Mallett exits Thrifty 30

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As feared, Mallett is a net-net but it doesn't look like a bargain. I've ejected Mallett (MAE), one of my favoured net-net situations, from the Thrifty 30 portfolio. I outlined the problem last week. Most of its current-asset value is inventory and the value of antiques and fine art is much less certain than the value of cash or receivables. Yet the net-net calculation treats the three main components of current assets equally on the assumption fixed assets, which it ignores, will more than make up for any shortfall from inventories and, to a lesser extent, receivables. The price of art and antiques depends on their markets, and although we know from Mallett's annual report the antiques and decorative arts markets are subdued now, things can always get worse. Since I have no expertise in art and antiques, and little faith in forecasting markets, Mallett was an unlikely pick for the Thrifty 30 in the first place. My decision is easier because of another factor overlooked in the net-net calculation, leases. Mallett has £32m in non cancellable operating leases compared to assets of £22m. In the past I've likened leases to debt and their existence cheapens the net-net calculation, as they’re not included as a liability on company balance sheets, but they could be costly to get out of. That said, Mallett looks as though it will profit from the assignment of the lease on its prestigious Bond Street showroom to another company, Fendi UK, because its waited years for the market for properties in Bond Street to revive. It's planning to move to Mayfair, which should be cheaper, as long as its landlord agrees. So its current-asset valuation is shaky, and I don't get any consolation looking at Mallett's earning power or current trading. If Mallett is as profitable in future as it has been over the last seven years, it promises investors a return of just 5%. Over the seven year period since 2004 it’s generated no wealth for shareholders at all (orange/yellow bars). My traffic light panel (see top) is lit up in red and amber as this year cash flow has turned negative (there is an explanation, the company has spent more heavily on stock, which is perhaps a sign of confidence), losses are larger, and Mallett has gone further into debt . It seems to be doing the right things; reducing staff and property costs, and changing its business model. Mallett describes itself as a destination business now, reliant on antiques fairs to drum up business and not people passing by its glitzy showroom. But I'm ejecting Mallett for a return (after fees, and using a realistic sale price) of about 10% because I'm not confident the shares are cheap, and I'm not confident it's in control of its own destiny. It seems all it can hope to do is keep costs low and survive until its markets recover. With that in mind, it might focus not just on reducing staff, but controlling the salaries of those that remain . Having awakened rather late to the cancerous effect of high executive salaries, I promised to comment on the salaries of all companies I profile. Average salaries including pensions look high when you consider Mallett has made shareholders an average profit of about £800,000 over the last seven years. Four executive board members earned around £175,000 each in 2010 and 30 other staff working in restoration, sales and distribution, and administration earned £45K on average. These are means, not medians, which would be preferable, but which are not possible to calculate from the data in the annual report.


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