Camellia (CAM)


Wilting Camellia will flower again

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Camellia is a beautiful, virtuous, exotic and dares to be different. But its also complicated and frustrating. I think I’m falling in love.

I almost passed over Camellia (CAM) despite its sub-tangible book valuation, but a fellow blogger and holder of the shares insisted. Since he’s of sound mind, I overcame my distrust of conglomerates and buried myself in the accounts of not one company, but many distinct companies.

Seventy per cent of Camellia’s turnover is from agriculture. It’s the second largest private tea producer in the World and also grows nuts, avocados, maize, citrus fruits and grapes, which it turns into wine. It manages forests and cattle and runs plantations and farms in India, Bangladesh, Kenya, Malawi, South Africa and California.

Agriculture is also by far its most profitable activity. General the price of tea and other agricultural commodities is high, the regions it grows in are peaceful, crops have been good, and these factors have outweighed rising costs. By contrast, Camellia’s industrial and private banking activities, have only been marginally profitable in recent years.

As well as owning Goodricke, an Indian tea producer and brand, Eastern Produce in Africa, Duncan Brothers in Bangladesh, and the majority of Kakuzi in Kenya, Camellia also owns businesses that repair and manufacture North Sea drilling equipment, paint and plate metals, provide engineering services to the energy industry, cut and grind, galvanise and coat, manufacture horse stables, distribute food in the UK and fish in the Netherlands, and provide private banking services.

That list isn’t exhaustive, but it’s exhausting, which is one reason to dislike conglomerates. Another visceral objection to Camellia is it contains a bank, which complicates the accounting. It is a very prudent bank. In 2009, when other banks went bust or avoided going bust by raising capital, Camellia’s bank reported a small profit and Camellia reminded investors in its annual report that the bank doesn’t lend out more than its net assets and customer deposits are placed in money market funds.

Camellia says all but £87m of its £262m cash balance is required for the operation of the bank so I’ve included the difference, the cash required by the bank, in the operating capital of the company, which reduces return on capital and increases enterprise value, making Camellia a less attractive investment.

There’s another unfamiliar complication in Camellia’s accounts. Each year it must revalue its biological assets, i.e. plants in the ground, according to market values or, where that’s not possible, the cash they’re expected to earn once harvested. This makes the company’s profit, and asset values, volatile. I’ve ignored £22m of unrealised gains on biological assets in determining profit as the company recommends.

After financial fiddling Camellia earned a moderate 9% return on capital in 2012, and, assuming it remains that profitable, its trading on an extremely attractive earnings yield of 18%.

Camellia’s immediate prospects aren’t good though. The engineering and distribution companies are still muddling through, and at the company’s Annual General Meeting last month it warned of droughts and price declines in South Asia and Africa. The cost of tea production is still rising. In the short-term at least, profits may be depressed, which probably explains the 15% fall in the share price after the AGM.

Longer-term I fear the benign conditions for tea producers in recent years could end. In the early part of the last decade prices were low, Camellia’s tea plantations in India were loss making, and the conglomerate made much less profit. Camellia may face more hostile conditions for years if high prices have attracted investment and increased the tea supply sufficiently, and other factors, competitive pressures from local suppliers, and political unrest in Assam and Darjeeling, have held back profits in the past.

Camellia’s earnings are questionable and since its biological assets are valued at market rates, its tangible book value could prove less tangible than investors thought too.

Cycles repeat though. If Camellia survives, it will prosper again. Everything  I’ve read about Camellia suggests it will survive. It regards itself as custodian of businesses it describes as ‘living entities’, which it aims to improve not to trade. “Above all”, the company says:

...We will never overreach ourselves so that our base becomes vulnerable to the changing circumstances of the banks.

That ambition might lack originality were it first adopted during the present financial crisis, but it’s part of a long-term vision first articulated in 1991 and reprinted in Camellia’s 2010 annual report.

Abbey Metal Finishing has a new site at Hinkley,  AJT Engineering has recommissioned a site at Altens in Aberdeen and at AKD  Engineering, the company talks of “continuous investment”. As money has poured in from its plantations, it looks as though Camellia has invested to improve the competitiveness of its businesses and saved a considerable cash surplus, which will protect them if conditions get really tough.

Saving and investing is in one sense detrimental to investors, as money spent on investment or hoarded in cash, is not paid in dividends. Investors receive a modest dividend yielding about 1.5%. In twenty years though, that dividend has never been cut, and Camellia has never made a loss. In another sense, it’s far-sighted.

Were it not for the fact that Camellia is controlled by a charitable trust, the Camellia Foundation owns 51% of the voting rights, it might have succumbed to shorter-term imperatives of other investors a long time ago. Although the trust eschews participation in the day to day running of Camellia, it surely has guided the strategy.

I’m torn. Using traditional value metrics, book value and earning power, Camellia’s very good value, but the cyclical nature of the businesses within it, and the complicated accounting, casts doubt on those metrics. I’m scared of romanticising a long-term strategy which corresponds so closely to my own values.

But even if Camellia’s average earning power in future is only half last year’s, which I doubt, it would still be a reasonable investment at the current price and Camellia’s record validates the fine words in its annual reports.

As a long-term investor I’ve schooled myself to strike when the price is low and news is bad, so Camellia’s joins the ‘Add’ category of the Watchlist.

I will consider it when the Share Sleuth portfolio has cash to invest.

Here’s the spreadsheet.


Is it just me or did it sound poetic?

Any way nice write up.

Thanks John

To what extent is the bookvalue undervalued? What's the quality of the bookvalue? Thx.

Hi Jacques, currently 0.8 times bv according to Stockopedia.

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