Culture

  • All companies experience cycles in their trading environment.  In weak markets businesses can build their franchise as competitors struggle while in strong markets businesses can milk their franchise. Only with a positive culture can a company build its franchise in weak markets and it is this factor which determines whether a company can achieve scale over time.  If we invest in small companies because they can become large then this is a vital factor. In management speak this is frequently termed “corporate governance” and yet I find that frequently a number of the shares that I own fail to comply with the code.  Which is puzzling.
  • Listed below are the stocks that in my view have very strong cultures.  Noting the top 3 or 4 factors for each stock that give me the view they have culture I find there are some recurring themes.
  1. Equity Holdings Management have a significant equity holding, not options or LTIPS but a straight equity holding. I know this from my own experience. I have been awarded options in the past. Participating in the upside is exciting and does motivate but the huge difference between options and equity is they didn’t cost you anything so when the hard times arrive and the upside isn’t there it is easy to walk away as the downside is nil. Whereas with equity there is downside from walking away.
  1. Customer focus – All of the strong cultures are focussed, most frequently on the customer.  Sometimes its passion sometimes it is discipline but it all amounts to a focus on the customer.
  1. Staff Respect–   One CEO said to me that he wanted to sell 30% of his business to the staff for a good price because the difference between entrepreneurs being successful and failing is often the finest line and they deserve to have that chance. Another said there is no enjoyment making money on your own. This struck me working in an environment where large ego’s in the city spend their time avoiding blame and doing their best to attach their name to any transaction that is successful while “inner circle’s” of management frequently carve the bonus pots up, largely to themselves. For a business to have longevity the staff have to respected by management and frequently this is subrogated to management’s requirement to own the trappings of success. Only if staff are respected will they build a business in a downturn.
Culture Stocks FC PER Management Holding
Mattioli Woods 19.1 13%
K3Capital 15.1 33%
Tatton I.M 21.3 21%
Manolete 24.3 18%
AJ Bell 47 25%
Alpha FMC 17.9 2.50%
Alpha FX 43.4 31%
Integrafin 32.5 16%
Liontrust 19.8 3%
Gateley 14.5 6%

Cheap Stocks

  • At the other end of the extreme we have a basket of stocks that are untouchable. Notably Harwood Wealth Management announced they are going private at a discount to the current share price on Christmas eve- a clear message that the stock market is no place for buy and build acquirers to source funding from.  Similarly Shore Capital, itself a NOMAD and broker to 123 listed companies cancelled its listing because the lack of liquidity results in artificial pricing and the costs outweigh the benefits.  The forces driving this result in a number of extremely cheap companies making rich pickings for private equity. Candidates include:
Cheap Stocks FC PER Prem./(Disc.) NAV Management Holding
Cenkos 54 10% 18%
Arden n/a -40% 15%
WH Ireland n/a 140% 1%
STM 4.1 -60% 12%
Amigo Loans 4.3 30% 6%
Orchard Funding 13.6 10% 53%
Ince Group 4.8 70% 22%
OnePM 5.3 20% 0.20%
Non Standard Finance 4.9 20% 0.70%

Alpha FX  – Trading Update

Share Price 1215p

Mkt Cap £451m

Conflict Disclosure: I Hold

  • Update: Since the last update on 17 October trading has continued to be strong. Revenues are expected to exceed £35m and margins are also slightly ahead of expectations. The company says it has increased front office headcount from 51 to 74 and the new hires are nit yet contributing materially to revenue and consequently future revenue growth is anticipated from the new cohort of front office hires.
  • Estimates Forecasts anticipate £33.6m revenue for the year to Dec 2019 so revenue looks to be 4% ahead. Perhaps with margins being higher than the anticipated 40% this may be a 10% beat. With front office headcount up 45% over the year the 21% increase in PBT during 2020 may be too low too.
  • Culture The company has an focussed, energetic, dedicated management that is the reason the stock is highly rated
  • Valuation PE 43X yield 0.6%.
  • Conclusion The rating reflects the fact that this company can become a large company.  The rating is perhaps discounting a doubling of profits which will take a few years but this high quality situation is one to own and tuck away.

Impax Asset Management – Trading Update

Share Price 387p

Mkt Cap £504m

Conflict Disclosure: No Holding

  • Update Net inflows were 5.1% over the quarter to December taking AUM to £16.1bn. The company says with policy makers commitment to a sustainable economy the company stands in good stead.
  • Estimates AUM is up 29% over 2019 while forecasts anticipate 12% revenue growth in the year to September 2020. Revenue looks 10% too low.
  • Culture: The company has no star culture but the flip side is that staff are well paid. Last year 26% operating margin was delivered which is extraordinarily low for a fund manager with £16bn of AUM.  
  • Valuation PER 30X Yield 1.7% EV/AUM 2.6%
  • Conclusion The high rating is anticipating upgrades which are likely to come through. The company is in the right place at the right time. With little operational gearing I find myself unable to pay the price, but the momentum may continue for a while.

Ramsdens – Trading Update

Share Price 235p

Mkt Cap £73m

Conflict Disclosure: No Holding

  • Update Strong trading over Christmas leads the board to believe results will be “comfortably” ahead of expectations. |The strong gold price has helped while pawnbroking and foreign currency continues to do well. Jewellery retail saw double digit revenue growth.
  • Estimates March 2020 estimates look for 15% revenue growth to £53.6m and 24% PBT growth tp £8m which represents a 15% operating margin. The statement implies perhaps a 10% upgrade today.
  • Valuation PE 11.5X Yield 3.1%. The ROE is 17.5% from a balance sheet with net cash of £12.3m.
  • Conclusion With net cash of £12.3m and a dividend of 7.5p against 19p EPS last year it may be that the dividend policy needs to be revisited as acquisitions opportunities are few. The shares are up 40% over 12 months and perhaps have further to go.

jeremy@charltonillingworth.co.uk