Finsbury Food Share Discussion Threads

[muangsing] 06/4/2012 08:32

Aleman re 612 thanks for the para.

I agree you are "still having problems with the logic of the method"

I myself use EV/(my version of underlying operating profit) which approx to EBIT and which is more prudent.

I don't understand your sentence "would more than doubling the debt ....."

CETERIS PARIBUS a low EV/(EBITDA or EBITD or EBIT) ratio is better than a high ratio and the lower the better.

Hence CETERIS PARIBUS, FIF on PGs ratio of 3.9, is better value than its peer group average of 6.6 and much better value than Devro at 9.3.

The only other food company I have looked at recently is ZTR, which if it maintained profits, would I THINK have a lower ratio than FIF but ZTR profits are likely to fall this year

Regards

[aleman] 06/4/2012 02:29

I found it encouraging because it was in line with my thoughts. My previous posts about cashflow assumed no growth to indicate how free cash generated could pay down the debt but I did suggest that cash would more likely get spent in other ways and debt fall less quickly or not at all. PG assume some reasonable investment in growth and let debt fall more slowly as fixed and working capital (capex and stocks) are increased, which absorbs some of the cash, to expand future turnover, earnings and cashflow and also pay a dividend (which will seem generous at current prices). The flipside of their slower debt reduction forecasts, though, is that their eps forecast is slightly higher than I would have gone for on just the reducing interest with no business growth.

You can debate whether the market will better reward the lower debt on no growth or the higher earnings with less debt reduction but I never thought they would just pay debt down. That was just a hypothetical on my part to optimise the free cashflow and illustrate the value added. PG have gone for moderate organic growth but I kind of get the feeling that an acquisition is looming. They say they have decided not to forecast a dividend now but it was a close call and it still might happen this year. It makes me think there is potential for a deal that may or may not happen. I'm probably adding 2+2 and getting 5 but that is my instinct. It has to be good news that they say there is a chance a dividend might still get paid this year as it indicates the potential postponement isn't on the grounds of any underperformance or bad news in the numbers but on some other grounds we can only guess at.

While I don't like to rely too much on a broker notes, because I have known them be way off the mark sometimes and have managed better results myself rare occasions, I do feel better because the potential dividend delay, if it occurs, may actually be for a positive reason. More than that, somebody else is seeing some potential for significant value accretion ahead for shareholders over only a few years.

MUANGSING may be interested to know they use EV assessment as well as discounted cashflow. EV/EBITDA was 3.9 compared to a peer group average of 6.6, based on year-end numbers which they now think have "good visibility" with only 3 months to go. I ask myself would more than doubling the debt to get closer to Devro's 9.3 really make FIF as good an investment as them? I'm still having problems with the logic of this method as I don't see how increasing debt would make them more attractive.

As well as liking the free cashflow analysis, I like the way they suggest a likely fall in net debt/EBITDA to 2.8 at the end of this year, from 3.1 at the interims and a peak of 4.6 in 2009, could cross an important threshold and bring a change of sentiment behind the stock. I think this threshold for improved sentiment should be higher for FIF and crossed already but it looks like some others may not be too far behind me.

In short, jp, I was confident enough to be overweight in FIF before the note. I now feel more confident, despite the thought that the dividend is potentially being delayed and there could soon be a small acquisition. I hope my confidence isn't complacency. I topped up yesterday. I now hold enough to make me nervous. But one famous investor said, if you are not nervous about your investment (i.e. see the possible downside), you are not doing it right.

[jpjp100] 05/4/2012 18:37

Aleman, Boffster

Do post your thoughts on the content of the broker note when you have had chance to digest please

[aleman] 05/4/2012 13:37

Cheers, jp. You can take it down, now.

[aleman] 04/4/2012 22:10

Some familiar ones for me in there, MUANGSING, but a few new ones, too. Thanks.

jp - Thanks for the offer but ADVFN messaging seems to be premium only - is that what you meant? Maybe you have an old or works email I can contact?

[sir rational] 04/4/2012 19:19

Aleman are you sure the truth is you do not want to get bad news?

[jpjp100] 04/4/2012 19:04

Aleman, if you message me your email addy, I will send you a copy in the morning

[muangsing] 04/4/2012 18:12

Boffster

I hope this doesn't sound like "unnecessary rabble" but in my opinion in your post 599, paras 1,2 and 3 are correct.

It is best for a company to have a low EV/underlying operating profit ratio, ie 5:1 is better than 10:1, on which incidentally FIF scores well, and then of course undertake further research.

Aleman

Even if you don't explicitly use the formula I think you use some of the elements of an EV model.

I think I have posted more the last few days here , than i have the previous 8 or 9 years I have been on advfn.

I don't think I have ever posted on advfn which shares i hold because it kinda makes you a hostage to fortune. As you say we all make some bad investments, me included, and I can't be bothered having some idiot slagging me off over a bad investment i made X years ago as tends to happen on advfn . Also i don't feel the need to boast about my successes.

As i said before I am not in the UK, though at least currently I have access to the internet , so i don't have access to my workings, but companies which are cheaper, than FIF on an EV/underlying operating profit basis (if i remember correctly ) include

ACHL, BBY, CCT, CKN, COST , CRE DTG, HVN, ISG
IRV , JD.,LOOK, , PAG,STAF ,

I'm not prepared to break a habit of a lifetime and say which, if any, I currently hold so it has to be a case of "caveat emptor". Particular care has to be taken of constuction companies where the cash they hold is in my opinion not "proper cash" since it is often payments in advance and indeed often they have negative current assets.

All the above companies have their weak points, there is of course no perfect risk free investment and certainly not at a reasonable price but if you are ever stuck for an investment they could be worthy of further investigation.

I'm going to try to reduce my posts now


Regards

[this_is_me] 04/4/2012 17:35

All you need to know is that the EPS last year was 7.3p, forecast to rise, and the debt is going down slightly. Better to reduce the debt than pay a dividend at present.

[aleman] 04/4/2012 16:51

No. It looked like a subscription service from the website. (I'm loath to register for anything due to the spam emails it brings, even if it's free.) Why do you ask?

[jpjp100] 04/4/2012 16:22

Aleman have you read the PG Broker note published 29 March?

[aleman] 04/4/2012 15:06

The PG summary numbers have appeared on the Proquote website. My instincts tell me they've delayed the dividend a year because they have a (small?) acquisition lined up. Although the dividend delay might be slightly disappointing news, the good news is the second dividend is a 1p increase as well, where I was only guessing at 0.5p. The 1p increase each year is indicative of just how much cash FIF can throw off now that deferred payments finish this year. These continue to look very cheap to me on a pretax profit,earnings, operating cashflow, and free cashflow basis.

Panmure Gordon BUY 02 Apr 2012
2011 5.84 7.07 - 190.00
2012 6.50 7.66 - 209.00
2013 7.05 8.49 1.00 215.00
2014 7.59 9.23 2.00 221.00

[aleman] 04/4/2012 14:29

MUANGSING - thanks again for a post of atypical length for you, and a generous attitude with a little humour. I would sum up by saying that I think assessing operating and free cashflow shows me firstly how sustainable the debt is, by operating cashflow/interest cover, and then how cheap the company is, by market cap to (expected) free cashflows after making allowances for the various risks like interest rates, sales cycles, commodities, pricing power, etc. I can understand how EVs might be more relevant if business ever hits the rocks due to the way it prices in all of the debt but I always seem to get a bit lost when I have attempted it in the past as it produced results I thought were a bit odd. I do not wish to write it off and would be interested to know what other companies you think look interesting on a EV methodology. I'll do some searches and read up on it again when I get some time. I would never rule out any valuation methodology. I try to take most of them into account in some way. Even simple reported pretax profit/market cap and eps are useful components of assessment, which I will still often refer to because everybody else does.

I'm not sure I was wrong to call CGS a safe steady plodder. I was thinking it looked a reasonable price for a company in the middle of its term as a cyclical company. Had it been carrying debt it would have been riskier due to cyclicality but the cash cushion and reasonable share price rating makes it look safe but dull with the prospect of moderate returns. I can;t say I understand it well as that takes time. I didn't say FIF was racy. I said it looks cheap, given the gearing and the market's overreaction to the debt, so the share return looks likely to be considerably greater. I think the risk is possibly greater and possibly not, but not enough to justify the price discount, after the business has shown itself to be surprisingly stable over 4 difficult years. I couldn't rule out being wrong on either count. I've been wrong in the past and will be wrong again in future. I just hope I can maintain the ratio of mistakes of the last 10 years, which have been very profitable, and preferably improve by learning from them - but there is an awful lot to learn in this business. I wish you, and all of us, good luck.

Good - the posts are getting shorter!

[jpjp100] 04/4/2012 09:13

markt, forget the past for a moment and work on the basis that you joined the Board in Sep 09

What would you have done / be doing differently from the current CEO (who was appointed at that time)?

[jpjp100] 04/4/2012 09:03

Panmure published a note about FIF on 29 March 2012

Maintained its BUY rating with a 40p 12 month target and an Adjusted Present Value model of 54p

Its a good note and you could do worse than register on the panmure site to get a copy

[muangsing] 04/4/2012 08:09

Aleman

Thanks for your reply.

Firstly I agree with virtually everything you say about FIF..

RE CGS you have delved into it more than I anticipated.

I will first repeat a few posts to show where I was attempting to come from

554 "If I'm overlooking some problem with the company I'd be grateful if anybody could point it out"


567 "I didn't suggest anyone should invest in CGS"

581 "even on a cash flow basis FIF is cheaper than CGS but by 6.04 to 7.84 rather than P/E basis of 3.75 to 11.5. Thats the main point I was trying to make"

I remember in 1 of your posts you said that nobody has ever been able to explain to you an EV model but I think the reason is evident in your post 596 "my biggest problem remains with the principle that you think I have to pay for all the debt now"

EV doesn't suggest you have to pay the debt down now BUT does suggest that 1 pound of debt is equivalent to 1 pound of equity and both should be added together to get the value of the company.(which I guess can be interpreted as similar to what you are saying)

If in effect, in your opinion, the debt should be excluded from the numerator than obviously you will disagree with the model and hence find it difficult to accept/follow

In my opinion some other investors probably follow a similar EV model which helps to explain why as you say in post 554 "its so cheap"

Even though you say you don't follow P/E ratios , although there are very few, if any, VIABLE companies cheaper than FIF on a P/E basis , there are quite a few cheaper on an EV basis (particularly in 1 sector, where as in any investment judgement has to be applied)

I think you are being a little unfair to CGS describing it as a "safe steady plodder". I'm sure that CGS didn't feel so when during the financial crisis orders fell by around 45% and I would hardly describe supplying cakes as racy.
I would like to put a smiley now , but don't know how to.

More specifically re FIF, and I hope this is not considered deramping since i have already pointed out that FIF on a cash flow basis of 6.04 is cheaper than CGS on 7.84, and additionally these points are hardly rocket science.

Firstly and obviously when your major customers are supermarkets , it is not the easiest business in which to increase or indeed even maintain margins. Also operational problems can occur. I remember about 10 years ago they issued a profit warning because and I paraphrase " heavy handed construction workers in Cardiff were putting too much of either icing or cream on the cakes in the Xmas rush"

In the recent interims it is worrying that whilst cake turnover increased from 64.2m to 76.4m , ie 19%, underlying operating profit fell by 12% from 1.45m to 1.27m. Maybe partly due to the costs of expanding LBE?

One interesting phrase was that LBE have had "3rd party distribution contract wins". Distributing 3rd party products could both be a good growth driver and reduce their overheads as a percentage.

Free form is continuing to do well , especially when turnover has increased by 16% on an underlying basis in the first 8 weeks of H2.

So as with any investment FIF has its pros and cons

Regards

Edit /Addition

Rereading your post, I also agree that future prospects are the most important consideration in an investment decision.

But of course its future prospects , at today's "value", and I believe an EV model which does not regard the"value" of a company as simply its stock market capitalisation is a better starting point.But I think we'll have to agree to disagree on that.

[aleman] 03/4/2012 17:17

MUANGSING - I have to admit it is hard to pin down exact comparisons between companies and work out which ratios to concentrate on and I thank you for your effort. I'm getting slightly better ratios for FIF on adjusted EBITDA (15.2/11.5) but then it depends on attitudes to depreciation and amortisation and adjustments to get underlying capex, tax and interest and I can get worse numbers on other ratios. I concede that CGS will grow faster (due to its cyclical nature?) this year to give a better ratio anyway and free cashflow is more than 2/1 and could push on to 3/1.

I am prepared not to worry too much about the ratios between them as my biggest problem remains with the principle that you think I have to pay for all the debt now whereas my view is assessing where companies will be in future and assume the business will pay the debt itself. I buy a company for its future performance and ratios rather than a snapshot of now. (A reason that I don't worry too much about goodwill and negative assets if cashflow looks set to be good - they will improve and I want to be in already when the market recognises. I don't mind waiting.)

CGS could buy back shares and increase its ROCE (and it probably should if it has no acquisition plans) to improve investor returns but it would be at serious cyclical risk if it got to FIF's levels. Part of FIF's attraction is the higher investor returns because it has actually shown recently that it can sustain quite high debt levels which means it can soon grow acquisitively. FIF is more akin to a cigarette company or utility that maintains high debt levels to achieve high returns for shareholders from predictable dull businesses. It is accepted that these companies do not pay off debt and reduce ROCE but distribute most of returns to shareholders who can hunt for growth in other companies.

In the case of FIF, the debate is how much we get to reinvest as dividend, how much the company can reinvest in acquisitions itself, and with how much debt in order to maintain the high returns to investors. (This is a reason foodies are popular with private equity funds, they can be picked up at moderate prices and returns juiced by gearing up in a way cyclicals can't.) Their recent track record is pretty good even if the market does not recognise it because of a tendency to compare debt levels with other companies that have been less consistent and hit the rocks. People just look at the debt and switch off but that will change if they keep throwing off £5-6m per year like they have done for the last 4 years. I simply don't know anywhere else where I can expect to get 33%+ (more like 50% on my initial purchase at £11m market cap) on my investment in a business that looks sustainable and likely to grow respectably.

THe problem with our exercise is that I see FIF's gearing as an advantage to utilise rather than a burden to be reduced to zero and think CGS's cash is a drag on what looks a safe steady plodder returning a middle of the road underlying 10% free cash (maybe even 12% this year?) to new investors. CGS could gear up - they probably should - but not too much in such a cyclical industry. I still think the problem is that FIF remain undervalued and should be more than twice the price to give an investor return nearer the market average based on free cashflows and risk which the market has wrong. I'm basing it on looking with some common sense at all the old and current numbers and guessing what cash the company will throw off in future and how it will be used, rather than inputting a mechanical valuation method that I feel has a downer on debt and so gives an unfair result.

I feel on principle that your EV method is giving a poor result due to its treatment of debt as being equal for all companies and I feel its snapshot-in-time-effect can be a bit misleading. I think my more fluid approach of trying to adjust everything to get to underlying free cashflows that can be used for shareholder returns and then comparing that to the cost I can buy them for is more realistic.

Sorry if that sounds like one of those waffling answers but I have spent quite a few hours looking at it and just can't see why FIF have to pay debt down to zero before paying out dividends or making acquisitions. It makes no sense. They could make a £5-6m acquisition in the next year from free cash generated and end up the year with the same debt but lower risk as higher earnings, operating and free cashflow and a stronger balance sheet of the expanded company reduce it. The share price should reflect that £5-6m growth (and rising) per year of reinvested free cash eventually as a valuation of more like £50-60m (and rising). I don't feel your EV model reflects that likelihood if it insists on cash being used to pay down debt rather than reinvest in growth.

[aleman] 03/4/2012 11:16

I usually avoid oil companies as I don't underdstand them and future oil prices are always volatile.I might still have a look. I appreciate the thought, though. THanks.

[woodcutter] 03/4/2012 10:27

Aleman

If your interested in companies with significant cash flow you might like to look at Melrose resouces MRS they've recently released results. As always i like to be honest and i haven't bought myself yet as i have no knowledge of the oil sector and i need to investigate further but it has a low pe and seems to be reducing debt at a rapid pace as a result of cash generation. I only browsed it this weekend and as of yet have not formed an opinion. Will be looking in more detail over this week. May be some geo political issues affecting the share price but it looks very cheap at first glance.

If i have anything worth posting you can pick it up on the MRS thread. Similarly from yourself.

Woody

[muangsing] 02/4/2012 16:08

boffster

Agreed, I put the decimal point in the wrong place, and have amended accordingly.

But "unnecesary rabble"?

Don't worry I won't post anymore.

Aleman

54.28m shares times 26.62p equals 14.5m approx.

I don't think I can explain better or differently. To me the example is well explained

[aleman] 02/4/2012 15:30

MUANGSING - I still haven't done a comparison on your first lot of numbers yet!

You're confusing me even more.

1.I don't value AVT at £14.5m! If I did, I wouldn't be buying.

2.It suggests you'd have to pay different prices for two companies with the same market cap but different amounts of debt. Obviously the same market cap means they'd cost me the same.

3.A FIF buyback would take debt to £50m or about 9 years free cashflow. A CGS buyback would also take debt to about 9 years freecashflow but the increased interest would reduce FIF free cashflow by 20% and CGS free cashflow by about 60%, making FIF look much cheaper.

4.I told you I don't use earnings so you don't need to tell me about its weaknesses. I know they can be seriously misleading.

I'm not convinced your method is poor. I suspect something is going wrong in the explaining. How about linking to a well explained example?

[boffster] 02/4/2012 15:00

Here's a negative aspect about FIF - Markt and his repetitive drivel