Mallett Share Discussion Threads

[rainmaker] 25/11/2013 23:12

Sorry for the delay Glen but to respond to your questions-

1) As a shareholder,using all the available evidence,ie the proposed subletting the ground floor of their US Madison Avenue showroom, gaining planning for redeveloping their Clapham High Street property thereby enhancing it's value, I have to believe that it is their aim to enhance shareholder value.

2)A conventional valuation at 15 times earnings given it's superior operating dynamics with a 21% corporate tax charge,would value Mallett's share at £1mln and the business whole at circa £4mln so roughly half of turnover. However I believe that it worth considerably more than this figure for several reasons.It's generally accepted that Masterpiece is a few years away from realising it's full potential as it's a relatively new event-the inaugural exhibition was in 2010.This brings into play it's large operating leverage-the vast majority of it's turnover comes from stand sales circa 90% and not ticket sales. There are accounts for the business available on line so it's a relatively easy exercise to work out an average stand price by subtracting the number of visitors x £20 from the turnover to gain a sense of the individual cost per stand and envisage the effect on profitability of a further 10,20,30,40 etc stands.

There's also the undeniable toll gate and business franchise aspects of the business which dramatically increase it's value.Then there's the uniqueness of the event in one of the worlds major capitals.Toll gate not just in terms of exhibiting but also a trading hub for dealers to interact with one another to create business.Business franchise because it's the largest event of it's kind in the UK and one of the worlds largest. This gives the Owner the freedom to raise stand prices over and above the inflation rate, thereby giving the business an expanding value. The cost of staging the actual exhibition is some £3mln so this provides a very deep and wide moat.


There are certainly gaps in it's roster ie Old Masters neither heavyweight dealers,Richard Green or Johnny Van Haefflin have ever exhibited at Masterpiece but I note that Mallett staged an exhibition at Ely House with Cagliari, the worlds oldest Old Masters Dealer perhaps with this in mind.

Given all these factors together with a business with strong cash flow(so little need for working capital)and no capital expenditure as a service Industry to sell for a multiple of annual turnover of some £8mln of 3/4 times, valuing Mallett's stake at £6mln to £8mln. On a conventional valuation that might seem an exorbitant price but there's is clearly room for another Art, Antique and Design exhibition to rival 240 stand TEFAT.

3)No but I think his presence has and will continue to induce a more cost conscious BOD.


4)I looked at this point a while ago and Mallett's turnover then(and it hasn't changed much) was some £4mln below the average of the last 5 years and £7mln below the cyclical peak.I've a got a profit/volume chart, somewhere.

5) Hopefully this will change.

6)I presume they take necessary precautions to safeguard their interests.I've never seen a bad debt provision in their acccounts.


Sorry if it's a bit scatterlogical

regards

[baner] 18/11/2013 09:25

Profdoc

Many thanks, excellent analysis! This seems to be a matter of throwing out the current non executive directors and replace them with shareholder orientated business men! Clearly there must be much more pressure put on the seriously overpaid executives.

[rainmaker] 14/11/2013 13:32

Hi Callumross, I think you've definitely got the right idea-ignore the noise of the market. In the final analysis just two things matter, price and value.

regards

[callumross] 13/11/2013 16:21

Just topped up with 5k at 77p although strangely, ADVFN showing it as a sell.

[profdoc] 12/11/2013 14:27

Rainmaker, I have finally managed to spend some time looking at Mallett. I would value your comments on the following ideas. As you know, earlier this year I analysed Mallett, the antique dealer, after a numerical-only screen showed it to have a market capitalisation lower than the value of the current assets minus all liabilities on the balance sheet – at first glance a NCAV investment. However NCAV requires more than a superficial analysis. We also need to be (a) reassured that the prospects for the business are good, and (b) that the managers are both competent and act with integrity, particularly with regard to shareholder interests, and that (c) the business is financially stable. It was put on the rejection pile because it had produced years of losses on a turnover of £14m to £10m (declined over 5 years) combined with a management that thinks sucking £750,000 or more out of the firm each year is suitable reward for a job well done. I was also nervous about placing so much weight on an inventory of antiques valued either by cost/net realisable value or by 'external independent valuation' subsequently adjusted by the directors based on 'market movements' (which is used is not entirely clear to me). But the facts have changed over the last nine months and so the strength of the case for investment has improved. I'm grateful to 'Rainmaker' for his well-reasoned arguments for encouraging me to take a second look at the company.
Mallett has a market capitalisation of £10.7m at 80p. Based on the accounts for the six months to the end of June 2013 it has inventory of £11.46m, receivables of £5.2m and cash of £0.95m. Current liabilities are £6m and non-current liabilities (all pension deficit) are £1.5m. Thus NCAV is £10m, which is less than MCap. However one of the facts that has changed is that a freehold building has been sold with planning permission for flats. When the receipts come in, the cash on the BS will be boosted by around £2.5m. This helps alleviate worries over the 'flexibility' in valuing such slippery items as furniture. Furthermore Mallett holds a 23.75% stake in a prestigious annual antique fair, Masterpiece, which had a successful fourth year with visitor numbers rising by 20% to 34,000 this year spread over 8 days. While Mallett's share of the profits is a mere £85,000 (2011: £82,000) this business has potential to provide a low-capital-input-with-high-upfront-receipt-of-cash income for many years to come (Rainmaker points to high operational leverage given the fixed cost nature of the business; negative cash conversion cycle; absence of bad debt risk; and 'toll-gate' characteristics). Once established as an annual fixture there are good reasons to think that a business like this has a quality franchise (If it is well managed).
Which brings me to reasons for cautious optimism concerning managerial competence and shareholder orientation. Peter Gyllenhammar, the activist investor, has taken more than 29% of the equity and has entered discussions with the managers on matters of importance to shareholders (he withdrew an attempt to get elected to the Board in March 2013). Whether his suggestions/pressure have stimulated pro-shareholder action or whether the senior team woke from their five year slumber (while asleep they draw millions in remuneration and blamed the economic climate for costs exceeding revenue) and decided spontaneously to take action we do not know. But action has been taken:
(a) Director remuneration totalled £0.58 in 2012, down from £759,000 in 2011 (It was over £1m in 2008 when large losses were made!). No executive is receiving more than £160,000.
(b) The expensive showroom in New Bond Street has been vacated after a sale of the lease. By moving to Ely House the company saves £0.7m in costs per year and increases square footage by 50%. Given that losses last year were only around £0.3m a rental saving of £0.7m is highly significant. Note also that turnover appears to be unaffected by the lowered property costs.
(c) A plan is under way (or is it? – the latest interims suggest that the plan may be 'reviewed') to 'reduce substantially fixed costs in New York by subletting two floors of the Madison Avenue showroom' The sublet rental income is expected to equal the rent currently being paid on the whole building. Background: the USA operations lost £1.2m in 2011 and £275,000 in 2012
(d) The FD is in the process of leaving (the date has recently been put back to December 2013. He will not be replaced. This should save over £100,000 per year - significant for such a small company. I agree that company of this size needs merely a competent accountant rather than a finance director.
(e) Over the past five years staff cost have fallen from £2.4m to £1.8m while numbers have decreased from 53 to 35. Turnover has dropped as well, but the staff reduction remains an indicator of managers cutting cloth according to their means.
(f) The loss-making JHBA subsidiary has been sold off. More recognition that unprofitable activities should not be allowed to continue?
(g) I'm led to believe that the recent liquidation of major competitors has left Mallett as the 'go-to' place to deal in high-value antiques. Perhaps they can develop an economic franchise on the back of this to allow acceptable ROCE?
(h) In the last three years they have built up the showroom offering by displaying as much antiques held on assignment rather than owned by Mallett. This smart: low cash requirements but exploiting extraordinary resources of name, retail position and expertise
(i) An innovation: a website for selling antiques
(j) Peter Gyllenhammar says that the company has "superb reputation, skills and infrastructure". Respected in the market place but managers promoted beyond their competence to run a business for shareholder wealth maximisation?
(k) Managers have made efforts to establish the company in China, Brazil and other developing economies.

Where might share returns come from?
The four possible areas of improvement for NCAV firms are:
1. Earning power is lifted due either the industry economics improving, e.g. exit by competitors improves the returns for the survivors, or due to managerial change when a spirit of revival emerges or they are replaced. In the case of Mallett we have some evidence of both these effects being underway. Competitors have gone to the wall and (under pressure) the directors are cutting costs.
2. A sale or merger. A possibility that is in the wings, but I cannot see it yet.
3. Complete or partial liquidation. Highly unlikely given the potential recovery in antiques, the strong balance sheet and the potential of Masterpiece.

Questions
1. Is the managerial conversion to shareholder wealth pursuit real, imagined or put on for show?
2. How valuable is Masterpiece?
3. Will Gyllenhammar encourage a greater proportion of professional managers (rather than antique experts) in the Boardroom?
4. How cyclical is the antiques business? Will the economic upturn result in significantly greater sales?
5. Director shareholdings are at laughable levels – are their interests really aligned with shareholders?
6. Very high levels of receivables outstanding, for example at year end 2012 those outstanding for more than 120 days were over £1m. Do these well-healed customers not pay on time? If not, why not? Is there a danger of high bad debt?

[rainmaker] 08/11/2013 13:11

Guys-I've spotted sporadic selling in thinly traded Value shares, Mallett(MAE) and Titon Holdings(TON) in recent weeks. I have to remind all would be Stockmarket Value Investors that there are frequently long periods of inactivity with this style of investing and you have to have the mental fortitude or toughness to cope with them. It's often a battle of wills between you and the "Market" to realise a profit on those £1 coins you bought for 50 pence pieces-sometimes this will involve taking full advantage of lower prices.You need faith,self belief and confidence and this comes with knowledge and experience together with a strong work ethic to really research Companies properly.All Investors would be well served spending less time watching a Company's share price and more time researching the underlying business,it's products and/or services, it's markets and it's customers together with it's growth outlook.

IMHO both Mallett(MAE) and Titon(TON) have excellent prospects, are trading profitably yet are on offer at less than their minimum liquidation value, at prices that would never be available to a buyer in the private market.Tangible NAV are 107p and 78p respectively but there are also important intangible assets thrown in for free-ie brands and patents. Titon's markets of supplying window and door fittings to Local Authorities and Ventilation Systems to private homes has an exciting future-look at the recent figures for Local Authority new build registrations and UK housing starts then look at their patented energy efficient ventilation systems. Also consider improvements made to the operating efficiency of the business in recent years-large cost cutting measures in the UK and the opening of their first overseas manufacturing base in South Korea in 2008 with costs half those in the UK.

Mallett(MAE)currently 75/78p have liquid assets less all liabilities of 72p a share but will receive a further 19p a share from the agreed sale of a property in the next few months and have mentioned paying a special dividend-I would expect in the region of 8p/12p-that's a 10/15% return without any appreciation in the share price or a further dividend being paid and the Company has already stated that it expects to return to paying a dividend once conditions allow.There's great growth potential in China, now the worlds largest market for Arts and Antiques where the Company has had a concerted marketing drive in recent years.IMHO there's also a realistic prospect of a upward revaluation of their large £10mln inventory- this was written down in value by over £3mln in 2009-it's a natural consequence, with finite supply, as buyers return and their markets recover-note exceptional returns last year from Masterpiece and the doubling of turnover in New York in the first half.

DYOR etc
regards

[spob] 11/10/2013 10:04

now now poacher, don't be nasty :)

[poacher45] 11/10/2013 09:57

Just for the record apparently the minimum stand at the antiques show costs £8000. Yes they had record attendance but on a quick survey of 20 dealers afterwards only 4 had made a profit. Rainmaker how about a comment on Bloomsbury I think you made a right bloomer on that one.

[rainmaker] 11/10/2013 02:04

Hi Glen-I keep meaning to add a comment to your post.There's certainly a great deal to analyse in Mallett-the underlying business, trading history, competitors and markets, so you and your students will have been busy.There's a great deal to think about.

I don't think there's any doubt that the Directors have their priorities, to put it delicately.I both understand and respect your decision not to invest. Sometime ago, I had the opportunity to buy shares in Jeweller,Theo Fennell(TFL) but declined before I even started my "in depth" investigation because I didn't like the Directors resetting their share options-they reduced the excise price. Of course, that's all perfectly legal but I didn't approve so I won't invest at any price.

There's a couple of Warren Buffett quotes that spring to mind for Mallett.The first is a corruption of the "not all earnings are created equal" quote and secondly his advice about picking a business. In the first quote, the word "earnings" are interchangeable with the word "businesses"IMHO Mallett's BOD are guilty of complacency but no more.Mallett dominant position as reputedly the worlds largest antiques dealer unquestionably have strong competitive advantages at the very top end of market. This hand has been strengthened even further in recent years with the demise two major competitors in 2009-Partridge Fine Arts, their largest direct competitor located just next door but one and John Hobbs, surely their biggest competitor in Mallett's forte of English and Continental seventeenth and eighteenth century period furniture. This loss of competition at the very top of the market has important ramifications for Mallett's business, as it means not just greater market share but also bigger profit margins through the greater bargaining power in both the buying and selling of exceptional pieces,they obtain through reduced competition. Structural changes in their industry will only increase Mallett's dominance, as the strongest get even stronger and the weak go to the wall.In recent decades there has been a substantial reduction in fresh stock coming to market through the drying up of supply, as prohibitively expensive to run,Country estates and Homes have largely been sold off along with their contents. Obviously there're isn't going to more antiques being created so supply has dwindled and the natural consequence of this is higher prices. There's also terrific business to done in China now the worlds largest global market for arts and antiques where Mallett have been focussing their marketing drive in recent years so I expect to see excellent business from this region.Mallett reduced their overheads by some £1.2mln in 2011 and last year more than halved their showroom costs in London, saving £600k pa, by relocating to their current address at Ely House,Dover Street(for anyone interested in visiting, the nearest tube is Green Park, just a short walk away), The Company now trades profitably, having made £200k in the first half of the current year.

Leaving aside the attributes of the Masterpiece exhibition that make it a terrific business-business franchise, toll gate business,negative conversion cycle, high scalability, risk aversion etc etc etc perhaps the best thing Investors could do is to obtain a copy of their latest accounts which are available, for a small fee, on line and then do some very simple calculations, as follows-


Last year there were approximately 28,000 visitors paying £20 a ticket so that's £560,000.If you subtract that from the turnover, I think around £7.5mln and divide by the number of stands-160, if I remember correctly, so then you can calculate, conservatively ignoring any sqm price increases, the average revenue per stand and then various profit figures assuming higher stand sales of 170, 180 etc etc(and no increase in admission numbers which this year were 20% up at 34,000) and determine the large effect on profitability. In 2012, there was a widely quoted figure in various respected journals indirectly quoting the Chairman that there had been 300 "applications" for stands. The worlds largest arts and antiques exhibition is TEFAT held in Maastricht each year, has some 240 stands or more despite an unpopular sales tax and poor infrastructure. IMHO mouthwatering.

AIMHO, DYOR

regards

[baner] 27/8/2013 08:07

Strange1

Alternative premises, yes - but not for the actual retail business. We talk a £50k or so work shop here!

[strange1] 24/8/2013 14:45

Dont expect to see that cash ever distributed -presumably this simply buys more time to wait and see if the market returns and remembering they need to find alternative premises so underlying expenses will increase

[spob] 23/8/2013 17:26

The Finance director has replied to my email

He said ...

" I can confirm that none of the directors of Mallett plc are in any way connected with Bencameron Limited "

Micheal Smyth-Osbourne

[spob] 23/8/2013 16:11

I've sent an email to Mallett. Will let you know if i get a reply.

[spob] 23/8/2013 15:59

www.rba.co.uk/wordpress/2011/04/20/company-searches-in-the-british-virgin-islands/

[spob] 23/8/2013 15:55

Bencameron is based in the Virgin Islands

Would companies house have their accounts, or would I have to look elsewhere ?

[spob] 23/8/2013 15:49

Is Bencameron Ltd linked to any of the directors in any way ?

Could Mallett have acheived a better price ?


Not making accusations, just thinking about it

[baner] 23/8/2013 15:44

more money for the management to spend on bad investments and remuneration........no real committment to pay out proceeds from Clapham to the owners of the Company. dangerous, given the track record of this team.very dangerous.

[elmfield] 15/8/2013 19:01

Not much to get excited about,

[baner] 15/8/2013 12:34

another set of tired performance from the Mallett camp - no dividend, virtually no profit - but a fat fee to the chairman while the executives take out generous remuneration incl bonuses and stock options. when will the major shareholders sort this out properly ?

we also read that the CFO is now staying a further 6 months, that the New York premises will no longer be consolidated etc - where is the long term strategy and stability in this company? stop wobbling - and start to perform !

[rainmaker] 07/8/2013 13:37

Thanks Baner-I'm going to refrain from passing comment on the Board, lol. You need a sense of humour to be an Investor.I can't exactly reconcile the figures but checking the segmental analysis of continued operations in the annual report, total assets for Hatfields are listed at £301k, some years ago they were £1.5mln but I think there was a large writedown in 2009.

I'm not sure about a writedown on their New York premise. I want to research further,I think there're located in Madison Avenue which, like Mallett's old address in New Bond Street, is one of the worlds highest rent streets. Against a generally very weak rental market, rents and prices in NBS continued to rise throughout the recession.

Anyway I think that unlike the "Market" we both have a good grasp on the value of 49 Clapham High Street so roll on the interims and lets see how much shareholder friendlier they have become.

best wishes

[baner] 06/8/2013 22:22

rainmaker

i wish you were right but you are not. what you refer to is likely to be the investment in James Harvey British Art. hopefully they will recoup the book value of this, but i fear they will not.

the 49 CHS property is in the books at around £2m - whether you like it or not!

further i believe you should get accustomed to the idea that Mallett will face a substantial book loss on their New York premises.

remember this is a very sad board/management team - with no real aim to rebuild shareholders values but rather to enrich themselves. as long as Lord D et al are in charge i thus suggest you also deduct a fair amount of negative goodwill related to their lack of interest in looking after the best interest of shareholders.

cheers

B.