Mallett Share Discussion Threads

[orinocor] 26/5/2014 23:20

anyone who is being seduced by rainmakers's plainly stupid comments on the Masterpiece exhibition needs to read this from Thomas woodham Smith is the creator of Masterpiece and this is what he says.
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The economics of it are mind-numbingly basic, explains Woodham-Smith. Everything costs the organisers money. For example, we pay the caterers to be there, not the other way round, so they represent a cost to us. The entry tickets generate peanuts, and our sole real source of income is from renting out stands. Even so, at about 20,000 + VAT for the week, a typical 24-square-metre stand is far from expensive by industry standards. Result: last year was significantly loss-making.

Assuming that the first priority for any exhibition organiser is to make pots of money, I find myself scratching my head stupidly, until Woodham-Smith takes pity and spells it out. We want the exhibitors to make money out of the fair. Maximisation of revenues for the backers is not the name of the game. And now we get to the point: What really matters for our backers [of whom three out of four are themselves dealers] is injecting fresh life into London as an international hub, and having a forum in which to trade. So whilst they of course hope to see the fair in profit sooner rather than later, they are taking a long-term view.

hxxp://www.edp24.co.uk/cmlink/the-resident/people-and-places/celebrity-interviews/thomas_woodham_smith_the_man_behind_masterpiece_1_1552420

[callumross] 26/5/2014 23:15

If this represents such a "value" play, rainmaker, why is that well known value investor PG selling down his stake?

[orinocor] 26/5/2014 23:02

Rainmaker
11 Jan'13 - 14:51 - 4114 of 4124 0 0

I personally believe that £44mln is too rich for Masterpiece.However given the great dynamics of the business, I would value at around 4 times annual turnover to give a price tag around £30mln.


Rainmaker
10 Apr'13 - 13:42 - 417 of 447 0 0

Sadly a sale of Mallett's stake in Masterpiece, I think, is a real possibility fetching as much as £5mln/£6mln(that's 43p a share). It's going to make a loss this year with the number of exhibitor stands(that provide circa 90% of revenue) dropping from 170 to 134.


Rainmaker
6 May'14 - 01:29 - 6049 of 6051 0 0

Re Mallett Pat, I expect the share price to go through 100p after they have paid the 12.7p dividend because quite simply there're trading profitably

[orinocor] 26/5/2014 22:49

you can only laugh

Rainmaker 26 May'14 - 21:33 - 620 of 621 0 0

I think that putting a £1mln valuation on Mallett's 23.75% stake in Masterpiece that values the business on a price to sales ratio of roughly 0.5 IMHO is way, way too low.Ok so my valuation puts the business on a p/e of 51 but that will seem very cheap if and when the business increases the number of stands by a meaningful amount and that huge operating leverage kicks in. I'll purchase the lastest set of accounts on line when they become available in June, I believe.

[orinocor] 26/5/2014 22:46

baner 26 May'14 - 21:00 - 619 of 621 1 0

Rainmaker

I wish i could agree with what you write, but you need to deduct the cost of settling the pension deficit, exiti g leases and pay off a greedy and less than profitable management team - plus all other staff. And then consider stock value and also time value for all this. Maybe 40-50p remains assuming inventory is worth book value, which by no means is a given. The BOD incl NEDs represent a huge liability here, not to forget! If Weinstock and Gillenhammer replaced these you-know-what with directors competent to look after the best interest of shareholders, i would share your optimism, albeit i believe you are in cucko- land re the Masterpiece investment: max£1m is the value of Malletts holding there. But sadly major shareholders seems keen to protect these you-know-what. Why - is a mystery?

[rainmaker] 26/5/2014 21:41

Actually if a hardworking, talented and trustworthy management can't generate returns over and above the cost of capital then Profdoc is absolutely right, the Company should be liquidated and the proceeds returned to shareholders.

regards

[rainmaker] 26/5/2014 21:33

Thanks Baner, As a Value Investor I'm always using net working capital to measure a listed Company's value attractiveness but I don't seriously think it should be liquidated although I can understand how the confusion has arisen with Profdoc's previous post.

I think that putting a £1mln valuation on Mallett's 23.75% stake in Masterpiece that values the business on a price to sales ratio of roughly 0.5 IMHO is way, way too low.Ok so my valuation puts the business on a p/e of 51 but that will seem very cheap if and when the business increases the number of stands by a meaningful amount and that huge operating leverage kicks in. I'll purchase the lastest set of accounts on line when they become available in June, I believe.


regards

[baner] 26/5/2014 21:00

Rainmaker

I wish i could agree with what you write, but you need to deduct the cost of settling the pension deficit, exiti g leases and pay off a greedy and less than profitable management team - plus all other staff. And then consider stock value and also time value for all this. Maybe 40-50p remains assuming inventory is worth book value, which by no means is a given. The BOD incl NEDs represent a huge liability here, not to forget! If Weinstock and Gillenhammer replaced these you-know-what with directors competent to look after the best interest of shareholders, i would share your optimism, albeit i believe you are in cucko- land re the Masterpiece investment: max£1m is the value of Malletts holding there. But sadly major shareholders seems keen to protect these you-know-what. Why - is a mystery?

[rainmaker] 26/5/2014 20:58

IMHO unquestionably, Masterpiece is a tremendous business even if "The Market" doesn't yet recognise it. Think about the Company and think about its business model-see the last few paragraphs of my write up. What is there not to like about this business?When Value investing articles talk about "hidden buried treasure" IMHO there're talking about exactly this type of scenario where an exciting and potentially very lucrative business is in a Company's share totally free of charge.A few years ago the chairman of the exhibition was indirectly quoted in The Economist as saying there had been 300 applications for exhibitor stands. IMHO it's just a matter of time before Masterpiece closes the gap with 260 stand TEFAF in Maastricht, the worlds largest such exhibition.

IMHO, DYOR

regards

[rainmaker] 26/5/2014 20:42

Yes Diku,definitely and I will add.IMHO the crux of the matter is the huge tangible "margin of safety" and an excellent and potentially very lucrative Masterpiece business thrown in for free.

regards

[diku] 26/5/2014 20:34

Rainmaker....I assume you are still in MAE....if you weren't in would you be a buyer at current level?....

[rainmaker] 26/5/2014 19:55

I think I should explain that the main reason for Masterpiece, aside from filling the void left by the defunct Grosvenor House arts and antiques exhibition, was to rejuvenate London as one of the worlds major cities for the sale of art, antiques and collectibles by creating a "trading hub" between dealers.So in effect, the exhibition becomes a once a year opportunity for exhibitors to look for new pieces in other stands that will likely appeal to existing clients,to locate specific items, to gain market intelligence, offload old stock etc.

regards

[rainmaker] 26/5/2014 19:39

TOT-I agree Investors need to look forward rather than backwards. A successful Masterpiece exhibition will put them right back on track as the Company says sales these days are very much "event driven". It was only a couple of years ago when Mallett enjoyed their best returns at Masterpiece in any fair this side of the millennium and they continually exhibit at all the major fairs, TEFAF, Palm Beach etc,etc.There is more than enough money spent at this exhibition to make it a very successful and profitable one for Mallett.


With all respect to holders who have been unloading recently, I really don't believe they can be thinking too clearly or rationally but instead are acting in automatic panic mode,gripped by irrational fear, fixated on a falling share price. I've seen such drops before when Investors completely ignore the underlying Company and its fundamentals and its when the best opportunities occur. Running the numbers-

As at the financial year end of 31 December 2013, Mallett had £12mln of current or liquid assets less all liabilities so 87p a share.This is the calculation for the Company's net working capital a proxy for its minimum liquidation value. Post year end in a deal completed on 21 February 2014,they realised £2.75mln for the sale of their Clapham High Street Property so some 19p a share and with a 12.7p special dividend,this means we can bring bring the remaining 6p a share into the net working calculation which concentrates solely on current and not fixed assets, increasing the figure to 93p a share v a current offer price 60p to give a "bargain ratio" of 1.5 and in the eyes of Ben Graham an automatic purchase.

We can look at the difference between the intrinsic value of 93p as calculated by the net working capital figure-which is the correct way to value a loss making business and the current market price of 60p as a buffer or cushion protecting us from any unforeseen adverse future circumstances or the continuance of poor trading conditions or any estimation errors or maybe a combination of all three factors very likely ensuring, since the margin of safety is substantial, that the Company's severe undervaluation remains intact.

However we also get Mallett's 23.75% stake in the annual "Masterpiece" exhibition completely free of charge.This is a consistently profitable and established business franchise and very much the leading Art, Antiques and Design exhibition in the UK. Established in 2010, the year following the demise of the Grosvenor House arts and antiques fair,this business stages the six day exhibition in late June/ early July and generates its turnover and profitability from the sale of stands to exhibitors, sponsorship and the sale of admission tickets.Last year there was 34,000 visitors, a 20% increase on the previous year and 157 exhibitors.

Masterpiece is a great service business so in effect has very little in the way of assets which is great advantage for its Owners-this one of the factors that Warren Buffett was referring to when he said "not all earnings are created equal". Furthermore the business requires very little working capital since the proceeds from the sales of stands and also sponsorship are collected ahead of the exhibition which is when the vast majority of operating expenses are incurred.It's known as a "negative conversion" cycle so as a business Owner you're not having to finance a trade cycle.This also means there is no bad debt risk which is another advantage.It's also a highly scalable business which means that it can grow rapidly without major investment and thanks to its high operating leverage-the vast majority of its costs are of the fixed rather than variable variety-profitability will soar with a meaningful increase in exhibitors. So all in all I consider this a terrific business franchise and potentially very lucrative if it expands from current stand numbers of around 160 and closer to TEFAF's 260.

However unlike Mallett you can't value the Company through assets but instead use the earnings power of the business.Masterpiece has very valuable assets but they are of the intangible kind-its brand, its knowledge base and archive history(Mallett have records of every item they have ever sold), trading relationships etc. Last year Mallet made £87k from the exhibition so Masterpiece whole made £366k but good reasons to expect this year's exhbition's profitability to roughly double ie a £5 hike in ticket prices this year so applying a 21% corporate tax charge gives a £578k profit then valuing it a bond using the current gilt yield of 1.91% gives a valuation to the whole business of £30mln and Mallett's stake worth £7mln v their current market cap of £8mln. You could argue that that UK yields are at historically very low levels but you could counter that by stating that this valuation is a "zero growth" model and factors in no growth but I confidently believe the real value in this business is the growth in future cash flows over the lifetime of the business.

AIMHO, DYOR

[rainmaker] 26/5/2014 17:32

I think one thing that has never been satisfactorily explained by the Company is why they moved their London showroom to a larger premise -some 50% larger when their intention was relocate to a smaller property.

regards

[rainmaker] 26/5/2014 17:14

Hi Glen, I believe if you check back over Mallett's return of equity figures for the last twenty years they've never had an ROE in double figures and if my memory serves me correctly the highest was just 7.5%.I haven't given up on the Company yet but us Value Investors have extraordinary patience, tenacity and determination.IMHO Mallett are grossly undervalued(see next post) and there's a massive "margin of safety" at current prices.The next major move should be up but you can never be sure when you're dealing "The Market"

I would say that any management running a PLC must always have a strong work ethic, never being complacent or resting on their laurels and must always be striving for better performance, driving the business forward rather than just managing it.


regards

[profdoc] 23/5/2014 11:56

I'm going to try and get to the AGM next week. Does anyone agree with me that the main issue for discussion is whether the company should be liquidated? If it is using £14.5m that belongs to us, the shareholders, it should consistently generate an annual return after tax of £1.2m. If the directors do not offer this prospect then why is the business continuing? If enough of us make this point then perhaps we might get a positive response from the managerial team. If they do not embark on actions to acheive this target then we should consider banding together to release our assets tied up in the business, allocating the cash released to managers who can acheive an 8% return on capital employed. The misalignment of managerial interests with shareholder interests is very worrying. Decent managers do not pay themselves so well when they produce such low ROCE. Am I alone? Glen

[longinthetooth] 22/5/2014 10:06

On reflection Special Dividend probably agreed with both Weinstock/PG beforehand otherwise why risk putting it to the vote?Also unusually gone Ex Div prior to the AGM.Agreed MBO improbable.Disposal of PGs stake to third party interested in launching a bid more likely-he has done it before!!A Full Listing,a strong Brand(even if not a Global Brand as suggested),relatively ungeared BS,strong prospects for recovery and close to £8million worth of tax losses will appeal to someone for what is not much more than small change!!

[cockerhoop] 22/5/2014 08:43

Rainmaker,

IMV makes no difference at all, if the Special Dividend isn't paid the company would have an additional 12.7pps in cash to offset a higher purchase price which any acquirer could extract themselves.

[rainmaker] 22/5/2014 00:06

Hi Stockonomist, I believe an MBO extremely unlikely;IMHO they have neither the aptitude, inclination or wherewithal to stop their gravy train and besides management shareholdings are pitifully small.

regards

[stockonomist] 21/5/2014 23:03

My reading of it would be that it's in effect a Management Buy Out being done in public ? Most shareholders will just pocket their cash and not re-invest why should they ? Management though could use the cash to buy shares and thus increase their interest. They will then have to pay less of a premium to acquire remaining outstanding shares.

[rainmaker] 21/5/2014 22:46

BBR-I agree that the payment of a special dividend makes an opportunistic bid at current historically low levels far more likely.Once the the resolution to pay the 12.7p special dividend has been passed at the AGM on 27 May then its 12.7p less than the bidder will have to pay since holders will inevitably take this return into account when deciding whether to accept a bid.

regards

[cockerhoop] 21/5/2014 07:56

BBR,

Can you explain why you think that paying a Special Dividend prepares the company to go private?