Tandem Share Discussion Threads

[greengiant] 22/8/2010 14:59

It has been a tough old week this week and next week does not appear to be any easier. I have spent the time that I have had over the last week (sitting in airports and sitting on aeroplanes formalising my thoughts on Tandem and preparing myself for the meeting on the 7th September.

First of all, let us deal with the current issues that management have to deal with.

1) Currency / Raw Material and Freight Costs. This management has explained is the reason for the fall in forecast earnings this year. And yes, the issues are real, there is a labour shortage in China (and I will be there next week to deal with related issues). However, the difference between good management and average management is that good management navigates their way through these issues with relatively minor turbulence, Tandem's management, however, has run smack bang into them. It fails to realise that its direct competitors, face the same issues and have not downgraded their own forecasts (Halfords, Character, Hornby). Only Cassidy has downgraded but even they trade on a higher multiple than Tandem.

2) Historic Performance: Over the past 4 years, management have not improved the performance of the company. Depsite what MK say's regarding strengthening the Balance Sheet - This management team have added NO shareholder value. The market cap of the company has been static for 4 years. It is irrelevant that they have strengthened their balance sheet, the market does not like them. Over the past 4 years:
Turnover
2007, £33,785k
2008, £34,878k
2009, £35,161k
2010, £35,678k

Operating Profit adding back Amortisation & Exceptionals
2007, £1,191k
2008, £1,368k
2009, £1,126k
2010, £1,217k

4 years no increase and 2 ED's and 1 Chairman have paid themselves £2,054k in salaries and bonuses. That is simply not good enough.

It is unfortunate that we are now at a stage where management had a chance to prove that they were capable of taking this business forward, but have so far failed. As shareholders and the owners of this company we have the right, that should say DUTY to ensure that if the management are not capable of enhancing shareholder value, they should not be in that position.

3) Strategy:
The company likes to say that the acquisitions that it has made so far have been successful in so much as they contribute to profitability by absorbing central overhead. That is, why dispose of any business, because the central cost would then have to be absorbed by the remaining businesses. This is wholly flawed logic. There is a saying which goes something like this,

From focus comes growth by narrowing scope one creates expansion.

Simply put, I see no strategic rationale for having a Golf business, the company cannot compete. The business should be disposed and the cash generated through the sale and the working capital released through the sale should be used to generate growth in the company's core market. You fund the areas of the business that you can target growth, not those that can absorb part of a central cost. By adding to non core businesses, you infact create a situation where there are diseconomies of bundling.

The company has in the past been obsessed with saving money. Whilst this is commendable, it also gets to a point of where constant cost control becomes a zero sum game and the company has to move from a cost view to a strategy for growth - but PROFITABLE growth. This is where this management team has failed miserably over the last 4 years. The strategy presentation on the 7th, should give us a realistic view of whether or not, they are capable of doing this. My view at this moment is that they are not. They do not have the management team who are suited to developing a business.

With any view on strategy, you should ALWAYS focus on what will yield future profits - what are you going to invest in. The rest becomes secondary and if it is not core, you have to ask yourself whether or not it is worth keeping the business, or whether you should dispose and focus the cash and the management resource on those activities which you can grow and which will yield future profits.

4) Raleigh: As one of Tandem's closest competitors in terms of Turnover, it is interesting to see how they are actually performing. They believe the outlook is positive and are actively strengthening their position through Cyclelife. This is what a proactive management team does - it invests within its core distribution channel to yield future revenues. This is what has been lacking at Tandem. Now the management at Tandem will tell you that Raleigh are always talking the talk and failing to deliver - I disagree. The strategy appears to be working. The company doubled its Operating Profit in 2009, from £575k to £1.2m. The company is upbeat on the prospects of 2010 - unlike Tandem.

It is also interesting to note the differences in salaries between the directors. As stated, TND's highest paid director was MK at a total of £270k. Raleighs was £205k, to me there is no question who performed better. Also, total director costs was £651k for Raleigh (6 directors) - Tandem £557k for 3 directors.

Now I have always supported the salaries of the directors by stating that I really don't mind as long as they deliver. I have always believed that you should allow management the benefit to perform - which to me is by not doing anything rash for 12 months. Well we are coming towards 6 months in and I continue to strengthen my position.

Whatever the strategy going forward is, I would hope that the company takes the following into account.

1) If Bikes are to continue to be core, large investment is needed into the IBD's. This is about helping them financially and systems wise. The company has to start to generate revenue growth.
2) The company needs to refocus to deliver profitable growth. There are elements to this business which are quite frankly wrong - dispose.
3) Question itself to determine whether this management team is actually good enough in its chosen markets.

I do not plan to make the Investor presentation easy for management as I believe that the way forward is to push them out of their period of complacency into one which delivers TANGIBLE shareholder value. I will also want full disclosure on Bonus performance for this year, as I believe no bonus should be paid for a drop in Operating Profit.

Hope this is helpful as to where my position is and hope that others can add to this thinking

Andrew

[greengiant] 19/8/2010 17:12

Davidosh - you have mail

gg

[greengiant] 15/8/2010 09:45

Mark,

I am also probably a little biased in my thinking as well, one of my best friends works at Bain and was part of the team that wrote Profit From the Core - which is a fascinating read, if not a little on the dull side. The ideas are interesting, but as I said earlier, what Bain found was companies implementing them got distracted and didn't actually focus on what they are good at.

As far as banks go, VC's invest money (into company's that will give them a return), Retail Banks invest money (into individuals that they believe will pay them back). It is all about numbers, which every banker I have ever met is good at. Very few companies advise on m&A deals, they understand management, understand the numbers and understand the strategy for growth. But beyond all of that they focus on the numbers, the rest can be outsourced in the form Commercial Due Diligence.

gg

[greengiant] 15/8/2010 09:07

Mark,

You are right about that, there is no simple formula and I agree completely that the major focus of any business should be keeping customers happy. Business is about relationships, if you satisfy those customers with the right price, right distribution channels and right product - you are onto a winner.

Core competencies is an interesting theory, been around for decades and whilst the logic is right, the execution is usually poor.

DD - Nice to have you back

gg

[marben100] 14/8/2010 21:59

Hi davidosh,

Welcome back. Hope you had a good holiday.


gg,

Yes, those are examples of vertical integration which are not directly applicable to Tandem.... but I'm not sure I buy the "core competence" theory.

"Lending money" is, IMO, very far removed from advising on M&A deals. What's the core competence?

Similarly I don't see any "core competence" between E&P, refining & wholesaling.


IMO the more important characteristics of "superb companies" are "super brands" and a determined ethos to deliver promises & serve customers, combined with products or services that their customers want. However, I suspect the real truth is that there is no simple forumula, much to the chagrin of business school students searching for one. ;0)


In Tandem's case I think there's little difference between our views. Tandem may have unrealised potential to increase shareholder value, and there is a good chance actions can be taken to unlock that potential. More than happy to leave it to your greater expertise (and much greater self-interest ;0)) to find the best way to do so.

Best,

Mark

[davidosh] 14/8/2010 21:37

Apologies for not having posted for three weeks but I have been away on family hols and just back today. I will play catch up and post later but meantime just a reminder...

I will keep a running list for the investor presentation at the offices of Grant Thornton, 30 Finsbury Square, London EC2P 2YU at 10.00am on Tuesday 7 September 2010. Those wishing to attend are asked to also email our Nominated Adviser ([e-mail]) or telephone [phone] to confirm attendance.

greengiant
marben100
davidosh
skegbyhouse
supreme mo
devymaster (TMF)
grahamty
DaveBrickles (Stockopedia)
Cornelia (TMF)
Elwyn (TMF)
neverforget

[greengiant] 13/8/2010 08:58

Marben100

Interesting conversation, but all you are talking about is vertical intergration which is a natural extension.

For Oil Co -

Explorer
Refiner
Wholesaler

This is logical for a Oil co, although most would argue that they do not do the Explorer part very well, hence, you see true explorers like Africa Oil, finding reserves and selling them to the big oil co's.

As for Banking, again, the vast majority of people that I have ever dealt with within the VC world have all been down a similar route

Start with Retail Bank,
Move onto Leverage
Move into VC

All offering a similar progression, these are people that have a profound understanding of the banks core product - lending money and debt structuring.

There is no vertical integration at Tandem (and I would argue there should never be) however, my point is that companies that do well are the companies that are focused - the question that I raise is whether having 2 dissimilar businesses detracts from the ability to focus on one.

gg

[greengiant] 12/8/2010 09:27

big owl - email sent, remove your e-mail address

cheers

gg

[marben100] 12/8/2010 09:10

Hi gg,

IMO investment banking is at least as far removed from from retail banking as plush toys are from premium bikes. It has little to do with simply lending money and requires a very different skill set (e.g. equity raising, M&A deals, creating & selling "structured products"). A retail bank branch manager would be of little use in an investment banking role. Equally, running oil refineries is similarly far removed from oil explo & production, yet all the oil supermajors do it. Owning & operating chains of petrol stations is equally far removed again.

Interesting to debate what are the characteristics of a superb company. :0)

Best,

Mark

[bigowl88] 12/8/2010 08:55

gg,

would you be able to drop me an email to my private email address ?


thanks

[greengiant] 12/8/2010 07:13

Marben100,

Apologies, it is more likely my writing rather than your misunderstanding. If you look at banks, they are in the business of lending money (and borrowing it). That is their core competency, whether it is to individuals, SME's or even as investment houses. Their distribution channel is even similar. The same applies to miners, oil companies teleco's and software companies.

What you can't have (or at least shouldn't) is
2 vastly different products
sold to 2 vastly different customer segments
through 2 vastly different distribution channels

It will make for an interesting day on 7th September

gg

PS - I am not saying that it is right to look at disposing a business, merely that the 2 alternative options mentioned above should be examined and examined properly

[marben100] 11/8/2010 21:05

Hi gg,

Thanks for that and agree on most of it. Not so sure I agree with you on the last point (but maybe I've misunderstood):

"Look at FTSE 100 companies, and see how many of them are serving multiple customer bases."

Banks are a significant FTSE100 component and all FTSE100 banks serve diverse customer bases: retail, SMEs, enterprises & government. You couldn't be more diverse than the largest & most successful UK bank: HSBC. I do consider that a truly superb business but one that's hard for me to value, so I'm not invested.

Much the same could be said of telcos & integrated oilcos (the latter serving customers as diverse as motorists & chemical companies).

...but, of course, FTSE100 doesn't necessarily mean "superb". ;0)



In the case of Tandem, I should think a core competence or, more properly, a key asset is its customer relationships. The impact of any change on that needs to be carefully considered - but I'm sure I don't need to tell you that!

In my eyes it is quite possible that there are certain "core competencies" that Tandem is lacking, and which a third party could add... I think we've spoken about that face-to-face and won't go into it here.


"It is in everybody's interest to look at a business from ground level and determine what is vital and what is secondary."

Definitely. Which components of the business are generating shareholder value and which are not needs close examination. ;0)

I look forward to the forthcoming investor presentation.

Best,

Mark

[greengiant] 11/8/2010 19:27

Marben100,

I am not saying that the company should dispose of any parts of the business, that may not be the right thing for the business to do. However, within any strategy review, a company should always assess the following 2 options, which most companies fail to assess (particularly the 2nd for obvious reasons - why do yourself out of a job)

1) Do nothing - continue as you are
2) Sell parts or all of the busines

The rationale of number 2, is that EVERY director should have increasing shareholder value as their over-riding principle. If the value that a company can get via disposal exceeds the market capitalisation then you should dispose - period. Unfortunately, agency theory kicks in, where the interests of the individual managers exceeds what is "right". I expect to ensure that the directors of Tandem explore ALL options available.

With regard to what market sectors the company is currently occupying, you can break it down even further

1) Premium bikes
2) Mass Market Bikes
3) Wheeled Toys
4) Plush Toys.

Now, if I was looking at this with a view of assessing whether there was any logical fit between the businesses I would start with the most basic of questions.

1) Who are our Customers
2) What are our core competencies and how does that make us different
3) How are we going to serve those customers (distribution channels)

Now if you look at Bikes and Toys, the majority of business serves different customers with parts of the busineeses overlapping with major retailers (Littlewoods, Asda etc) but is there really any synergies selling bikes and toys to the same retailers

A Core Competency is a deep proficiency that enables a company to deliver unique value to customers. It embodies an organisation's collective learning, particularly of how to coordinate diverse production skills and integrate multiple technologies. Now you could argue that the company has a core competency in R&D and distinctive product design, but again, what is the cross over between the bike division and toy division? Again, I would say little.

The distribution channels again, you could argue there is some synergies to be had with the children's cycles being distributed through the same channels as the main stream bikes, but the majority of bikes are distributed through IBD's, so any synergies are lost. Of course there as some, with the likes of ASDA etc, but is this really core to the company?

It is in everybody's interest to look at a business from ground level and determine what is vital and what is secondary. The key between superb company's and average company's is that superb company's has singular (or very similar) business units and their focus is soley on those units, they do not get distracted but different businesses. Look at FTSE 100 companies, and see how many of them are serving multiple customer bases. There lies the answer.

gg

[marben100] 11/8/2010 17:15

Hi gg,

"When I first started acquiring shares in TND, I believed that it was important to undertake a strategic review to determine whether the company was right in pursuing what I thought was 2 distinctively different businesses."

Just some thoughts on this, FWLTW. ISTM that Tandem may actually have three potential business streams:

1. "Premium" bikes
2. "Mass market" bikes
3. Toys

1. is sold through independent bike stores; 2. and 3. are mainly sold through toy stores (AFAIAA). Clearly there is sales-force synergy between 2. and 3. But are there supplier synergies between the streams?

Would synergies be lost by splitting the business streams? Is the current business exploiting potential synergies optimally?

I think an independent review is an excellent idea. Perhaps these are some of the questions a review could look at.

Cheers,

Mark

[supreme mo] 11/8/2010 07:59

GG totally agree with your comments around 'lost shares'. Also I note there is only one market maker on the stock with a NMS of 2000 shares and a 10p spread!!

[saturdaygirl] 10/8/2010 19:39

Good discussion on Radio 2 today . Steve Wright/Lisa Tarbuck talking about top of the range bikes as the new male 40 something yr olds new accessory comparing the ownership to that of a £100k sports car . 15 minutes of disscussion on the subject ..

[greengiant] 10/8/2010 19:19

SM - no, don't hold them, but like to look at what the market believes the value of TND's competitors are worth. Wouldn't touch CDY, for just that reason, it is a family owned company and in all reality shouldn't even be listed.

It will be interesting to see how many shareholders are "old" shareholders. My belief is that there are a large number of "lost" shares.

gg

[supreme mo] 10/8/2010 18:55

GG do you hold CDY? I could never get the size and the spread always put me off! Furthermore, the family own a massive chunk of the company so you would be tied to whatever they decide!

[greengiant] 09/8/2010 14:26

It is interesting to note the destruction of Cassidy Brothers Shareprice over the past 3 days. The reason for the severe fall is the statement within the final accounts which states about current year -

"Trading in 2011 is going to be difficult and will see prices rise significantly. Firstly because of the rise in V.A.T. but more importantly the impact of price rises in China and transportation and shipping costs from there to the U.K. These will effect all important price bands of £5.99 - £10.99 etc. that the consumer and trade has been accustomed to for the last ten years, most of which can no longer be maintained. The transition will take two or three years to filter through but it will happen, and any company who shuts their eyes to it will not survive. Companies have to expect negative responses from their customers and accept a decline in sales as a result. Casdon has experienced this many, many times over the past 65 years and will be prepared."

This shows some of the same issues that Tandem faces. However, it should also be noted that despite the destruction of the share price - CDY is valued at £2.5m and last year generated £250k profit. Currently TND are valued at £6.2m with a penciled profit of £640k. That shows that despite the annihilation of the CDY share price, it still values CDY higher. Of course CDY is protected somewhat by a near 10% dividend yield.

When I first started acquiring shares in TND, I believed that it was important to undertake a strategic review to determine whether the company was right in pursuing what I thought was 2 distinctively different businesses. I believe this more than ever now. It does not necessarily mean that I am right, but outside eyes can offer a valuable different perspective, which management might be blinded towards. I agree that the emphasis seems to be on Toys with the potential push into Plush, so what skills can the company leverage for the remaining divisions? Is it a case of trying to focus on too many different parts of the business and not really delivering on any of them?

September 7th will determine this.

gg

[supreme mo] 04/8/2010 21:09

neverforget no probs. I agree with you that how can the company now predict 2011 forecasts to be 640k - we haven't even entered the new year yet!

I also agree with your comment that the company hasn't promoted itself as much as it could - i.e. asda deal and future pipeline business enquiries are healthy. Furthermore what about new brands/licences they plan to take up? or even the other possible growth opportunities which were discussed at the AGM (overseas).

Are you a recent holder?

[greengiant] 04/8/2010 15:36

neverforget,

At the company's AGM, I made the point that I would not expect the company to pay a bonus for merely standing still and even quoted the passage from the Article by PwC "AIM the state of pay"

"Remuneration committees need to be able to satisfy themselves that there is a clear link between bonus payment and corporate performance in excess of what an individual is receiving a salary for."

To me the company has proved that it can achieve a profit of £1m, that is why they get paid their salary. Any bonus should be paid for performance IN EXCESS of this amount. If the BoD's thinks that it can pay itself a bonus for a 40% reduction in Profit and EPS then it is going to fracture shareholder relationships.

Also, very good summary of what should be expected in the preparation of the investor presentation.

gg

[supreme mo] 04/8/2010 07:44

neverforget, remember that it is has to be seen as an independent and balanced view. it is my understanding with these notes the company sees the final version before it goes out. Plus the broker who is writing the note has to get it signed off from his/her compliance unit...

[neverforget] 04/8/2010 07:26

Broker Note for all to see



Doesn't make good reading and actually sounds very poor.

[neverforget] 03/8/2010 22:19

Well I never expected to see the shareprice rise today by 8.50%, if anything I expected a sideways movement or small drop. That could only be our major shareholder further increasing his stake.

As for strategy, let me have give you my 2 pennies worth (about as much as it is worth), daviddosh, I will be attending the meeting so you can add my name to your ever growing list and I thank you most sincerely for acting as orchestrator.

T For the presentation, I would be expecting the following points to be addressed

* A description of the company's mission and vision;
* What are the business arenas and explore each market for emerging threats and opportunities and whether or not these areas are still fit for purpose;
* Analyze the company's strengths and weaknesses relative to competitors including financial performance and forecast performance versus its competitors;
* Identify and evaluate alternative strategies, The Ansoff Matrix is useful for this despite its age;
* Define stakeholder expectations and establish clear and compelling objectives for the business;

This is the minimum I would expect any company to cover at its first presentation.I have heard musings of a push into plush (MV brochure even says such things). I would love to hear how the company reconciles bikes with plush toys. Maybe the accountants should do a DCF of what they could achieve now via a disposal versus the potential future cash flows from keeping the business, boy, would I love to see that at the presentation.

I feel that this board of directors are blinded by the history which attaches them to the company like the strings that attach a puppet.
It will be interesting to see whether or not the company has set the bonus level for executives for achieving a profit level at £600k. If they have, I am sure there will be one or two angry shareholders who might not accept that.