Stock to Watch: AGA Rangemaster Group

While press comment on the recent interim results from classic range cooker manufacturer AGA Rangemaster Group has focused on a weak property market and cash-strapped social climbers unable to afford up to £12,000 for one, a much wider upshot for stockpickers is contained in a paragraph on pension funding.

As part of a deal with pension trustees over the fund's £41.9 million deficit, the company will henceforth only pay dividends with trustees' consent. The context is that after annual payouts of 10p to 11p a share before the 2008 financial crisis, AGA suspended dividends in 2009 when profit nearly evaporated from about £20 million and has only recommenced modest dividends - 1.7p a share, last year.

Company REFS shows only Numis Securities, AGA's broker, recently providing a forecast which in early July targeted a 2012 total payout of 2.0p a share relative to earnings per share of 7.4p, based on £7.0 million pre-tax profit. This now looks aborted given the board has decided not to pay an interim dividend as part of the agreement reached over future pension contributions.

Admittedly this is just one UK-listed example and in the small cap sector, but if it signals pension trustees becoming more vigorous, also as a result of the Bank of England's quantitative easing programme debauching the value of annuities, then this needs watching at other companies.

The total deficit in FTSE 100 pension schemes is estimated at £73 billion at end-March 2012, a deterioration of £38 billion from a year before as bond yields have fallen and stockmarkets been volatile. While the effect may not be so overt as with AGA, which looks like a suspension of dividends also with regard to a fall in profit, it is possible that pension trustees exert more influence that quietly compromises dividend growth - relative to the forecasts some brokers entertain in their "buy" pitches.

Big companies such as BAE Systems, Barclays, BT, Lloyds Banking Group, Marks and Spencer and Royal Bank of Scotland have ended up paying more into their pension schemes, to mitigate deficits, than they paid in dividends in 2011. With the Bank of England firmly in defence of quantitative easing as a means to offset a slump, it is possible this will continue as the recession grinds on - hence pension trustees deciding to become more exacting, especially when facing deficits.

Besides potentially frustrating income seekers, capital growth may also be compromised. The FTSE SmallCap shares in Trinity Mirror trade on a seemingly ridiculous multiple of 1.5 times earnings and also offer a 4% prospective yield.

In contrast with AGA, Trinity Mirror is using its pension scheme to pay off US creditors with the suspension of £70 million payments into its final salary scheme over the next three years. Although the company is not paying a dividend anyway, potential scrutiny from the Pensions Regulator helps explain why the market treats TNI cautiously. It is an unusual example, but shows how pension issues can compromise share values.

AGA is also relatively extreme, exposed to consumer discretionary spending where a range cooker is easy to postpone buying. High oil prices for running these cookers will also be having an effect and may not come down soon hence it is understandable how "the onus is on new markets such as China and on raising market penetration in markets like North America, where our market position is not yet fully developed".

At about 60p the shares are bumping along a level visited in the autumn of last year also the 2008/09 bear market, and trade on about eight times earnings assuming the £7 million pre-tax profit projection for 2012, however this may need downgrading. Interims show pre-tax profit fell from £4.2 million in the first half of 2011 to just £1.6 million, although revenue was only shaved 1.8% to £119.2 million; the mismatch being due to operating costs and a £1.4 million reorganisation/redundancies programme (likely to be viewed as an exceptional item). AGA's margins don't allow much room for one variable to change without impacting the net outcome. Further efficiencies and/or significant revenue growth look needed.

The balance sheet is described as "strong" with £11.9 million net cash, although goodwill and intangibles represent £89.3 million of £123.1 million net assets so net tangible assets were 48.8p at end-June. Current assets outweighed current liabilities by 1.6 times.

So AGA's essentials don't really appeal as a stockmarket play, indeed it's hard to say "investment" as the track record is bumpy. Management needs to achieve something truly radical in the US and China while the UK market remains difficult - possibly for years. Yet the US economy is tricky due to the "fiscal cliff" of tax cuts expiring soon and pencilling in Chinese revenues looks speculative.

While the group also consists of Fired Earth, a tile brand that was once a listed plc, the trading split against cookers is not disclosed. The AGA brand is genuinely strong however, and if the group does make progress in China with its joint venture partner - there is a roll-out programme for Rangemaster products in 500 shops over the next two years - then it is possible a Chinese company may consider acquiring the group. For example, in May, a Chinese company acquired a controlling stake in Weetabix, valuing the Northamptonshire group at £1.2 billion.

So there is a long-term rationale for watching AGA Rangemaster, if sadly because a takeover may result from the likelihood the shares will remain out of favour. Without a dividend, drift may set in.

For more information see agaliving.com.