UK plc is fit and healthy…
Posted on November 21, 2007 by Richard Beddard
Filed Under Companies |
Continuing my evangelism for the annual report, and the role it can play in discovering good companies I have a few more for you this week, though it’s a quiet one for new reports.
But, first, to expand on the rationale a little, this is what I’m looking for on my first pass through an annual report:
- Insight into what a company is doing,
- where it’s doing it, and…
- how profitable it’s been over the past five years of so.
Most companies put this information in their annual reports, and they don’t necessarily put it in their preliminary results i.e. the results that are widely reported in the press. Often the details are in the financial review and the notes to the accounts, which can be absent or truncated in the prelims.
It’s the big picture, not the highlights, I’m interested in: whether it’s an established company, whether its operations are mainly in the UK or international, what it’s most important activities are, and whether it’s expanding, contracting or moribund.
Individually these are useful pieces of information. Combine the observations on hundreds of companies and you get a bottom-up view of the stock market, and the position of various companies within it.
It’s an alternative to the top-down view of analysts and economists, based on economic measures like interest rates, inflation and GDP growth, and consumer confidence surveys.
I think the bottom-up view serves private investors better for three reasons:
- Most of us don’t have the data or skills to crunch numbers like City big boys,
- the bottom-up view is unique to the person who forms it, it’s his competitive advantage, and…
- it keeps us focused on businesses, which are after all what we are investing in.
Also I’m generally predisposed to try and make sense of the world from the bottom up - going from the familiar and usually understandable (what companies are doing) to the unfamiliar and incomprehensible (trends and business cycles).
I have a suspicion, mostly prejudice I’m sure, that for all the fancy theory, should a top-down analyst look up from the rows and columns of his spreadsheets and check what’s happening in the real world, he’d get a shock.
Not everyone has the time or inclination to plough through newly published annual reports, though, so my modest ambition is to share my bottom up view of the market as it develops and dig up a few stock ideas along the way.
There’s money in servicing social housing. Connaught’s (CNT) share price has gone up ten times in less than ten years and there’s evidently an element of expectation, (a braver man would call it hype), in the share price that ought to attract the attention of momentum investors. Chairman, Mike Tincknell, doesn’t do much to manage expectations in his statement:
Connaught’s investment has laid the foundations for the creation of a much larger business. The forward momentum is unprecedented in the Group’s history.
Backward momentum sounds alarmingly like a paradox, but if past performance were any indication, he’d have a good case. Anyway top marks to Connaught for featuring these likely lads:
…When so many companies cram their reports with airbrushed execs and unfeasibly good-looking stooges. These boys look like the real deal. And there are jobs for the boys at Connaught, especially now it’s diversifying into servicing offices, gyms, care homes, shops, factories…
Group NBT (NBT) is a ten-bagger twice over since 2002, an epic rise that is, nevertheless, dwarfed by its collapse in the dot.com crash. It doesn’t have much in common with Connaught, being an internet company that primarily sells and manages domain names (names like iii.co.uk that identify websites), but it’s expanding.
It’s shifting away from selling domain names online, which judging by the number of domain name sellers, is a very competitive business. Servicing big corporate clients is the biggest segment now, and Group NBT’’s taking over other internet companies whose services it wants to cross-sell.
It remains to be seen how badly customers want Group NBT to host their websites, or protect their brands, but investors are following gleefully.
Also featuring in today’s investor love-in is Associated British Foods (ABF) which plasters “INVESTING IN SUGAR GROWTH” all over its annual report, literally.
Incongruous for the front cover, perhaps, of a company that not only owns British Sugar, but Primark - the fashion retailer (annual sales of £1.6bn) and grocery brands like Ryvita, Mazola and now Patak’s (total annual sales £2.6bn). Although it’s investing in those too, it’s agriculture and sugar that made the front cover.
It’s expanding sugar production in Africa and China. I can’t imagine a project with more in it for the trigger-happy investor. Mix go-go economies, with rising food and fuel prices (ABF has commissioned the UK’s first bioethanol plant, which uses sugar beet) and a boring old conglomerate is the next big thing*1.
Sadly, there’s no restructuring or spin-offs from companies publishing annual reports in the last week or so, and precious little doom. It’s a shame for me because those are situations I favour as an investor. Also reporting were:
- GETECH (GTC),
- Lok ‘n Store (LOK), and…
- Jubilee Platinum (JLP).
Unremarkable, to a company I thought.
On this week’s tiny sample UK plc looks like it’s in good shape. It’s expanding, diversifying, and growing. But we should reserve judgement, at least until the banks report…
A colleague bought shares in RBS recently. Like many banks, it’s plumbing new depths. By coincidence we have a copy of last year’s annual report in the office. It’s the size of small telephone directory and wouldn’t fit through most letter boxes. I dropped it from an unnecessary height on my friend’s desk and asked him if he’d read it, and satisfied himself the business is as solid as a rock, or at least its annual report. He gave me the withering look of a true speculator.
Two hundred and sixty pages. Could it be a record?
Footnotes:
- See Edmond Jackson on Lonrho, for more on conglomerates coming back into vogue.
- You can order annual reports in print or pdf on the Interactive Investor mothership.
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[...] cursory look at Connaught (CNT) last week was enough to write it off as a momentum play. Its chart resembles the trajectory of a rocket [...]
[...] I said there’s money in social housing, perhaps I should have extended that to any building. Just like Connaught, GSH (GSH), which [...]