Aga’s blimmin’ pension fund
Posted on December 17, 2008 by Richard Beddard
Filed Under Companies |
Despite its monumental cookers, I think the investment case for Aga (AGA) depends on something even more monumental, its defined benefit pension scheme.
Last June Aga’s pension liability was £682m, and although the scheme was in surplus, which means actuaries reckon it has more than enough assets (shares, bonds and property) to pay the pensions of all the Aga employees and former employees enrolled in it, since December that surplus had more than halved to £31m.
The value of Aga’s pension scheme dwarfs the value of the company. Its market capitalisation is about £50m, comparable to the drop in the surplus in just six months.
A weak stockmarket, and expectations of higher inflation explain the fall, and those are just two of the variables in the complicated accounting of pensions, the interplay of which could turn surplus into a deficit the company might have to fund. More money for pensioners means less for shareholders as investors in Chrysler and GM are finding.
In the very worst case, there’s a doomsday machine at the heart of Aga, which has guaranteed the pension fund to the tune of £50m through a combination of £22.5m cash and £27.5m in bank debt. Should its finances deteriorate below levels agreed with the pension trustees it would trigger the guarantees in much the same way a company might breach its bank covenants, forcing Aga to fund the pension, when it might need the funds itself. Should a deficit fall below £50m, the company would have to make further guarantees.
I’d like to invest in Aga. If it hadn’t been for impending recession I’d have parted with £10,000 for a stove this autumn, despite the incredible price tag and the, shall we say, disputed environmental credentials, simply because of my wife’s devotion. I don’t share the passion, but I talked about Agas with enough people to realise that nothing, not even Marmite, polarises opinion like an Aga. I think enough people love them to ensure the brand, at least, has a future. By modernising its cookers, the company seems to be ensuring it too.
The shares are also incredibly cheap in relation to the company’s profits over the last decade or so, but therein lies another source of uncertainty. Aga Rangemaster, it sells ordinary cookers, stoves, fridges, and kitchen furniture as well as range cookers, has a more dynamic history than a glance at its cast-iron flagship product reveals. Last year it sold off its foodservice business, which supplied commercial cookers and kitchens and amounted to half the company, and for most of its history, the company was primarily in engineering.
The changes may be good ones, though commentators question Aga’s new focus on the consumer in the face of a recession, but they make it more difficult to rely on the company’s record of profitability as a guide to the future. Value investing is supposed to work because we’re choosing stable industries (like cookers), suffering temporary setbacks. They should return to former levels of profitability and repay investors who backed them when they were down. Aga’s record seems less pertinent because its focus hasn’t always been… Aga.
Likewise, the pension fund could be an opportunity, not a threat. That must have been Pension Corporation’s thinking when it increased its stake in Aga to 25% in April, since its specialty is running pensions, and for a while at least, its business model seemed to be to buy companies with fat pensions and extract some of the fat.
While Pensions Corporation may have specialist skills in valuing pensions, I do not. I’m sceptical of the notion that you can account for all the variables that might determine a company’s pension liabilities decades into the future1, and when the scheme’s as large as Aga’s, that puts a great big doubt in my mind about investing in the company2.
No wonder it’s committed to making the pension self-sufficient by 2020, if not before.
Footnotes:
- This could be a problem, since many established business with long records of profitability will have large pension funds.
- It’s still in my watch list, though.
- Evidence that investors underestimate the impact of underfunded pension funds, doesn’t surprise me. I wonder if we ignore the impact of large pension funds too, even if they are in surplus.
- iBall.
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I had AGA around to do a service and the workman reckoned they had orders for about 20 % of what they did last year! recession hitting hard on a great product