Chilled about Uniq

Was it all worth it?

One of the little bits ‘n pieces that clutter my writing month is the Share Snapshot that sits amid a mass of data near the rear of Money Observer. The editor gives me a list of the shares that moved most in price over the previous month. The sub-editor gives me an implausibly small word count like yesterday’s (105 words) because it has to fit in a tiny box, and a ridiculous deadline.

It’s more of a shot taken at speed from a one-megapixel mobile phone than a snapshot.

This time I wrote about Uniq (UNIQ), which has little debt yet investors seemed to have lost confidence – probably because the producer of chilled and frozen food has also produced losses over the last five years.

Uniq’s shares closed at just over 2p one day in December and rose to almost 17p on 9 January, the day the company issued this trading statement.

It looks as though, having paid off most of its debt and secured enough money from its bank to keep operating, investors are more optimistic.

Two things interest me about Uniq, apart from the elephantine one, which is whether its earlier record of profitability has any relevance, given its recent performance.

1. The first is the restructuring, which as is so often the case seems to be about selling off profitable businesses to keep unprofitable ones afloat. The company has steadily moved away from its past life as a dairy (it was Unigate) and two sales to Dairy Crest (DCG) bracket its list of disposals. The first was Unigate in 2000, and one of the latest was St Hubert in late 2006.  Dairy Crest is struggling too, partly because of the debt it took on to finance its takeovers.  It makes me wonder if it was all worth it.
2. The second is the tripling of Uniq’s price during the three days before the trading statement. Was that anticipation? Or, did the buyers know something?

Extremely distressing diligence

Arrghhh! Words can’t describe the frustration I feel at Education Development International (EDI). It starts with stockmarket ticker code, which is EDD – not EDI, and continues with every syllable of its annual report. Words are in fact, part of the problem.

It ought to be so simple. The company has a turnover of little more than £20m, it appears to be growing, it’s not in debt, it’s in a business – qualifications and assessment – that, I think, is genuinely beneficial (but not flash and prone to hype), and the share price values the company at less than eight times earnings, which is not very much at all. It should be an interesting small company. All that’s left is a bit of due diligence – checking that I understand how it makes money.

I’ve read the recent regulatory news, and the latest annual and interim reports. I’ve even flicked through earlier ones. It’s been tough. Fifteen years ago, I was a secondary school teacher, so I approached EDI with optimism. I didn’t expect to stumble through the chairman’s report in a daze, as though the document was a long-forgotten exposition of Finnegan’s Wake.

The words aren’t incomprehensible, just ambiguous. What is a support service, for example? Fortunately, I have a friend in the biz, and one evening last week I bought him a shandy and got some answers. Support services are syllabuses, past papers, marking schemes, training (for teachers), and schemes of work, lesson plans – we used to call them.

More seriously, for a little business EDI’s fiendishly complicated. It sells vocational qualifications but tests school children. It owns a bewildering array of even smaller companies – including its own Internet Service Provider. It’s an exam board, and it designs and administers bespoke qualifications too. It seems to be trying to make money from every corner of the examination industry and many corners of the world, which makes me wonder what it’s ‘core’ business is, and whether it’s any good.

The story (so far):

1. EDI was once Goal and its main product was an online assessment programme tied to the national curriculum for secondary schools. The idea is computerised testing and marking is more efficient than good plain old pencil and paper, but it caught on much more slowly than the company and its early dot.com investors thought. EDI still sells it to over 600 schools, which is less I think than in 2002 when 927 schools had access. You can try Goal  here.
2. Since then it’s bought exam boards, principally the LCCIEB (London Chamber of Commerce International Examination Board) and entered the qualification business in 2002: charging schools, training companies and businesses a fee for candidates they field in its exams and designing and accrediting qualifications for  organisations that want to run exams themselves.
3. Its qualifications are mostly vocational, under the EDI brand in the UK and the LCCI (London Chamber of Commerce International) brand abroad. Eighty-five per cent of its UK sales are vocational qualifications, so I think I’ve found the core business. Most of its international qualifications are vocational too.
4. EDI has just completed a multi-year ‘organisational development’ program in which it has physically moved from to Coventry and redeveloped its IT systems, and now its going to go out and sell. Alan Sugar would be proud.

Since vocational education, in particular a new diploma qualification to be introduced in September, is Governments answer to NEETs (young people Not in Education Employment or Training), who otherwise have poor prospects and generally muck up the employment statistics, and since British education has a strong reputation abroad, there are grounds for optimism. Doubly so, if EDI’s moving from a period of consolidation to a selling.

So good news, today EDI revealed its new corporate image to:

…bring together into a common ‘house style’ the disparate corporate and product presentations which are the result of acquisitions made by the Company over the past three years.

It’s mailing 5,000 customers, and it’s updated the website, which was utterly shambolic, alternating the new brand EDI, with the old one, Goal (that’s a page from the old site, which still appears to be available).

But it’s been a good decade for exam boards. The government’s obsessed with assessment and league tables so one concern is why, for most of the decade, EDI has struggled? And why’s it sticking with Goal? I’ll be asking the directors when I call to check the story I’ve concocted because the positive thing about a company that doesn’t present itself well is it turns off investors¹, which may in part explain the share price. They’ll wait until the profits speak for themselves, which may give the hard-working investor an edge.

Dairy Crest on iBall

Talking of examinations, Dairy Crest has graduated from blog to iBall. Watch it, if only for the Benny Hill intro.

Footnotes:

1. Though the new website is a big improvement, so perhaps that edge is about to vanish.

A company and a book to cheer you up

If you thought my last post on Dairy Crest was a reluctant vote of confidence, you’re right.

Posting links to news stories like the ones in the right sidebar of this blog it’s hard not to let gloom seep into my stockpicking brain. Sadly hysteria is an occupational hazard, which explains why journalists don’t make good investors*¹.

Headlines like RBS issues global stock and credit crash alert are driving me to listen to techno music as I write, just to ward off all the negativity.

Editing articles like Peter Temple’s latest Growth Portfolio update doesn’t help. Over the long-term his portfolios have done very well, but the growth portfolio is in retreat. He’s sticking by Claimar Care (CCGP), a company profiting from our aging population. You might think it’s the mother of all growth markets but the shares are down 60% since he bought it, and he’s not usually one for overpaying. He’s cutting Zirax (ZRX)  just because it’s a smaller company.

They say “elephant’s don’t gallop” but when the prices of smaller companies are galloping in the wrong direction and just about every company looks like a burnt-out cyclical, an ex-growth stock, or a fantastically overpriced hole in the ground, you know the psychological bunker‘s caving in and the Jerries are coming to get you.

Education Development International

But surrender is not an option and panic definitely isn’t, so I keep looking for opportunities. The good news is I’ve discovered a promising share, Education Development International (EDD). It markets qualifications, tests, and examinations and the textbooks and crib sheets that go with them. It’s quadrupled in price over a year or so, it’s on a price earnings ratio of less than ten and there are as many letters in ‘education development’ as there are millions of pounds in its market capitalisation. Too good to be true? We’ll see. I’ve much research to do, but I got the idea from the best possible kind of tip. Not the:

Psssst! This one’s gonna make us rich

…kind. I learned about EDI from an admirer of the company, who works for a rival.

That’s the first glimmer of hope, that there are still stocks worth buying. The second comes in the form of therapy, a book to help us see through the fog.

Turtle Trading

I asked our bookshop to send me a review copy of The Complete Turtle Trader by Michael Covel because:

1. Fellow blogger, Todd Sullivan liked it.
2. It’s going to teach me about the dark side, momentum investing.

It’s also a good reminder of the importance of shutting out noise, and sticking to your system. Richard Dennis, the Chicago trader at the centre of the tale, was a reader of ‘Psychology Today’, not the Wall Street journal.

The book documents a unique episode in investing history when, to settle a dispute in the early ’80s, Richard Dennis and his partner trained a diverse band of recruits in a simple momentum trading system. They wanted to prove whether great traders are born great, or whether trading is a skill that you can learn. Their results give us hope. According to the jacket blurb, Mr Dennis made £100m from his Turtles.

Momentum traders buy assets that are going up in price, and sell assets going down in price, regardless of the fundamentals (i.e. what those assets might actually be worth or how much they might earn). It’s the antithesis of value investing. I should hate it, but I’m about 60 pages in, and I love it so far.

But I think momentum traders have more in common with value investors than either side cares to admit. Both seek to exploit behavioural anomalies. That’s to say markets tend to extremes or exuberance and disgust. Momentum investors seek to ride the exuberance. Value investors seek to plunder cheap shares, when other investors won’t even consider them.

Just as the existence of anti-gravity might validate the physics of gravity, an analogy I’ll not push any further because I don’t actually know it’s true, if momentum investing works then value investing should too.

At its most extreme, the efficient market hypothesis, which I’m guilty of bashing at every possible opportunity, says that knowledge and experience cannot help an investor beat the market. The lesson of the Turtles is, apparently, it can. Interesting, I think, even if you don’t subscribe to Dennis’ system. And comforting too, if you’re on the wrong end of a lesson in humility from the stock market.

More books to mend the soul next week.

Footnotes:

1. Just a supposition. It’s why I tell the ed-in-chief I’m an investor first and a journalist second. You really can’t let all the bullshit get in the way.

Giving Dairy Crest the benefit of the doubt

With a suite of strongly growing brands like Country Life, Clover, Utterly Butterly, Frijj drinks and Cathedral Cheddar and its less profitable but nevertheless essential milk distribution business you might expect Dairy Crest (DCG) to be immune to a faltering economy, for no better reason than the old ‘you’ve got to eat’ argument.

In fact, Dairy Crest investors have the jitters just like the rest of us. Were it not indebted, and were its growth not based on buying up brands and dairies, I think it might be facing a period of tighter credit and rising commodity prices with more alacrity.

But profit growth is going to be hard to come by if raw material prices – milk, energy, packaging, vegetable oil – continue rising, and if Dairy Crest can’t finance new acquisitions. I’m surprised the analysts who attended when Dairy Crest presented its results in May didn’t push the company harder on debt and growth. Skip right to the end of the audiocast and you’ll find the Q&A. Skip on a bit more and you’ll find a hesitant question on whether Dairy Crest can sustain its debt-fuelled expansion.

Mark Allen, chief executive:

We’ve got a very strong portfolio of brands… So we think there is quite a significant opportunity for organic growth within the business… That’s not to say we don’t look at acquisitions, because we do from time to time…”

Alistair Murray, financial director:

We have in the past always been ambitious to grow the group by acquisition and in principle that remains the case. But you’ve got to recognise the fact that we did a big acquisition eighteen months ago [Express Dairies] which has affected our gearing and I think you”ve also got to recognise the credit markets and the financial markets have changed hugely in the last twelve to eighteen months.

Another business plan knobbled by the credit crunch then, leaving the investment case resting on the dividend, which is yielding nearly 7%.

Now Dairy Crest’s share price is almost half what it was last year, it merits consideration as an income investment. We collect the dividend for a year or two, say, until the debt market and raw material costs stabilise and then we watch the share price rise as the company’s prospects improve.

When Dairy Crest’s dividend yield last rose above 6% about eight years ago it was a good time to buy. Sadly, history need not repeat itself, but we can gain confidence, or lose it, by comparing the size of the dividend to the shareholders’ profit. This is where the story gets a little muddy, because the calculation depends on which earnings figure you use.

In May, Dairy Crest reported adjusted earnings per share of about 57p for 2008, and basic earnings per share of just over 40p. The total divided for the year was 24.4p per share. So profits were either 2.4 times the dividend, or 1.6 times. If the former figure is right, profits could even fall somewhat, and the company could still afford the dividend. If profits only cover the dividend 1.6 times, there’s less breathing room.

Long-term, I’m inclined to give Dairy Crest the benefit of the doubt. Some of the exceptional costs excluded from the adjusted earnings figure look like genuine one-offs, though some are debateable, it has a good dividend record, and its cash flow, and therefore its ability to pay the dividend, generally exceeds its accounting profit.

But it’s difficult to foresee much enthusiasm for the shares while the twin Rottweilers of economic doom – commodity prices and debt – are gnawing away at investors’ confidence.

It’s the times we live in.