for each of the two targets, 0.75% in total. Thus, even if it fails to meet targets it only pays only 2.5%. The weighted average interest rate for all its debt was 2.7% at 30 June 2022 and the stated debt strategy is to borrow predominantly at fixed rate (87% is currently fixed) but to do so without giving specific security, thus permitting flexibility regarding its property assets, it can rent or sell them with few restrictions. Interest cover was 2.92 times for the six months to 30 June 2022. The debt covenant rule is that cover must be above 1.25 so Hammerson are doing well on that score (The definition of interest cover is gross rental income less rents payable and property outgoings, divided by net cost of finance before exceptional finance costs, capitalised interest and change in fair value of derivatives) Moody’s and Fitch’s senior unsecured investment grade credit ratings were re-affirmed as Baa3 and BBB+, respectively. Importantly, it is rated as “Investment grade” rather than high yield. The trends are encouraging: net finance costs were down 25% in the half year to 30 June 2022 compared with the same period a year before. This was due to the early repayment of debt with the proceeds from disposals and refinancing and higher interest received from cash deposits True loan to value ratio Value Retail, in whic |
Glen ArnoldI'm a full-time investor running my portfolio. I invest other people's money into the same shares I hold under the Managed Portfolio Service at Henry Spain. Each of my client's individual accounts is invested in roughly the same proportions as my "Model Portfolio" for which we charge 1.2% + VAT per year. If you would like to join us contact Jackie.Tran@henryspain.co.uk investing is about making the right decisions, not many decisions.
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