600 Share Discussion Threads

[kazoom] 20/7/2017 17:50

But CJohn the £10.8m is by definition the CURRENT value of the future realisable assts (and that on conservative assumptions) so if you want to apply a DCF to it, you should do so on the FUTURE value not current.

Your inheritance analogy I don't think to be honest is particularly analogous so I'll skip over it.

I'm comfortable that this asset is a measurable tangible thing that can be taken account of, you see it as a liability - other must make up their own mind.

What is of more interest to me though is how you value the business to make it seem investible if you regard the pension surplus as a liability - you must have a massively more positive asessment of the worth of the operational business than I do.
I really hope you are right in that!

Anyway with this in mind, the light bulb moment that Buywell's point gave me was not that I should disregard the pension asset, but that a sum of parts valuation would be much more insightful than the enterprise value model I was looking at.

I'll come back to that ......

[rburtn] 20/7/2017 12:37

I don't profess to be any kind of expert on the, deliberately IMV, black arts of pension fund accountancy but if a pension fund is in deficit, shareholders lose out due to the need to top up with additional contributions. By the same token, if a company fund is in surplus, then surely a pension fund holiday - unless it is contracted with fixed proportion to that of employees -is distributable, or can be re-invested in the business?

[cjohn] 20/7/2017 11:25

I haven't bought SIXH because of the pension situation and it's inflating of balance sheet with phantom assets. The pension situation ia a negative, as I've explained already.

What is of interest is the pattern of real profit, creating an increase in tangible asset value. Now standing at around 6m.

Buywell, you are wrong. The company made a clear profit after subtracting the accounting gains on the pension scheme. Look at the figure for adjusted profits.

May I suggest you also go through recent balance sheets and subtract all intangibles, the pension scheme surplus and associated deferred tax laibilities etc. You will then see a clear increase in shareholder equity over the last two years.


Operational cash generation in the last half was very promising and there is likely to be cash inflow from working capital changes in the current half in addition.

[kazoom] 19/7/2017 11:42

Hi buywell, apologies, I thought you were being facetious. To be clear NO they cannot spend the pension surplus, but they do as you point out earn notional interest on it. (In fact this interest is calculated on the much higher IAS19 calculation of the surplus £52.5m as opposed to the technical provisions surplus of £10.8m)

I think I would need to go and sit in a darkened room for a few hours to see whether I should be looking at the Enterprise Value in a different way therefore.

Bottom line though is I place a value to the company on this surplus, others do not.

[buywell3] 19/7/2017 07:36

So you are saying they could

I don't think that is correct as trustees have to act in the best interest of the pensioners they are working for

How many of the are there ?

''A credit of £0.65m (2016: credit of £0.94m) is included as a result of the work by the Trustees of the UK pension scheme and the Group in reducing pension liabilities.

A number of transactions took place over the prior and current year including a pension increase exchange, commutation of small pensions and other flexible retirement options. These are now an integral part of the flexible offer to members at retirement. These resulted in actuarial adjustments to the pension liabilities, which are processed through the Consolidated Income Statement.

In addition, as a result of the pension scheme being in surplus on an accounting basis, a credit of £1.45m (2016:credit of £1.17m) is recorded in financial income. No cash was paid to or received from the scheme in respect of these transactions.''

So re the £1.45M , without that being recorded in the financial income , there would have been no profit made .

[kazoom] 18/7/2017 19:53

If you need to ask that question buywell you clearly haven't been paying attention.

Is there something in particular you'd like them to buy?

[buywell3] 18/7/2017 19:37

I ask again can SIXH get the trustees to use the cash to buy something ?

[kazoom] 18/7/2017 18:30

But we already know the CURRENT discounted value of the future realisable asset - £10.8m as per the conservative technical provisions analysis.

Why you would feel the need to apply a second discounting to that escapes me.

But given that even the pension trustees are comfortable with the idea that the asset value will outperform the assumptions, I suspect that even if you double discounted this you'd still come up with a positive number.

[rburtn] 18/7/2017 17:34

My problem with sixh is that it is really two companies. One is an engineer in which it is hard work and difficult to make money and in which I have a tiny measure of control. The other is a pension fund from which making money is normally easy and highly remunerative for its managers. The control of the latter is opaque. Perhaps if we knew something of the management of the pension fund of ppix, we might see the logic of that purchase. Somehow, the value of sixh as an IHT saving vehicle has got to be used to incentivise the controlling minds of this pair of companies so that the engineer can at least match the returns on offer to those managing the pension fund. The words 'expansion' have crept into the sixh lexicon of late but I fear that if precedent is anything to go by, any discharge of pension fund liability is going to punish the poor old sixh shareholder yet again. This is despite its surplus and value to the acquirer as a cash cow. It seems a surplus is irrelevant until it has to be bulked up to persuade someone to take it off the company's hands to make it adequate. On the calculations above, any meaningful surplus - as the existing one is rated worthless - would have to be unimaginably too expensive for the company. It doesn't make much sense as anything other than a potential rip-off.

[buywell3] 18/7/2017 16:21

So can the company spend it now?

[cjohn] 18/7/2017 09:00

What's the CURRENT value of of a posible pension surplus - after all pensioners paid off - in say 60 years' time.

Use a reasonable cost of capital -say 10% - as the discount rate. 10% annual discount over 60 years produces a PRESENT value of near enough zero.

In other words, it's not worth bothering with.

[kazoom] 17/7/2017 12:02

Not likely CJohn with asset returns outstripping inflation (and surplus assets moreso).

[cjohn] 16/7/2017 19:20

And the present value of any such future possible surplus would be close to zero.

[cjohn] 14/7/2017 10:11

Hi Kazoom, Yes, I would certainly be happy with a buy-out and like you, I do believe this position could be reached in the future.

Yes, Carrick's right.. When all the current and future pensioners have died off and there are no further liabilites, then there may be a surplus left over. But this would obviously be in decades' time, when I will likely be dead and you too, unless you're a precocious adolescent.



all the best

CJohn

[buywell3] 14/7/2017 08:46

Update on ProPhotonix out this morning

Anyone know who the large customer was ?

''partially offset by a decrease in sales to one large customer that converted to an alternate technology in the second quarter of 2017. ''

[ntv] 13/7/2017 14:38

guessing the traders are selling it down
could be a nice buying op coming up

[kazoom] 13/7/2017 12:37

I am not for one minute trying to suggest that release of the pension fund surplus is easy or likely to happen in the foreseeable , but there are ways and means, including scheme mergers which do happen (although merging a UK & US scheme I think would be virtually impossible).

Even though if you consider it as a 50 year bonds that accrues rather than pays it's coupon, I'm certainly very comfortable to consider the scheme surplus as an asset. (To be honest if you took the flipside and actually considered it a liability then the shares would not look at all cheap.

It's certainly true that on a "full buyout" basis (ie effectively if you bought all of the current and defered pensioners annuities) the scheme is in deficit (£51m march 2014 and probably £15m or better March 2017).

Something that may give you comfort, CJohn, (but that gives me pause for thought) is that the company have stated a number of times over the last few years that they and the trustees are committed "to pursue opportunities to secure a full or partial buy-out of UK pension liabilities when conditions permit."

The underlined part of the statement is wishy washy, but bear in mind that the scheme could plausibly be in surplus even on a full buyout basis in the next two years, that could be on the cards.

(Personally I'd be extremly unhappy if they effectively gave away ALL of the valuable assets just to boost the profits of an insurance company - so I'd be looking for some more rational compromise).

Anyway there is slightly conflicting (and more comforting to me) view from Neil Carrick in the recent interview Hastings.

Carrick says that this is obviously by far preferable to a deficit situation endured by many company's, but adds “it isn't something that the company can now tangibly benefit from or in the foreseeable future.

At some point though it will come back to the company, but that is more likely to be many years down the line”.

Which kind of talks to my "long bond" analogy, but also makes clear to me that he recognises this is an asset of value that should not just be given away for the sake of simplification.

Anyway enough of all this, far more interesting things happening in the market atm.

[c1d] 12/7/2017 12:37

Hi CJohn, I don't disagree with any of your points but I do believe that they apply even more strongly to most other companies with a defined benefit scheme.

[cjohn] 12/7/2017 12:23

Hi C1D,

You are right. The pension surplus will not accrue to the company, unless the agreement of all current and future pensioners is obtained to take a lump sum now, in lieu of future pension. (This would have to be at a major premium to currently accounted liabilities, given each pensioner's uncertainty about his/her lifespan, future inflation etc) It will not happen and does not! (Not even after a merger!)

The UK pension schemes, though in surplus on a technical provisions basis, is still a negative.

-It must be administered, which costs money. (And some management time, to liaise with trustees etc)
-There is the risk that it will go into déficit, and would then require cash payments.
- It puts off potential acquirers, because of its vast size and the risk I've just described.

[cjohn] 12/7/2017 12:14

On a more positive note, operational cash flow before working capital changes was 2 million in the second half. We might expect this figure to be even better in the first half of the current year given the guidance on the order book. We might also see a reversal of the decrease in payables of the last couple of years to add to cash flow. So we might have some serious cash generation, at last, assuming capex is subdued and restructuring is finished, as the report suggests.

[cjohn] 12/7/2017 12:10

Hi Kazoom, with regard to my comment that you need to ADD, rather than subtract, I think you may have misunderstood what I was getting at. You are envisaging the possiblity in which the surplus - ie after paying off all the current and future pensioners - might accrue to the company. I'm saying that, in that case, you need to use a more demanding calculation of the liabilites. You need, at the very least, to calculate on a buy out basis. And on that basis, the pension schemes are still in déficit. So you would need to ADD that déficit to obtain the current EV. (The pension déficit is a form of debt.)

So if the pension scheme assets conitnued to perform well, in spite of an increase in the discount rate, the schemes might go into surplus on a buy out basis. I accept that.

What will the company then do? I sincerely hope they purchase insurance for all their pensioners ASAP and get rid of the millstone. That is certainly what they've said they'll do, which shows good sense. I believe this would be a very positive development.

Even when the pension schemes are in surplus, they are a negative. After all, you've seen the humungous size of the schemes. They obviously have the potential to fall into déficit. At which point the company, would then have to make recovery payments. (As you know, in view of SIXH's inability until recently to generate postive cash, this would not be a positive development.)

You've presented the hypothetical case of a merger of pension schemes in the event of a take over by another company. I don't think that can be done! The pesnion scheme assets are specific to each scheme! (Think about SIXH itself: part of the the UK surplus can't be used to cancel out the US déficit.)

Best regards CJohn

[c1d] 12/7/2017 12:09

NTV, I am not a pensions expert but have done a little research and it seems to me there is no way of returning anything to the company from the pension scheme for the foreseeable future and probably longer.

However, I do think there is an upside as the pension position means that the company is not having to pay contributions into the scheme whereas most other companies are having to pay significant amounts - this gives SIXH a relative cash flow advantage.

[ntv] 12/7/2017 11:54

these do seem cheap but it is the level of gearing that holds it back
conversion of loan stock would help but unlikely to happen as they are main shareholders and are enjoying the income
holding a few and probably have to wait for the next update results to see if gearing has gone down
a rare beast with a pension surplus, now if they could unlock some of the value there it would help gearing.
but guess everyone has looked at that side of the story but found no way of doing so.

[hastings] 10/7/2017 17:46

Write up as previously mentioned, hopefully of some interest.