Tuesday, 12 July 2011

micro cap notes

FSTA:LN #56.208 @ 675p Fuller, Smith & Turner

Several revenue streams, managed pubs (£138mm revenue), tenanted pubs (£27mm), Fuller's beer sales (£104mm). I quite like London Pride. the numbers look pretty solid, with some good growth, and a decent brand, sensible organic use of FCF, opening up some small accomodation, spending on refurbs. In liquidation the firm would be worth ~ 540p, so there is a good floor to the valuation, its on about a 15x multiple, which is not cheap, BUT, it is well run and is a good brand. However the really bitter thing is the shareholding structure, they have three classes of shares.

A shares, listed on the LSE, which you or I could buy, in total have 58% of the economic exposure, but only 24% of the control, because the B shares effectively 10x the number of votes compared to their economic value, making up only 10.7% of the economic exposure, but having 65% of the votes. These shares cannot be sold on the open market, and effectively the families that still own these shares have first dibs on them if they come up for sale. Then there are the C shares, which are just like the A shares except they are not listed, but can be listed with 30days notice.

That puts me right off, I don't want to own a business and not have any say over it. Even when you get down to the liquidation floor, there isn't really that much you can do, because the family will want to continue to run the business.

Redhall group RHL:LN #29.589 @ 75p

hits nearly every red flag on my last list, absolutely terrible cash conversion, and appalling contract management. a bag full of semi unrelated businesses, being poorly run, with very little board level ownership of the stock, stay well clear. The Vivergo contract saga permanently excludes this stock from my investment universe.

Dignity PLC DTY:LN #54.757 @ 812p

without making jokes about this business, because I have a black sense of humour, it is important to note that there is a stable and increasing revenue stream, it is unlikely people are going to stop dying any time soon, so a funeral business does have some structural demand. The issue with this business is that it effectively has too little working capital for the expansion that it should be making, and is running too much leverage for my linking. Sure the cash flow is steady, but effectively £350mm of debt is too high for £72mm of FCF, because they need to invest £35mm to grow, with financing costing £30mm, it doesn't leave a lot for shareholders, so you're banking on growth, a lot less fun than picking up burnt cigarette butts. a fair value of ~ 827p being aggressive doesn't leave much meat on this one.

Molins PLC MLIN:LN #20.172 @ 109p

They've made what appears to be a good change of management, APB seems like a good pair of turnaround hands, and has taken a stance against unions with which we agree. Again its a mix of businesses, at least the there is a theme though, and the valuation looks ok, a 138p valuation doesn't look too difficult, thats 25% of good upside, without having to fight the tape too much one should imagine, especially as the balance sheet appears to give you a bit of a backstop. Need to do a bit more work on this one...

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