New fizz from the kings of Vimto

But John Lee discovers that the company has much more to offer these days

For most investors, Nichols Vimto is a rather dour north of England company battling against the might of Pepsi and Coca-Cola.

But it holds many memories for me: not only did I drink Vimto as a schoolboy, it was an early share in my late mother’s portfolio. More recently, my investment ledger records a near trebling of the share price between purchase in 1991 and sale in 1995.

A visit to Nichols Vimto’s spanking new headquarters, midway between Manchester and Liverpool, gives a very different perspective. John Nichols, executive chairman, and Gary Unsworth, the first non-family managing director, point out that Vimto itself accounts for little more than 25 per cent of turnover. In reality, the group is now a broadly-based beverage company; hence the proposed name change to Nichols plc.

The “new” Nichols produces hot drink systems for Little Chef, Burger King, and British Petroleum. Through its Cabana subsidiary, it is third in the market for supplying draught soft drinks to pubs and clubs. It has also just won its first NHS order: for 20 hot drink trolleys at the Middlesex Hospital.

The group’s three former drink manufacturing units have been brought together in a new facility producing Vimto, Sunkist orange and Indigo.

Its fast-growing foods/ingredients business supplies own-brand products for vending machines, and food sachets for the hotel and catering sectors.

The plan is to double food sales over five years. All this reorganisation and change has inevitably led to a plateau in profits, but it points to a very different future.

Nichols has always delivered a progressive dividend. At about 100p, the shares yield around 9 per cent and are bumping along the bottom on a price/earnings ratio of only 6.5. The dividend is twice covered by earnings. For me, it is an ideal stock for personal equity plans or individual savings accounts. I have been buying both before and after the recent results.

My hope is that more investors will recognise the metamorphosis that has transformed Nichols. In December, the group bought back nearly 5 per cent of its equity. It would, almost certainly, have bought more had it not been barred from doing so because of the 60-day close period around the results announcement.

This brings me to an interesting issue: just who is supposed to benefit from the closed period restriction on companies buying their own shares?

The share price invariably sags when the company itself is barred from the market, meaning that sellers get a less attractive price. Conversely, this is a window of opportunity for shrewd prospective buyers who are prepared to study close period dates carefully.

I fully accept the logic of restricting directors’ share trading – but why the company? Nichols is clearly frustrated by its lowly stock market value, and I sense a real desire by John Nichols and Gary Unsworth to raise its profile and deliver shareholder value. A new share incentive scheme will certainly focus the minds of key executives.

Source: Lee, J. (2000) New fizz from the kings of Vimto, Financial Times, 23 April.
© The Financial Times Limited 2000. All Rights Reserved.

Author note

Nichols has been one of my most successful investments in recent years. The key was the company’s decision to ‘outsource’ production, leaving management to focus on marketing and distribution. In addition, capital was no longer tied up in the manufacturing process. Profits growth and a re-rating have delivered the ‘double whammy’ which we seek and the shares have appreciated over ten-fold since I wrote this article.

Dicing with dividends

John Lee

When I first started to take an interest in the stock market 50 years ago, the big figure dividend yields were offered mainly by plantation companies – rubber and tea stocks pregnant with nationalisation and commodity risk, or the occasional rather speculative shipping line – sectors that have virtually ceased to exist.

Then I remember the secondary banking/stock market crash of the early 1970s when equities were totally friendless and any number of established plcs offered huge yields. Investors who bought in then did extremely well when markets recovered. Today, we are in an extraordinary period when not only do large caps yield 5–6 per cent and “proper” small caps twice that, but returns on cash deposits are minuscule.

It is thus hardly surprising that we are beginning to see some braver – I would say shrewder – souls edging back into individual savings accounts (Isas). In the last two months, more people were buying than selling Isas for the first time since April 2008. Net inflows in December were treble those of a year ago. Of cource, most investors are still clinging to cash – paralysed with uncertainty and shock at our financial meltdown. But, when recovery and optimism return, sentiment could change very quickly.

Currently, I am very focused on dividends – accepting that few shares are likely to show capital growth in the short term. From my higher-yielding stocks, I am hoping for maintenance of dividends – a dividend increase is a bonus; a “passing” or slashing of the payment is bad news. These board decisions reflect not only the profitablity/debt levels of the company, but also its attitude to shareholder dividends, so past dividend history is an important consideration – as is the size of directors’ holdings.

February saw me make two further purchases of Fenner, the conveyor belting/advanced polymer products company on a 9 per cent yield – tax-free within my Isa. Almost a year ago, the company “placed” shares at 223p with institutions to raise funds primarily for a US acquisition. I added to my holding at 65p and 70p – highlighting the ridiculous hammering of word-class businesses such as Fenner. What other class of asset – certainly not house prices or even commercial property – has fallen by anything like this percentage?

Writing in November’s annual report, the company’s financial director said: “The group is well placed, not withstanding the current disruption of financial markets, to fund and support its operations, with continuing access to medium and long-term debt finance, cash resources and, where necessary, shorter-term facilities.” The chairman concluded: “Despite the inevitable challenges, we believe we are very strongly placed to outperform. For the longer term, our business drivers remain highly positive.” Hardly the language of a likely dividend cut!

Elsewhere, very recent maintained dividends from BBA Aviation (final) and Town Centre (interim) produced modest share price appreciation, as did Bodycote and Vitec’s small dividend increases – all with encouraging trading statements. Current yields on all four are still between 7 and 13 per cent.

I couldn’t resist picking up more Town Centre at 60p – it was at 64p in 1999 that I first bought into it, selling some shares at 138p in 2002 and more at 595p in 2006. Property shares are hardly flavour of the month but the yield and a NAV of 270p are tempting.

Source: Lee, J. (2009) Dicing with dividends, Financial Times, 7 March.
© The Financial Times Limited 2009. All Rights Reserved.

Author note

Here I am drawing readers’ attention to the way stock market movements are often exaggerated both ways – sometimes too bullish, sometimes too bearish. I was convinced that the subprime banking/financial crisis had driven many quality shares down to absurdly low levels. I was delighted, for example, to buy conveyor belting manufacturer Fenner on a 9% yield. Subsequently they rose to nearly £5 before falling back somewhat as the world’s mining industry became less buoyant.

Plenty of potential in store

It’s in an unloved sector, but John Lee has lots of time for James Beattie

Retailers are out of favour with investors. So perhaps it is understandable that those of us outside the Midlands value the James Beattie department store group on a “double eight” – dividend yield of 8 per cent and price/earnings ratio of eight.

But surely the thousands of customers who shop at Beatties each week must appreciate that the shares are worth more? I recently visited the Solihull store to meet managing director Chris Jones, who has been with the group for 35 years, and finance director Bill Kelly, and was impressed.

I invested in Beatties in 1998, attracted by the yield and cash pile on the balance sheet. As the share price drifted, I became bored and took a loss. After my recent visit I repurchased (at virtually my selling price), but this time I knew far more about the company.

Beatties, founded in 1877, has nine stores, and is described by market reseach company Verdict as “a strong, impressively profitable and enduring player”. It sells branded goods to middle-class customers, with a big emphasis on ladies’ clothes, fashion accessories, perfumery, and household and leisure goods.

The group has delivered shareholder value, albeit unrecognised in the share price. Since 1996, on the back of operating margins rising from 5.7 per cent to 8.8 per cent, earnings per share have nearly doubled. Dividends have risen 70 per cent. Beatties has always maintained a high payout ratio and is content with a one-and-a-half times dividend cover.

While profits to January, which should be announced early next month, are forecast to plateau, the scale of the group’s expansion has yet to be reflected in the shares’ rating. The group has set about increasing its selling space by 50 per cent. This is forecast to cost £28m (half the current market capitalisation) and is being financed almost entirely from internal resources. New stores will open in Birmingham this year, in Huddersfield in 2002 and, it is hoped, in Gloucester the following year.

The five-floor Birmingham store in Corporation Street, formerly C&A, is regarded as a coup, and should be profitable from year one.

In many ways Beatties is a textbook exercise: a settled and ambitious management, an emphasis on staff training, low employee turnover, coupled with a ruthless “clean stock” policy and a “customer is always right” attitude.

As an investment it offers yield, nil gearing, full asset backing and every opportunity for a re-rating as profits advance over the next two to three years.

For income seekers there is an 8 per cent yield and scope for steady capital appreciation, spiced with a predatory potential if the shares don’t buck up soon.

I also like the board’s willingness to build up directors’ shareholdings through market purchases, and not just by relying on share options, although these are in place as well.

If I have one criticism, it is that Beatties appears to have put little effort into shareholder relationships. Attendance at the annual meeting is thin, and there are no shareholder discounts or benefits.

Source: Lee, J. (2000) Plenty of potential in store, Financial Times, 24 March.
© The Financial Times Limited 2000. All Rights Reserved.

Author note

My investment in Midlands’ department store James Beattie was not a particular success – I probably broke even overall. Its new Birmingham store, once C&A, was not a winner, beset with all sorts of traffic problems. However, the fundamental point here is that because I had bought it at a low level – a dividend yield and a PER both of 8 – there was little downside risk. The key to building an appreciating portfolio is to avoid the losses – don’t take unnecessary risks or buy at inflated levels.

Family values at a discount

John Lee

Proprietorial PLCs – companies that are controlled or dominated by one family – have always fascinated me. I hold shares. I like the alignment of board and shareholder interests, the focus on conservative growth and “stewarding” a business through generations, their generally low borrowings and usually progressive dividend policy.

Each has its own characteristics and ethos – and this interests me from a wider sociological perspective. Property company Daejan is a classic example, as I observed when attending its annual general meeting (AGM) last month.

I have held Daejan shares in my individual savings account (Isa) for some time – paying between £29 and £40 in 2007, and then about £27 in 2008 and 2011. In all cases, I was buying at a discount to Daejan’s net assets. Today, the share price is £24, capitalising the company at £390m, and the dividend yield is 3 per cent.

Daejan is effectively 80 per cent owned by the Freshwater family, who injected their property interests into a cash “shell” in 1959. Over the years, shareholder returns have been very impressive: since 1981, the share price has appreciated 1,350 per cent and the dividend by 1,950 per cent, having increased annually for the past 30 years. Over a comparable period, the retail prices index has risen by 315 per cent.

About 50 shareholders and advisers attended the AGM, the majority somewhat elderly, for whom the gathering was clearly something of an annual ritual. This audience faced a five-man board – four Freshwaters and one non-executive who dates from 1971 and is thus not regarded as “independent”. Daejan’s founder, Osias – the father of the present chairman – escaped the Holocaust by leaving Gdansk, Poland, in 1939 on the last vessel out, and arrived in this country virtually penniless. The family commitment to Orthodox Jewry remains very strong and Jewish educational charities have benefited handsomely over the years from the company’s generosity.

In the 1960s, the group was the largest private landlord in the UK and, over the years, diversification into commercial property and the US has taken place. At March 31 2011, 80 per cent of the company’s £1.25bn-worth of property was in the UK, split between commercial and residential. Daejan is probably the largest residential owner in London.

Overall gearing is low, with borrowings less than 20 per cent. Within the portfolio, the £40m redevelopment of Africa House in Holborn – likely to deliver a £7m annual rent roll – has significant potential.

On the other hand, the portfolio includes nine care homes, leased to Southern Cross, though these are only 2.5 per cent of the total portfolio.

Daejan’s annual report discloses a net asset value per share of £51.43p, up from 2010’s £48.17p – but even this may be understated.

So, at the current share price, an investor is getting £1 of property for less than 50p. I cannot think of any comparable example.

Daejan is hardly in the vanguard of progressive corporate governance. But the huge discount, participation in London residential values and a hopefully rising 3 per cent dividend yield are compelling. I can also recommend the excellent AGM kosher buffet – many delicacies were reminiscent of my late grandmother’s traditional cuisine!

Source: Lee, J. (2011) Family values at a discount, Financial Times, 2 October.
© The Financial Times Limited 2011. All Rights Reserved.

Author note

When I wrote this article, property company Daejan’s share price was £24 but its net asset value was over £50 – thus it was a ‘no-brainer’. Given the company’s modest gearing, its shares just had to recover unless we faced a meltdown of Armageddon proportions. I am glad to say that by mid-2013 Daejan’s shares had recovered to around £40.

Share prices can belie true value

John Lee

My investment approach is based on a belief that “value” always comes through in the end – although I quip that, with some companies, many shareholders will have died waiting! Sometimes it can feel as if I am creating a portfolio for my future grandchildren.

Usually, my investment judgment is based upon relative dividend yields, price/earnings (p/e) ratios, price/earnings growth (PEG) ratios, market expectations, etc. But with property companies, a value assessment is more easily made with professionally certified net asset values – hence my earlier purchases of Daejan and Town Centre at big discounts.

Often, however, there is a clear differential between stock market capitalisation and what a trade buyer or competitor might pay – thus some surprisingly high premiums are seen on takeover bids. I have always felt, for example, that family-controlled flavours/fragrances manufacturer Treatt – my largest holding – is “worth” significantly more than its market capitalisation, although it is determinedly independent.

Occasionally, a glaring anomaly arises particularly with a small PLC that falls below most investors’ and analysts’ radar: I believe Aim-quoted Christie Group to be a classic example.

I have been “aboard” for 10 years, buying first in the mid-30ps in 2002 and seeing them climb to a peak of 272p when pre-tax profits in double figures were reached.

An expensive software venture then acted as a considerable drag, thankfully now terminated, and trading conditions in recent years have not been easy with dividends passed in 2009/2010.

However, Christie has steadily developed over the years and is highly regarded within its two principal sectors: professional business services, covering valuing, buying, selling, financing a wide variety of businesses in the leisure, care, retail sectors; and stocktaking and inventory systems and services.

Christie’s business services are provided from 14 offices in the UK and 13 abroad – having opened in Dubai last year and Dublin very recently – and helped it win Estates Gazette’s “Most Active UK Agent” award in the Leisure and Hotels category for a second year. Apart from disclosed clients such as Von Essen Hotels and Southern Cross, it does a substantial amount of work for banks, insurance companies etc, with no publicity. Most of its major competitors are now virtually all overseas-owned.

Christie’s stocktaking business – number one in the UK, number three in the world, with 11 offices and more than 1,000 employees – has roots going back to 1846. But new clients include Zara, Butlins, Tesco Pharmacy.

Total group revenue increased to £53m for 2011, split broadly equally between the two divisions. With directors and staff owning 65 per cent, marginal profitability and a recent dividend reduction, the shares have come back to 52p, giving a paltry £13m capitalisation. So I recently added more at 49p to my already sizeable holding. This year has reportedly started well and I expect the high operational gearing to build bottom line profitability.

I would suggest a trade buyer might value Christie at £1 for every pound of turnover – £50m-plus – or four times its present market valuation. But even a more conservative calculation makes a mockery of the present share price. Indeed, the group floated at 145p in 1988, when it was considerably smaller.

Source: Lee, J. (2012) Share prices can belie true value, Financial Times, 5 May.
© The Financial Times Limited 2012. All Rights Reserved.

Author note

My core investment philosophy is that ‘value’, i.e. real worth, always comes through in the end, but you must be patient. Here I focus on leisure industry services/stocktaker Christie Group – its share price graph (see figure overleaf) demonstrates wild gyrations over the years. My belief is that any price below £1 represents a bargain; it was ‘floated’ at 145p in 1988 when the business was much smaller than it is today.

Misunderstood and undervalued

John Lee

The most frequent complaint from small-cap chief executives is that their companies are misunderstood and their shares are undervalued. Occasionally, this frustration spills over – as in the case of Laurence Orbach, founder and driving force of Quarto, the international book publisher.

In his chairman’s letter accompanying the recent 2010 results, he writes: “I know that it is considered inappropriate for executives and directors of publicly traded companies to stick their necks out and proclaim that their businesses are not understood by investors and should be more highly rated.

“I risk opprobrium for voicing my dismay that Quarto shareholders have not been better served by my explanations of the company’s virtues to the investing community. We have grown our business over the years, but could do much more if we were trading on a higher multiple of earnings.”

I concur, and happily declare my own interest as a long-standing shareholder.

Over the years, I have made 20 purchases – mainly for my personal equity plan (Pep) and individual savings account (Isa) – at prices between 211p and 88p.

Quarto is one of the largest international co-edition book publishers with two main strands of activity: its publishing segment publishes books, under imprints owned by the group; and its co-edition publishing segment creates books that are licensed to third-party publishers for publication under their own imprints.

Overall, 85 per cent of its total revenues derive from outside the UK. It is focused and risk averse, with a business model honed conservatively over the last 35 years.

Essentially, it publishes books of an enduring interest: “not looking for the next big thing, but the next lasting thing”.

Quarto’s top five sellers in 2010 give a flavour: Complete Guide to Writing, 1001 Movies you must see before you die, Anatomica Revised, 1001 Songs you must listen to before you die and Art: The Whole Story. None of these exceeds 1 per cent of group revenues – most sales are made through large arts and craft store chains and home improvement retailers.

Recent results showed encouraging profits growth, debt reduction and a welcome 5 per cent dividend increase – with current trading described as “interesting and exciting”.

But Quarto’s real value is in its niche business model and its £30m backlist of titles from which it derives substantial royalties – its books are sold in 35 countries and 25 languages. At 155p, a price/earnings (p/e) of 6 surely seriously undervalues this £31m capitalised business – offering a 5 per cent dividend yield covered 3.5 times.

Elsewhere, markets have inevitably been unsettled by the Arabic uprisings and consequent rise in the price of oil, but thankfully the majority of announcements emanating from my holdings have been positive.

There have been dividend increases from THB, Town Centre, and Wynnstay, and encouraging statements and newsflow from Capital Pubs, the Cable & Wireless duo, Christie Group, Dairy Crest, Gooch and Housego, MS International, Norcros, Park Group, Primary Health, S+U and United Drug, with “old friend” Dawson Holdings seemingly engaged in takeover talks.

Source: Lee, J. (2011) Misunderstood and undervalued, Financial Times, 5 March.
© The Financial Times Limited 2011. All Rights Reserved.

Author note

‘Misunderstood and undervalued’ is how I describe book publisher Quarto, a holding which I believe will ‘deliver’ in the future. The founder and then CEO Laurence Orbach vents his frustration in the annual report: ‘I risk opprobrium for voicing my dismay that Quarto shareholders have not been better served by my explanation of the company’s virtues to the investing community.’ Sadly, this brave and honest statement failed to bring about any improvement in Quarto share price and Laurence was deposed by shareholders’ vote in 2012. We hope that the new top team will succeed where Laurence unfortunately failed. Public company life can be cruel.

Unloved, unwanted and undervalued

Even so, John Lee believes that Pifco has a bright future in the electrical appliances market

For all the interest the stock market takes, Pifco, which makes small electrical appliances, might as well have stayed private under its original name: the Provincial Incandescent Fittings Company.

In spite of having a progressive record and owning valuable consumer brands (including Russell Hobbs, Carmen, Tower, Mountain Breeze and Salton), the company has been ignored by investors. In part, this comes from its profile which stems, I believe, from Michael Webber, chairman and chief executive. He is a very private person as well as a diligent manager.

While having a laudable and comprehensive mission statement, I am not convinced that Pifco has really tried to embrace shareholders. The AGM is held off-site and, although I have been a shareholder since 1977 and have had regular discussions, it was only very recently that I was allowed to cross the drawbridge and enter Fort Pifco – a large, red-brick, former textile mill in the Failsworth district of Manchester.

Pifco is one of several “proprietorial” plcs (my term) where a family either has the controlling shareholding or operates under some similar arrangement. (To its credit, Pifco enfranchised its “A” non-voting shares in 1998).

Succeeding generations regard themselves as stewards, conscious not only of responsibilities to employees, customers and shareholders but also to safeguard the family silver. With luck, they will provide growing dividends income and capital worth for members of the family not active in the business and, often, for charitable trusts and settlements.

Such companies usually are characterised by low borrowings, steady organic growth, modest bolt-on acquisitions and conservative image.

Pifco has much to commend it. It is a tightly managed and cash generative company with new products coming on stream continually. It also has some flexibility of manufacture, either at Wolverhampton or in east Asia, and racked up a very creditable achievement in turning round the loss-making Russell Hobbs in short order. Moreover, it has wasted no time in integrating Hi Tech Industries, a maker of lighting products, which it acquired recently.

How successful it will be in bringing home a bigger acquisition is uncertain. In my view, Pifco needs either to get bigger or be absorbed by a larger international group. It is known to have been circling Kenwood for some time.

Interim results just announced show further progress: pre-tax profits up 12 per cent and the dividend (I criticised the company in an earlier article for being too parsimonious) up 10 per cent and covered three times. Analysts project £4.2m pre-tax profits for the full year to April 30. With the share price around 135p, this implies a miserly price-earnings ratio of seven on a low tax charge.

I found Webber and James Wallace, a key colleague who also has a sizeable shareholding, welcoming and frank. But both had a bad dose of the “triple U” virus – unloved, unwanted and undervalued – that strikes so many smaller company directors today.

Pifco is clearly worth much more than its £24m capitalisation. I would be fascinated to hear just what value a brand consultant would place on it. There is also a large cash pile likely to be around £12m by year-end.

I left with two things. First, I now own a state-of-the-art Russell Hobbs kettle (which will be recorded in the register of shareholders’ interests).

Second, I have a clear belief that the Webber/Wallace duo is determined to deliver shareholder value. I would be surprised and disappointed if, in two years, my Pifco holding had not appreciated enough for me to re-equip my whole kitchen.

Source: Lee, J. (2000) Unloved, unwanted and undervalued, Financial Times, 25 March.
© The Financial Times Limited 2000. All Rights Reserved.

Author note

There is a saying that ‘small cap’ stocks are valued correctly only twice – on original flotation when they first went public, and when they are ultimately taken over. This article refers to electrical appliance manufacturer Pifco, which was my first PEPs purchase. It became one of my favourite holdings – tightly run, cash rich, with valuable brands like Russell Hobbs. Finally it was taken over, very profitably for me, by Salton of the USA in 2001.