600 Share Discussion Threads

[kazoom] 31/8/2017 15:23

On reflection though - I think the price reaction overstated the impact of the sale, so I've decided now to sell.

Whilst I do agree there is further value here my concern is generally, given the limited interest this minnow gets , is how long it may take to "out" that value.

So even with the hideous spread, booking a 30% gain on my small position over 5 months is something I've gone for.

Back on the watch list for me.

GLA

[kazoom] 31/8/2017 15:09

Yes a good thing imho.

They originally acquired the PPIX stake in the hope of some form of strategic alliance, but when it became clear that wasn't going to happen they put it on the accounts as an investment.

As an investment it had appreciated in value nicely (hence the £1m profit they state) but threw off no cash. Who knows whether it would have / will continue to appreciate in value.

As NTV comments the cash proceeds will pay down debt resulting in P&L improvements and/or more flexibility.

Just a curiosity of accounting for those interested :

Although they will recognise a £1m profit on the deal, the increased value of PPIX was already on the balance sheet (the revaluation was a non-P&L item.

So although it will result in a one off P&L gain - that's largely artificial and all that has actually happened is that they have liquidised the asset.

No, I wonder if there are any other non-core assets they could do that to?

No No lets not go there ;-0

[ntv] 31/8/2017 14:40

paying down debt will cut the interest and therefore increase profits
looks like they pay 3.5% on american borrowings
don't think they will be able to pay the loan stock, that pays an interest rate of 8%
that would be £120k

[hastings] 31/8/2017 14:35

Happy enough with the news and given previous comments from the FD on trading there should be more upside to come.

[ntv] 31/8/2017 14:25

price is not bad considering the goings on at ppix, pity they couldn't have sold a few into the market when the price spiked to 20p
cost borrowing is fairly high so it will make a decent dent in the finance costs

[my retirement fund] 31/8/2017 14:08

Buy the rumour sell the fact for me.

[my retirement fund] 31/8/2017 14:07

Disposal not going to be greatly long term earnings enhancing. Bit of a disappointing price too. Imo.

[my retirement fund] 31/8/2017 12:08

Very pleased to sell into this mini rally

[kazoom] 25/8/2017 21:51

I think you might be missing the (or a) point somewhat.

Certainly the lack of any payments into the pension fund is a a legitimate "benefit", but one that is already factored into the financials so in no way is an incremental benefit to the standard financial metrics.

The (arguably) more important point though is that the balance sheet and to a slightly lesser extent the P&L are boosted by the pension fund surplus / increases in it's value.

If you in fact believe that this benefit is unlikely in anyway to be realised by shareholders[*] - then the statutory balance sheet & P&L are overstated and would need to be adjusted down when considering the value of the business.

* This is essentially CJohn's view and whilst I personally don't fundamentally agree with it, it is a perfectly valid position to take - everyone needs to take their own view on how they value companies.

[rburtn] 25/8/2017 21:33

So, I've not missed the point, whether re-invested in the company or paid in divi's to the shareholders, it adds value every year that the holiday is available to be taken. It just isn't available for a quick killing.

[rhomboid] 25/8/2017 19:56

Well I've edged back in here, I think we are likely entering into a period when interest rates & bond yields start to increase, so the pension scheme will become a neutral to positive factor rather than a negative. Orders were up 41% at the Y/E so I'm hoping for a positive trading statement pre Interims in November🤞

[kazoom] 25/8/2017 19:27

Yes rburtn - I think you are. ;-)

They are already not making contributions to the scheme, so taking that 'benefit' already.

But the surplus is still increasing (and very likely imho to continue to do so), this finds it's way onto the balance by a combination of the P&L and non-P&L items.

The debate that we've been having is to whether this "asset" actually has any value to shareholders and if there is any likelihood of it being converted into "cash" and if so over what time horizon.

[rburtn] 25/8/2017 08:15

Am I missing a point here? If the fund is in surplus then the company can take a contributions holiday and give it to shareholders - isn't that so?

[kazoom] 24/8/2017 22:25

Hi CJohn - hope you enjoying the beach!

I too have been travelling so only keeping superficially up with everything.

Anyway you asked a simple question : "
So what I would be interested in is an estimate by Kazoom or Buywell of what they think is the probability of any money coming back to SIXH from the current technical provisions surplus."

Simple questions, obviously deserve complex answers ;-)

> 1-2 Years : No chance. [<5%]
> 3-5 Years : Modest [say 20%] chance for an indirect return. (IE some kind of M&A activity that places a value on the surplus - possibly be means of a pensions merger).
> 3-20 Years : Substantial chance [>60%] that they buy-out or insure all remaining liability risks and release the surplus to the company. This to me is the worst option for shareholders, but the longer they wait to do it the bigger the potential return IMHO as even on conservative estimates the surplus should grow.
> 20-30+ Years : Definite [100%] If none of the above options have triggered then at some point the remaining liabilities versus the assets will be so stark that a realisation event (eg buyout of remaining liabilities) becomes inevitable.

The last option is effectively my "long bond" model and would probably be the best for shareholders, but is clearly fraught with lots of regulatory / policy risk.

So I guess where you were coming from is to ask is this a realisable asset? Realistically in the near term NO. But imho that does not make it worthless.

When I get back I will eventually return to the sum of parts valuation I talked about which will hopefully illustrate why I think you need to ascribe some value to this asset in order to think this is a good investment. (But of course if the underlying business is actually worth more thank I think I will be delighted)

[rhomboid] 22/8/2017 22:16

Interesting analysis john

Fwiw Carclo,Molins & Aeria are my pension deficit value plays as I agree with your logic

[dan_the_epic] 22/8/2017 21:47

Interesting CJohn; I've been reading here just for background for a while.

If you think pension defs are a source of misvaluation, then might be worth having a scan at ALU.

[cjohn] 22/8/2017 09:23

Hi Buywell,

If you said SUN to me, I'd say MOON to you. All best.


This is a quick one as I'm on the beach. I want to say a word about pension DEFICITS. I regard pension déficits as a potential source of misvaluation, and hence a potential buying opportunity. I've invested money on a couple of occasions in companies with large and apparently threatening pension déficits.

The last occasion was about 5 years ago in Trinity Mirror. A sloppy article in the FT suggested Trinity Mirror's pension déficit was unsustainable. This article was then bandied around like it was gospel. This pushed TNI's share price down to 25p, valuing the company at less than a single year's free cash flow. A no-brainer. The share price subsequently rose to above 200p. (5 years later, TNI's pension funds are still a thorn in its side and a constant drain on cash. But the company still exists. And will probably eventually pay off the déficit.)

(Of course, sometimes pension defcits are terminal.)


Regarding enterprise value and pension surpluses: the usual ítem that is subtracted from enterprise value is net cash. Obviously, it's much better to have 10m net cash than a 10m surplus on a technical provisions basis. That's a no-brainer. So a discount factor must be applied.

It's also better to have 10m net cash than a 10m surplus on a full buy out basis. Why? Because even with that surplus, the chance that the company will actually pull off a buy out is less than a 100% for reasons we've already discussed. Say you estimate the chances of the surplus coming back to the company in this situation is 30%,then it would make sense to subtract 3m from enterprise value, rather than 10m.


So what I would be interested in is an estimate by Kazoom or Buywell of what they think is the probability of any money coming back to SIXH from the current technical provisions surplus. My sense is that it's very slight. I admit before the long discussion with Kazoom I thought the chance was negligible. Now association with Kazoom's cheery optimism and dogged plugging away has had its effect and I'd be prepared to go as high as 5%.


All the best to both. Enjoy your holidays.

[buywell3] 09/8/2017 09:19

Well done guys

Perhaps you two should get together and form a new company to sort out/manage pension fund deficits for smaller cap companies (to begin with) by means of perhaps going through insurance companies / other financial institutions.

As you both recognise there is a very big market there and thus monies to be made if a formula to fix the problem ( even on a temporary basis eg 5 years ) so that companies
could present their balance sheets in a better light and thus get themselves bought.

CJohn if I said SUN to you would that mean you saw the light ( if you get my drift)



PS

Perhaps I could also be involved , say as CEO / ideas guy

[ntv] 08/8/2017 20:43

a move late in the day, any news?

[kazoom] 25/7/2017 22:40

LOL CJohn.

I will do my best to come back with the sum of parts view later this week before I go off on my hols; I think we might find more common ground there - or maybe even that I think you're overly bullish ;-)

[cjohn] 24/7/2017 15:17

Hi Kazoom, many thanks for your long and interesting posting. Withut generating acres of ink, I can't respond in depth to all your points.

1. Yes I do realise surpluses are listed on the balance sheet!! This doesn't of itself, make them in any real sense an asset. Bear in mind, that until a few years ago, pension déficits and surpluses were not listed on the balance sheet at all. (So according to you, suddenly in that year SIXH gained a huge asset. Wowee!) Clearly putting surpluses on the balance sheet leads to misunderstanding.


2. I do realise that pension trustees do not always demand balancing payments when a scheme is in déficit. I didn't actually want to go through every permutation...... You've done that for me. Thanks.

3. It's still an error to subtract the surplus from Enterprise value. No company looking to take over SIXH would use that definition of Enterprise value.


4.Regarding buying insurance. I wonder, if there will be a window of opportunity to buy insurance contracts for all pensioners. Or come to some other resolution. I do understand your point that waiting could produce a better resolution later: one that might allow a complete pay off and a surplus for the company. Of course, this is a tempting view. Of course, I'm tempted. I am human, after all. However, they'd be taking a pretty big risk in not going for a speedier resolution.


VALUATION: The huge assets and liabilities of the pension fund are a negative for the company. I believe the risks involved have put off potential acquirers over the years.

Regarding EV evaluation: there is obvious uncertainty, so quote a range for EV. This has two positives- firstly, it's more original than quoting a single figure. Secondly, it would alow us to agree and stop arguing.


Have a beer and a cheese sándwich for being so good-tempered and for getting in a couple of good digs. All the best. CJohn

[rburtn] 24/7/2017 09:13

I have mentioned before, I don't know all the ins and outs of pension fund legislation - no doubt I would be outraged as an outsider if I did. However, it is pretty clear to me that if this same pot of money was managed as an investment trust, neither the pensioners nor the management would have the slightest worry about its ability to exceed its obligations. Even a mediocre IT prospers significantly enough. I would be aghast if this company tried to raise what the pension industry regarded as a suitable 'insurance' payment when the significant surplus already is deemed inconsequential. In the meantime we probably continue with pension funds - in general - lending shares to shorters instead of moving out of poor performers, I do wonder why.

[kazoom] 20/7/2017 21:31

Oh and just one point re rburtn's point :

The rule about pension funding are deliberately (and imho rightly so) skewed in favour of the pensioners.

Any projected shortfall must be addressed via a plan to make it back which has to be agreed with the trustees (who do as I understand it have quite a bit of power in the event of a dispute).

On the other hand it is actually now very hard to recover any surplus (as we've discussed earlier here).

Whilst somewhat frustrating to investors this seems to me to be entirely appropriate. The principle reason that many funds are now in deficit is because back when ridiculously optimistic investment return assumptions were being made (see the endowment mortgage scandal) many companies took sustained "pension holidays", which when reality struck resulted in the big deficits we are now looking at in most cases.

I'd even go so far as to say that without that episode Defined Benefit pensions may well still be considered the norm - but that's a rant for another time and place ;-)