Agonising about Aga again
Posted on April 23, 2009 by Richard Beddard
Filed Under Companies, Investing |
In practice:
Trust no-one
First, a quick recap. Aga (AGA). Cult product. Cheap price. Strong finances. BIG pension.
Since I concluded that wild swings in the value of Aga Rangemaster’s pension fund relative to the present value of its obligations made an otherwise sound company too speculative for a safety-first portfolio, it’s published an annual report for the year to 31 December 2008. Of less interest to a value investor, but by way of background, the share price has rebounded a little too.
The present value of Aga’s pension obligation is now about £600m, nearly ten times the company’s market capitalisation. Happily the fund that must meet this obligation is in surplus, it owns nearly £60m more than it owes, which is not much less than Aga’s £70m capitalisation.
Why these comparisons with the value the market places on the company? Well, if the £60m pension surplus is actually worth £60m to investors it means the value they put on the bit of Aga that makes cookers and sells kitchens is less than £15m.
The revulsion I, and other investors feel for those huge pension liabilities could be a massive opportunity for anyone who can see through the fog of pension accounting and come to terms with those huge pension liabilities.
The get out of jail card could be the 25% stake of Boston Holdings, part of Pension Corporation which, apart from running pensions, takes stakes in companies where it thinks large pension liabilities are wrongly depressing the share price.
There are two problems with this line of thinking:
- Relying on the words or deeds of other investors is not safety-first investing, they could turn out to be wrong.
- The business of manufacturing and selling expensive range cookers isn’t that healthy. Aga’s F_Score, a measure of financial strength, is just four out of nine, and more typical of a company getting into financial difficulty than one pulling out of it.
So, for another year I’m going to pass on Aga, despite its ten year price earnings ratio of just five. It could be a bargain, but it’s too speculative for me.
On a more whimsical note, I’m also a bit sceptical about a company that devotes the first three pages of its annual report to commemorating the birth of its iron foundry. Apparently Abraham Darby first smelted iron ore with coke at Coalbrookdale, where Agas and Rayburns are made.
I like tradition, but I can’t help thinking that, like a magician’s sleight of hand, three pages of historical colour are there to impress us of Aga’s durability and draw our attention away from the pension fund and falling profitability, declining working capital ratios and increased borrowing (albeit modest borrowing) revealed by the F_Score.
In theory:
A Stern warning
iBall gets budget reaction from business and investors.
More pension woes, this time at Whitbread, where analysts expect the pension deficit to widen from £33m to £250m in this year’s results because of falling stock markets and government bond yields. It’s not alone, says the FT.
Buttonwood examines a paper on investment returns that shows the American stockmarket did not beat government bonds over the last 40 years. The moral: There’s no equity risk premium, if you buy when shares are overvalued.
The Roman Empire fell slowly and violently, says Sir Peter Stothard, editor of the Times Literary Supplement. It’s never been a cheerful subject for those with empires of their own.
Saj Karsan, a value investing blogger, reasserts his blind faith in capitalism, which, let’s face it, we all share to a degree.
In a lecture at the London School of Economics, Sir Nicholas Stern, an economist, says the world is more risky than he thought when he wrote the Stern Review, but he’s hopeful we can act on climate change, and tackle the financial crisis.
Alphaville has a list of the World’s 50 safest banks. Two of them are British.
A list of popular econo-blogs.
Comments
One Response to “Agonising about Aga again”
Leave a Reply
[...] Friday 24 Apr 2009 Home / Editors’ Blog About « « Agonising about Aga again [...]