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|profdoc: Shareholders of Wensum,
We must unite to prevent the reverse takeover of our company by Crown East.
Wensum may not be profitable at present, but at least it has a balance sheet fit to withstand the turmoil of a recession. It also has the capacity to maintain dividends. If it combined with Crown East both the balance sheet and the dividend capacity will be crippled.
Merger with a successful rival might make sense, but merger with what some might call the 'living-dead' Crown East could be very dangerous for Wensum, for the following two reasons:
1. Wensum is making losses. This is no time to be adding Crown East's £2m or so of annual losses to this. The company could be destroyed. The new management are hopeful of achieving synergies; but will the company survive through to the period of supposed synergistic savings?
2. The real killer in the merger proposal is in the balance sheet of Crown East. It has virtually no net assets, a large (and fluctuating) pension deficit and an extraordinary amount of debt. In the event of a merger Wensum cash will be siphoned off to support the debts of Crown East to keep it alive for a few more months.
There is a better way. Wensum should be seen as consisting of two businesses. The first, and most important, is the £2m or so of cash. This should be separated from the other business (i.e. corporatewear). Two financially separate divisions should be created.
The corporatewear division has enough resources in the form of (a) swollen inventories, (b) swollen debtors (use factoring) to service its customers and eventually return to profit. If profits are not attainable then tough love is required. The corporatewear division should not be permitted gradually drain away the value in the cash division. Corporatewear either starts making profits or it will be sold to a competitor (the 'list' being the most valuable asset), or, in a worst case, it will be closed down (not something I say lightly given the employee pain this will induce we must work hard to avoid this).
The improved management of inventory and debtors will probably permit survival while restructuring over a period of 2-3 years.
The cash accumulated by Wensum (most of which has already been squandered, but at least we can save the £2m) has until now been invested at interest rates of 5% or less. This must change. Once these funds are recognised as the main driving force behind the share price (and not a textile business with constant headwinds) this money must be invested effectively to yield at least 8-10%. Over the next two years there will be many opportunities to build a soundly-based portfolio of shares and other investments. Remember you do not have to make it back the way you lost it! There are other industries with strong economic structures, offering good economic franchises.
So, how do we get from the current downward glidepath to the New Wensum?
1. First the shareholders must rally to elect a new slate of directors. There is surely enough talent amongst us to elect a three non-executives with an executive chairman.
2. The new board must quickly appoint a new managing director and finance director for the corporatewear division. We need a team who can, (a) win the confidence of customers to the point where business is won at rates that produce profits for shareholders, not just shopfloor busyness, and (b) who can devise and employ accounting systems that allow the board to know where in the business value is created does product line X or customer X produce a rate of return on invested capital greater than the required rate of return for the level of risk (in Wensum's case 9% per annum).
3. We need to appoint a chief investment officer for the cash division (or is that the 'portfolio division'). This role may be undertaken by the executive chairman, if carefully selected.
So, vote against the reverse takeover.
Please write to me (firstname.lastname@example.org) if you would like to join me in calling for an extraordinary general meeting to elect a new Board we need 10% of shareholders to support and EGM demand.
Also write to me if you would like to put yourself forward as a potential director.
Please pass on this message to any Wensum shareholders you know.
Professor Glen Arnold
(Professor of Finance and author of The Financial Times Guide to Investing, The Financial Times Guide to Value Investing (2009), Valuegrowth Investing, Corporate Financial Management and Value-based Management (Editor).|
"Wensum Corporate, based in Gatwick, designs and manages corporate clothing
projects for leading companies in the leisure, retail and financial services
sectors. Wensum Clothing, our men's tailoring business based in Norwich, manufactures own -label suits, mainly for premium menswear retailers in London."
Annual report is here; http://www.wensum.co.uk/2004_results/Wensum%202004.pdf
This looks very good value given the profitability (to grow?), asset backing and huge 9% yield.
Market cap is 5.54M at current share price of 71p and 7.8M shares in issue
After tax profit of 560K which is eps of 7.2p (7.05p) on turnover of 14.1M (13.06M)
NTAV = 5.4M
Net current assets = 3.5M
Freeholds worth 750K (last valued 1988)
No pension deficit.
The company is paying a stonking 6.2p dividend which they expect to maintain out of their strong positive cash flow. Thats a yield of 8.7%.
Outlook predicts growth for this year.
"In spite of the first-half difficulties, prospects for the full year are encouraging. The strong second-half performance expected from Wensum Corporate is likely to recoup any first-half shortfall, and group profits for the year should be comfortably ahead of 2003/4."
A director bought 40K at 83.75p last month (he did collect a 4.2p dividend though). Directors own about 35% of the company.|
Wensum share price data is direct from the London Stock Exchange