William Sinclair, a contrarian conundrum
Posted on February 17, 2009 by Richard Beddard
Filed Under Companies |
Guilty of perverse optimism in the first degree
Some people see roses where everyone else sees dandelions or sense opportunity where others despair.
Although perverse optimism is part of being a value investor, it’s difficult to be optimistic about William Sinclair (SNCL). The company’s share price describes long-term decline and stagnation and its latest annual report1 reveals declining profitability and cash flows, and rising debt. It’s F_Score is four out of nine, which means, in terms of financial strength it’s close, but not in the death zone*2.
Bernard Burns sees roses, though, which may be because the company he runs makes weed killer (and fertiliser), but more likely it’s because he’s the kind of stubborn contrarian that can turn a company around (or run it into the ground).
Exhibit one for the prosecution: On the first page of Sinclair’s annual report Mr Burns praises former management:
Previous management action to reduce the Company’s cost base and improve the productivity of the business ensured the Company has been able to endure recent extreme market conditions. In particular the early and cold Easter, the poor harvest3 due to heavy rains and the rising costs of raw materials.
…Which is unusual for the chief executive of a struggling firm. Then he looks forward to recession with optimism:
With inflationary pressures subsiding, fuel and haulage costs returning to more realistic levels the Company is starting to restore its margins as price increases begin to flow through.
Traditionally sales of garden products are relatively resilient during economic downturns. With a low exposure to exchange rate fluctuations, strong peat reserves, a 100 per cent increase in the use of recycled materials in our products and a reputation in the industry for strong customer service, we are well placed to withstand the current economic downturn.
Exhibit two for the prosecution: In this interview with the FT, Mr Burns reveals he drives a Skoda, and lobbied hard to call his son “Bernard”:
“I don’t know if it’s so much a lack of imagination. More like sheer cussedness, I suppose,” Mr Burns says. “Bernard is not an easy name to grow up with and I think having a name like that builds character. It’s a bit of a badge of perversity, if you like, like driving a Skoda.”
Guilty, I think of contrarianism in the first degree.
Sadly, that’s not enough to make William Sinclair pick of the week, much as I admire Mr Burns’ pluck and Churchill China (CHH), another company he helped turn around.
Mr Burns says that, because Sinclair uses peat from British bogs, its fertilisers require less transportation. That may be so, but customers are demanding peat-free products, alternatives are more expensive, and its bogs are turning into conservation areas.
The company hasn’t turned its local advantage into profit either. Profits are a fraction of their levels at the beginning of the decade, and I wonder if they will ever justify its long-term price earnings ratio of nine.
While Mr Burns is a contrarian’s contrarian, I’m not sure the company is cheap enough yet, or far enough along the track to recovery.
Footnotes:
- For fifteen months, because the company has changed its year-end.
- A company isn’t likely to go bust if it has a low F_Score, but it’s much more likely to go bust than a company with a higher F_Score.
- Peat harvest.
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4 Responses to “William Sinclair, a contrarian conundrum”
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[...] down share prices so potential returns more than compensate us for the risks, but rather like William Sinclair earlier in the week, I’m not sure they [...]
You congratulated Mr Burns for supporting previous management - if you read it he doesn’t congratulation previous management - he is referring to previous management decisions ie his own decisions.
Do you not feel your negative assessment is mistimed now that this company is being offered £12M compensation in cash for a piece of land?
Hi Harvey, thanks for your comment. On reading it again I think you’re right, so congratulations are not deserved, all round!
I don’t know if my assessment is negative, more undecided. One of the problems I have with SNCL is the number of unknowns, when I’d say the valuation is already pricing in a bit of a recovery. I’m no expert on peat and fertiliser but it seems the industry is changing for environmental reasons to peat-free products, which is both a threat and an opportunity.
£12m sounds a lot for a bog, but it is SNCL’s livelihood. The company says it expected more, and that all of the options it has when it loses the land are more expensive. Ultimately SNCL has to make money making peat and fertiliser so I’m not sure how relevant a payment like this would be.
It is interesting to look back at your assessment of this company at the beginning of the year - it looks like you were very wrong as the price is now 80% higher than when you were commenting.