Investment lessons in a tough school

John Lee feels he has learned plenty after being on the receiving end of many bids over the years

What do engineering group Charter and textiles company Courtaulds have in common? Both recently received takeover bids at 100 per cent premiums to their market share prices.

That was nice work if you had bought the shares only recently. But, for long-termers, it was only a limited recompense for years of distinctly lacklustre investment performance.

Nevertheless, for a value investor like myself, takeover bids provide at least an acknowledgement of the real worth of companies. Over the years, I have been on the receiving end of many bids and have learned several hard lessons:

■ Be patient and back your own judgment. Don’t be tempted to take profits too soon before a likely bid.

■ It usually pays to see a bid situation through to the end. A rival bid often appears, and there is nearly always a premium paid for a recommended bid.

■ Do not be tempted to take loan stock or similar as consideration purely to defer or avoid capital gains tax liabilities. This ties up capital for a longish period.

I prefer to take the tax hit, so freeing resources to take advantage of new investment opportunities.

Looking back, my worst mistake was in March 1998 when I decided to take profits on half a dozen shareholdings, including Border Television.

I had bought Border in 1992 at 107p, on a yield of 6 per cent plus, believing that a larger media predator would appear one day, and I took a nice profit six years later at 346p. Now, after a keenly-fought battle, Border has just been taken out at £14 a share.

Sometimes, I kick myself for not buying in the first place. I always believed that tennis/leisure centre operator David Lloyd would attract a predator, and was not surprised when Whitbread pounced. On the other hand, I was convinced that Smith and Nephew would have lost its independence years ago.

In recent times, my portfolio has achieved two or three good bids each year. Bridport, an air cargo restraint specialist; Trafford Park Estates; and Henry Cooke, my main broker, have been significant successes. I was particularly fortunate to have Bray Technology, a Leeds-based maker of gas burners, taken over within six months of my purchase.

One of my core holdings at present is Breedon, a quarrying and housebuilding group that I bought at the end of 1998. It has just agreed a 180p cash bid from Ennstone – a 100 per cent profit.

I have the proceeds of the Royal London/United Assurance deal waiting for reinvestment within my personal equity plan. In addition, Landround, a niche travel incentive promoter quoted on the Alternative Investment Market, is in talks that, with luck, will end happily.

Spotting bid targets is never easy. Financial services, pharmaceuticals and telecommunications continue to be obvious areas for consolidation.

I also expect activity in department stores, leisure clubs, motor distributors, and smaller hotel and property companies with share prices representing sizeable discounts to net assets.

Bids tend to be rarer in what I term “proprietorial” plcs where there are significant family shareholdings, with the present generation “stewarding” the business for the next.

Corporate activity here is more likely to take the form of a “buy-in” where the dominant shareholders take the company private, with a much lower premium being offered than with a third-party bid.

Be alert, however, to family companies where there are no obvious successors and where a deal seems likely at some stage.

For the ideal bid opportunity, look for small, well managed businesses in sectors dominated by much larger and wealthier groups. Like Border Television, these should offer profitable journeys, hopefully with a crock of gold at the end.

Source: Lee, J. (2000) Investment lessons in a tough school, Financial Times, 13 May.
© The Financial Times Limited 2000. All Rights Reserved.

Author note

In this article, written in 2000, I say that ‘in recent times, my portfolio has achieved two or three good bids each year’. However, in recent years merger and acquisition (M&A) activity has slowed down markedly – now it is more like one bid per year, with buyers being considerably more cautious and focusing on conserving their resources.

Profit-taking with a catch

John Lee

My annual salmon fishing week on the Tweed near Kelso always gives me the opportunity to relax and reflect on my investment strategy. This year, though, there were few fresh fish, few new jokes to share with Kenny the head gillie and few new investment ideas.

The lack of new ideas is hardly surprising given the very considerable rises in my type of small-cap value stocks. It really has been a fabulous period.

For me, equity investment is about long-term growth in both capital and income. I have never worried too much about annual performance comparisons, though obviously recent returns have been very satisfying.

I am now very reluctant to pay capital gains tax through taking profits in my main portfolio. But within my tax-free Peps and Isas I will “topslice” at times where a holding has raced ahead to unsustainable levels in the short term or has become disproportionately large.

This decision, when a stock keeps rising, is amongst the most difficult to take. A classic example of this has been Clarkson, the world’s leading shipping broker. Shipping has long been a notoriously cyclical industry and the company’s earnings fluctuated, but it always had a strong cashflow and paid a dividend.

I bought into it in November 2002 at 149p on an incredible 10 per cent yield – a wonderful Peps/Isas scoop. I bought more at 170p and more again early last year at up to 228p. Investors were waking up to the tremendous rise in freight rate powered by China’s economic growth; arguably Clarksons was becoming the best and safest play on China’s boom.

On and on the shares climbed through the £4 barrier and then towards £5. I asked myself frequently how long this could go on, torn as I was between banking part of my profit and my fundamental investment belief that one usually does better to stay aboard for the long term.

I finally decided to topslice a fifth of my holding at 488p this January, telling myself that nothing goes up for ever. Hardly pausing for breath, off went Clarkson again, leaving me agonising about what to do as I drove up to Scotland with the shares at 550p and the yield down to 3 per cent.

Freight rates were (and are) still very high, and the company’s coming annual results would clearly be excellent. Furthermore, the way they earn their commissions over the duration of a contract substantially underpins earnings for at least the next couple of years. Against this, many investors were sitting on large profits and the slightest negative hint on freight rates or China could precipitate a sharp reaction.

In the end my innate caution prevailed, and an early call to my broker before heading from hotel to river saw another fifth of my holding sold at 550p. The tragic news of the Madrid bombings knocked prices towards the end of the week, since when they have hovered just above £5. Bonanza results this week – a near tripling of profits – should underpin the shares. But a repeat tripling of the share price is hardly realistic.

The week’s fishing brought me just one fine 7lb fish, although the environmental programme necessitated me returning it to the river, for which I received a Tweed Foundation sweatshirt – probably the most expensive such garment ever. My investment activities during the week have, of course, created useful liquidity in my Peps and Isas for reinvestment, but like those elusive salmon, undervalued stocks are currently very hard to find.

Source: Lee, J. (2004) Profit-taking with a catch, Financial Times, 3 April.
© The Financial Times Limited 2004. All Rights Reserved.

Author note

A classic example of selling a fine company far too soon! Having first bought Clarkson at 149p, it would have turned into a ‘ten bagger’ if only I had stayed aboard. Here in 2004 I write, with the shares around £5, ‘a repeat tripling of the share price is hardly realistic’. Well, that was precisely what happened and I couldn’t have been more wrong. They are now approaching £20!

Jewellery shares acquire extra sparkle

John Lee discerns bright prospects for Abbeycrest behind the glitter of its product range

Leeds has been a happy hunting ground for me in recent years. Bray Technology was taken over for a good price and Town Centre Securities, a property developer based in the city, is showing a 40 per cent appreciation.

I was hoping for continued success as I prepared to attend the annual meeting of jewellery maker and distributor Abbeycrest.

I had already made a modest purchase of shares on the back of solid results, a good set of accounts, and favourable press comment. But I also wanted to check the company for myself.

The meeting was held at the city-centre office of Arthur Andersen, the company’s auditors – not the most exciting venue. Even one of Abbeycrest’s non-executive directors had wisely gone on holiday. But once the board had recovered from the shock of a shareholder actually turning up at the meeting, I was well received.

I was impressed to find that Michael Lever, chairman and chief executive, had himself started the business in 1979 – with a partner who has died. Twenty years later, a turnover of £70m, pre-tax profits of £5m and a personal shareholding worth £6m clearly point to a wise career move by Mr Lever, who was previously a dentist.

Lever and his team believe they have only just started the task of building Abbeycrest into a much larger international company. Although 85 per cent of its sales are in the UK through high street chains such as Signet, Goldsmiths, Debenhams and independent retailers, an increasing proportion is coming from the US and continental Europe. Wal-Mart, the giant US supermarket group, is now a customer.

The past year has seen a build-up of manufacturing capacity in Thailand and Hong Kong, and the purchase of a Teesside maker of bracelets and bangles.

An increase in production and assembly employees from 362 to 573 indicates the scale of change as Abbeycrest moves to owning more of its manufacturing capacity. Lever hopes this will bring greater management control, better customer service and higher margins.

The group is very focused on cash generation and bottom-line profitability. Even after the above expansion, gearing remains modest and the current 115p share price is fully backed by assets.

In spite of being in a rather bright and glitzy business, Lever is modest, conservative and cautious, albeit with ambition. This is an attitude which has clearly impressed institutional investors, which include Prudential, Legal & General, Hermes and Royal & SunAlliance. The institutions together own about half the equity of Abbeycrest.

There are just under 500 individual shareholders, among them Danny Fiszman, a big investor in Arsenal football club and a leading diamond trader. He has been steadily buying and is believed to own approaching 12 per cent. His intentions remain unclear.

All this makes Abbeycrest an intriguing and compelling proposition. In an age of increasing affluence and fashion consciousness, jewellery is clearly a growth sector. Abbeycrest is determined to be a force. Profits have increased steadily in recent years, even though they remain below the £6.8m peak achieved in the early 90s.

With the shares on a prospective p/e ratio of around seven, and with a three-times-covered dividend yield of just less than 5 per cent, I was confident enough on the return journey to phone my broker and add to my holding. Just my sort of share.

I hope that, following a little gentle chiding, next year’s annual meeting will be brighter and better. I don’t want to be the only shareholder there next time.

Source: Lee, J. (2000) Jewellery shares acquire extra sparkle, Financial Times, 5 August.
© The Financial Times Limited 2000. All Rights Reserved.

Author note

I can only conclude that jewellery manufacturer Abbeycrest was a complete management failure – that is the only explanation I can offer for its near collapse. I probably should have exited much earlier. Scant consolation that institutional investors Prudential, Legal & General, Hermes and Royal & Sun Alliance also got it wrong. Had I been operating my current 20% stop-loss policy, at least I would have limited the damage.

Tailored for both comfort and fit

John Lee finds that clothing company Wensum is an impressive corporate dresser

As an active investor for 40 years, and with an accountancy qualification, it usually takes me only a few minutes to form a view of a company as I work through its report and accounts.

The experienced eye knows what to look for, the statistics on which to focus, and which phrases convoy the key messages.

One does not always draw the right conclusions, of course – investment is not so easy – but going through a checklist should help to keep losses to a minimum.

Take the Norwich-based Wensum plc – one of my more recent purchases – and see why I formed a positive and favourable opinion.

I ask 10 questions, applying a score from one to 10 to each. The subject areas cover trade/activity, profits record, dividend yield and cover, asset backing, cash/borrowing, board shareholdings, institutional holdings, the price/earnings ratio, professional advisers/non-executive directors, and company optimism/brokers’ forecasts.

In Wensum’s case, and to assist clarity, I have blocked together the subject areas that I score the same. In three categories, I gave Wensum a score of seven. These are trade/activity, asset backing and cash/borrowing.

Although men’s tailored clothing and corporate career wear (Wensum is No 1 in travel/leisure, supplying uniforms to groups such as Virgin) do not have the growth potential of internet stocks, the company’s record and modest size points to further expansion.

On the issue of asset backing, shareholders’ funds of £4.6m compare satisfactorily with the £6.8m market capitalisation. As for cash/borrowing, Wensum is financed conservatively, being moderately cash-positive at the year-end.

Two categories achieved a score of eight: profits record and professional advisers/non-executives. Wensum has increased its earnings per share every year, from 9.14p in 1995 to 14.24p in 1999. And while it only has one non-executive director, comfort comes from the presence of auditor Ernst & Young, solicitor Eversheds and broker Williams de Broë.

In the higher-scoring areas, categories deserving a mark of nine were dividend yield and cover (a 6 per cent yield covered nearly three times is very acceptable), and institutional holdings (venture capitalist 3i Group has 15.9 per cent).

Wensum also scores a nine on company optimism/brokers’ forecasts. According to the board: “Both divisions have excellent order books and have started the year well.” Brokers are forecasting a rise in profits, from £1.54m to £1.73m, for the year to January 2000.

Finally, scores of 10 were achieved on two counts: board shareholdings and p/e ratio. Wensum’s directors appear to own a constant 45 per cent of the equity, which demonstrates a deep, permanent commitment to the company.

The p/e of around six is exceptionally low for a solid and growing business.

When it comes to adding up the marks, my general conclusions are that any company achieving more than 90 out of 100 is an outstanding investment; 80-plus is very cheap – an excellent buying opportunity; 70-plus is good, but better value might be found elsewhere; and 60-plus is nothing special. Below 60? Forget it.

So, for Wensum, a total score of 84 (three sevens, two eights, three nines and a pair of 10s) out of a maximum of 100 says “buy”.

Although it is a very small public limited company, with all the usual lack of liquidity in the shares, Wensum should provide substantial reward for the patient investor. Meanwhile, a rising 6 per cent dividend yield is worth having.

A final note. Wensum’s board continues “to strongly believe that the company’s share price does not reflect the underlying quality of, and prospects for, the business”.

This is a view that I endorse happily. It has to be worth at least 50 per cent more.

Source: Lee, J. (1999) Tailored for both comfort and fit, Financial Times, 31 July.
© The Financial Times Limited 1999. All Rights Reserved.

Author note

Sadly, another management failure, with the company and my shareholding both going downhill. Embarrassingly, I paid up to 112p in 2006, finally selling out two years later for a measly 16p – frankly, a disaster. Here again a 20% stop-loss would have been damage limitation. In the article I quote the Wensum Board who continue ‘to strongly believe that the company’s share price does not reflect the underlying quality of, and prospects for, the business’.’ Enough said. I am afraid they lost considerably more money than I did as they had substantial shareholdings themselves.

On the scent of success at Jasmin

John Lee finds a software company making some shrewd moves amid top team changes

The Nottingham headquarters of software systems company Jasmin is protected by a heavy security gate. The gate has seen substantial activity in recent years. Since 1998 the company has parted company with its nominated financial adviser, broker and auditor, not to mention an array of executive and non-executive directors. The group is on its fourth finance director since that date.

It was these upheavals that concerned me when I first visited in 1999 after buying a modest holding. What would this year’s annual meeting hold?

Jasmin is very much the creation of chairman and managing director Roger Plant, who founded it 30 years ago. He still owns about a third of the equity. Plant admits to being a hard taskmaster and setting high standards. He accepts that getting the right top team has not been easy.

What attracted me to Jasmin was a record of steady profits growth through the 1990s. What’s more, the company had lived within its means, building conservatively. But fighting larger competitors eventually took its toll, as did heavy spending on R&D. Turnover dived to just over £4m for the year to March, producing a £1m loss. Gearing rose to 56 per cent.

Jasmin now accepts that, given its limited resources, it has to form strategic partnerships. Some of its likely partners remain commercially confidential. But relationships with WS Atkins (in traffic control systems) and Marconi Communications (a deal that involves developing readers for sophisticated new smartcards) say much for Jasmin’s reputation.

Plant has shrewdly taken the company into a number of areas with potential. These include: passenger information displays for London Underground and Railtrack; airport ground lighting systems (with Jasmin now having preferred status with BAA for closed-circuit television); and city surveillance systems for local authorities. Each of these fields should see large increases in national spend, and many projects are being tendered for.

Jasmin has significant defence interests, working with the Ministry of Defence in simulation and biological and chemical detection systems.

I found a mood of optimism at the annual meeting, boosted by the company’s new £10m contract with the National Highways Agency to upgrade all motorway emergency phones.

Jasmin is definitely not a “widows and orphans” investment, but my own portfolio is sufficiently solid to carry one or two “hope” stocks.

The current financial year will produce breakeven at best. But Jasmin could then begin to motor. Its broker, Old Mutual Securities, calculates that at the current price of 140p the shares are trading on a multiple of 6 times forecast earnings for 2002. This compares with a ratio of 50-plus on many software stocks.

With a current modest capitalisation of £7m, the brokers reckon that the potential for re-rating is “enormous”. I am more cautious. There is a long way between a contract being won and its profitable and successful completion.

Jasmin must not over-stretch itself, and I would like to see a more settled board. Even so, I was sufficiently enthused by the annual meeting to add to my holding. My hunch is that Jasmin’s time will come.

Source: Lee, J. (2000) On the scent of success at Jasmin, Financial Times, 9 September.
© The Financial Times Limited 2000. All Rights Reserved.

Author note

While I did say that Jasmin was not a ‘widows and orphans’ investment, I still should have known better. Between 1998 and writing the article in 2000 they were on their fourth finance director. Even the dumbest of investors should have smelled a rat. Serves me right!