These seem reasonable to me, I think one has to strip out the profitable disposal as a one off, the dividend ex the special 8p is 2p for the year which means at 46p the yield is 4.3%, not compelling nor is the adjusted p/e which I reckon is c10. Share price is about 10% ahead of nav of 42p of which cash is 31.5p. Year has started alright although Leave has meant buyers and sellers delaying doing deals so not good for transactions but the chairman hopes a pattern will establish itself and deals will resume, he is probably right this is only a short term blip. Company has bought a couple of properties which will let in 2017 or maybe they will sell at a profit and pay a special dividend, they are rather good at doing this.
Perhaps I am wrong in thinking no reason to rush out and buy the shares, but all things considered I see the shares as no better than a hold and think they could drift back. The company's conservative stance remains a plus as ever, they can withstand difficult conditions if necessary and wait for better times so at least holders can sleep at night.
It does not make much sense that this company is valued at only the cash the company holds, this is a conservatively managed and profitable (if cyclical) business arguably valued at zero which is a bit of a nonsense. I understand management reads comments posted on here, so may I suggest they buy in shares around this level to use up some of the surplus cash and benefit all shareholders by doing so.
Yesterday's AGM was very interesting. I've written a report on the meeting, but it is 1557 words so ADVFN are not keen on me publishing it here (they prefer it at http://newsletters.advfn.com/deepvalueshares/). Anyway here is some of it:
David Fletcher and the other directors warmly welcomed the four shareholders who turned up to the AGM yesterday.
They were very willing to discuss the important and intellectually challenging issues facing the business. So for about an hour we probed many of the dilemmas that come with managing an organisation such as Fletcher King.
(By the way, it turns out that the board have been reading what Ive been writing on the company so they have probably also seen the bulletin board comments made by others.)
Is the London commercial property market near to the top of a bubble?
This is always an extraordinarily difficult question to answer except, of course, with hindsight.
But there are straws in the wind. There is a post-election lull in the lettings market. Also yields are approaching record lows. Or was that 2007 yield levels? (which might be the same thing, Im not sure). Whatever it is, prices are high.
On the other hand, rental growth for smaller office suites has been going great guns over the last 2-3 years. This fits with the evidence of good demand from both tenants and office buyers in the performance of the Leadenhall Street property in SHIPS14.
A key point of hope is that the supply of new offices is not as great as in the lead up to past peaks.
The people around the table had seen a few London property cycles and, I could be wrong, but I sensed a consensus that we are getting close to midnight here for speculators betting on rising prices, where all turns to pumpkins and mice for those who do not get out before the clock strikes.
However, not everyone in the property game, or those supplying services to those investing in property, needs a rising market to make a living (for example, weve done fine in Leicestershire with a flat market).
There are many working at FK who collect fees for looking after clients (collecting rents, doing rating appeals, valuations) whether the market is in an up-phase or is down. I pointedly asked what profits were like in 2009 and 2010. In both cases revenues were in the ballpark of £3m and underlying profits were made. This is a very conservatively run company, strong enough to cope with recession.
However, the icing on the cake for a business like this is say when a number of banks ask for FK property valuations so they can lend to investors keen to buy, or when fund managers (e.g. pension funds) are enthusiastic about investing in London property and need various services, or when investors are keen on piling money into SHIPS for FK to charge a management fee.
Other issues discussed:
The dilemma of paying enough to retain rainmakers.
How much to invest in SHIPS?
Growth through acquisition?
What about other routes to growth?
Quality of management?
Thank you for your interest. ADVFN host the Newsletter, Try http://newsletters.advfn.com/deepvalueshares/ (It's £6 per month - I write 4 per week - currently posting about Warren's 1960s investments following my lecture tour in Malaysia talking about Warren. I'm also looking at the entire market for net current asset value investments for my NCAV 2015 portfolio - FK was bought for the 2013 NCAV portfolio)
Ive written a 3,576-word report on Fletcher King (for my Newsletter subscribers). Obviously I cannot post the whole thing here, but I would like to make a contribution to the debate on this bulletin board and so have put some points below (Im sorry it is still so long). Please let me know your thoughts.
1. Whether the profits downturn is permanent.
2. Whether the 18 people working for FK will suck out the value due to shareholders through their bonus packages. Linked to that, are questions over the rewards to shareholders through dividends.
3. Whether the NCAV (mostly cash) is greater than MCap. Linked to that is the question of excessive amounts of shareholders cash stuck earning 0.4% pa.
The headline profits fall gave such a jolt in large measure because of the great results in the 1st half: revenue was up 36% and PBT up 99%, and interim dividend doubled to 1.5p.
But, David Fletcher warned: as I pointed out in my Chairmans statement last year, those results would be a difficult act to follow, but we will use all our efforts to do so.
There was a black mark against these half year results: Revenue was up by £486,000 but the staff increased employee benefit expense by £232,000, so the advantage of high operational gearing was blunted by the staff being first at the trough.
The company clearly had a rotten second half in 2015 with revenue at £1,562,000 compared with the last years second half of £2,311,000. Profits fell even more from £431,000 in the second half of 2014 to £128,000 in the second half of 2015.
A longer term perspective
Ill look at five years of numbers to gain an impression of the earnings power of this business.
Profit and loss account
£000s 2015 2014 2013 2012 2011
Revenue 3,380 3,653 3,031 3,105 3,175
Less Employee benefit expense (1,843) (2,017) (1,641) (1,673) (1,595)
Less Depreciation (36) (44) (43) (46) (59)
Less Other operating expense (1,057) (1,083) (1,085) (1,012) (1,130)
Produces operating profit 444 509 262 374 391
Add profit on disposal of available for sale investment - 174 - -
Income from investment 4 13 11 11 13
Finance income 13 15 19 10 10
Totals to Profit before tax 461 711 292 395 414
Tax (102) (169) (65) (115) (83)
Profit to equity shareholders 359 542 227 280 331
Earnings per share 3.9p 5.89p 2.46p 3.04p 3.59p
Revenue has been fairly flat at a little over £3m, with a boost in 2014 because of some one-off events.
Employee benefit rose and then fell.
Operating profit rose over the five years from £391,000 to £444,000, with a blip up in 2014.
Headline PAT and eps strongly influenced by the one-off profit in 2014 due to the selling of FKs stake in SHIPS06 and SHIPS11. Thus it appeared to many observers that the managers lost the plot, with eps falling by 34%. However, look at operating profit - fall of 15% - perhaps this can be accepted as a normal bump in the road of unpredictable business life.
We clearly cannot attribute future growth to this firms profits and still claim we are building a margin of safety into our analysis. Thus something like £359,000 after tax is a reasonable estimate, with eps at 3.9p. Unless, of course, there is additional value in the two recently established SHIPS.
The strangeness of the decision to hold nearly £3m cash is highlighted by the return it generated - £13,000 i.e. 0.4%. A service-type of business such as this does not need this cash pile.
A very important factor in judging a good business with good management is the ROCE. FK scores surprisingly well on this:
With NTA of £3.3m in 2014 and OP of £509,000, a bumper year, it achieved a ROCE of 15.3%:
£509,000/£3,325,000 = 15.3%
With NTA of £3.7m in 2015 and OP of £444,000 it achieved a ROCE of 11.9%:
£444,000/£3,729,000 = 11.9%
But, look at the transformation in ROCE if £2m is returned to shareholders, so that this service business operates with only £1,729,000 of NTA:
It seems to me that a crucial factor in the assessing the prospects for this firm lie in its SHIPS - it now has two in operation SHIPS14 and SHIPS15. This should result in a two fold benefit (1) additional fees of the order of £200,000 - £300,000 per SHIP (2) capital gain on the sale of the SHIP property (e.g. SHIPS 06 and SHIPS11 combined made a realised capital gain of £174,000 boosting 2014's results. This was on a £500,000 total investment by FK). The latest batch of SHIPS have taken £875,000 of FK's cash to coinvest with outsiders (they oversubscribed because they saw returns of 11% pa and 20% pa in the past on SHIPS06 and SHIPS11 respectively) to purchase one property at £9 and another at £8m. That will mean a nice income boost. And, maybe, a capital gain on the amount invested. That is about all I know about the SHIPS. Can anyone help? Does anyone have any information beyond that which is presented by Mr Fletcher?
I'm flattered that you are interested. I'm currently thinking and writing about FK - I'll probably write about 2,000 words because it needs a difficult weighing of opposing thoughts and facts. I'm sorry I have not posted here recently, but ADFVN asked me to write a regular Newsletter last year (4 per week) which people pay a subscription for, so I'm not sure that I should be here also. However, I'll try to summarise my writing and post something here - I won't tell if you don't!
Some early thoughts: Negatives: Managers who like to pay themselves well (one individual gets more than the PAT). Potential London downturn. Managers' scant regard for shareholders who wish to attend AGM (I'll have to get up really early that day! (from Leicestershire)
positives: Share price only a bit above NCAV. Cash nearly £3m (MCap £4m). Employee benefits: 2012 £1.67m 2013: £1.64m 2014; £2.01m 2015: £1.84m - so some degree of rise and fall with revenue. Operating profit (excluding impact of SHIP realisation) down from £0.509m to £0.444m (is that really so bad?)
Taking last 5 years: dividend payout ratio greater than 50% on average - giving shareholders a total of 9.75p or 33% for those of us who bought around 30p (22.7% on current share price) so company not guilty of gross hoarding but could be guilt of unreasonable hoarding (what does it need £3m in cash?)
Anyway I'll write it out neatly in the next few days.
In previous cycles, the buying area was when the share price equalled cash in the balance sheet so 28p, I think we would need a proper bear market to get down that far. Net worth and there is no goodwill is around 37p, I would be happy to repurchase at that level on a yield of 6%. Current yield is 5% and as you say too much cash in the bank and the cautious Mr Fletcher hints a better year in prospect. So probably a bit late to sell at today's 43p, better to buy more if they fall further I suggest, but DYOR, WDIK etc and good luck. Perhaps profdoc will favour us with his thoughts at some stage.
I am listening Mr P. I took a few a while back, and am now underwater. It struck me as a play on London property without being in London property! The yield stands at 4%+, and there is cash in the bank, so I will not worry too much at the mo. The management are so tight-lipped it is nice to see some news, even if it is musings and speculation. Would you care to call a bottom on this?
One week on and I am right so far as the price is down another 10% at 45p despite the market going north, but I realise I should have said I was not expecting the total dividend to be down from 3p the previous year to 2.25p this year. All the more unexpected given the interim dividend was doubled. So I reckon the drift down in price could continue some more.
However, who cares, I seem to be posting only to myself.
So the shares are down 10% plus today following the results for the year. I think they could fall further although the company, which is always very cautious in what it says, is talking of the current year being better so no doubt it will. However, on a historic p/e of 12.8 and a yield of 4.5%, I was expecting the final to be increased but it was not, I think the shares might still be over valued at 50p.
Puzzled the second half was not better given a positive trading environment, though last year's results were flattered by a profitable disposal which perhaps most did not regard (as I did) as an occasional one-off. The balance sheet remains very strong, but over the last decade it has been possible to buy the shares for the value of the cash in the company, which is what I think profdoc and I did (see earliler emails). Will be interested to read his views in due course.
Aim market was particularly weak I think and lower on not much volume, since recovered most of the fall with the general rally on not much volume either. So sometimes right to ignore price fluctuations I suppose. Yield on the increased dividend looks a useful prop.
Hi Old_Punter. This company is looking better and better. It was solid and strong in the recession; the high operational gearing, exceptionallly sound balance sheet and potential for a doubling or trebling of dividends bodes well for the next couple of years. They really do not need all that cash, so they might as well pay it to us. It is conceivable that the total pay out over the next four years could equal the current market capitalisation (if the directors have the will to do that - but given their conservative stance the pay out will be less, but the result will be a robust BS for the next downturn). I can live with that!!
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