Investor Column: Fuller Smith & Turner, J Sainsbury, Purplebricks
HOLD: Fuller Smith & Turner (FSTA)
The pub group managed to get their debt under control before the restrictions were lifted on July 19, writes Arthur Sants.
Fuller Smith & Turner must be happy to see new Health Secretary Sajid Javid “learning to live” with the Covid-19 position. After a tumultuous year, it should bounce back well once restrictions are completely lifted on July 19 and England’s race to the Euro 2020 final should help restore public visitation habits to pubs.
Fuller’s comparable sales were already 76% of the 2019 level for the 12 weeks leading up to July 3, even without the ability for patrons to enter a pub without a reservation. The group has also cut net debt levels below what they were before the pandemic, although it has burned up to £ 5million in each month of lockdown. This prudent financial management and its recent capital increase of 52 million pounds will give it leeway to continue investing.
The benefit of canceling his dividend and taking out a £ 100million Covid Corporate Financing Facility loan is that he was able to pursue the ’10 transformational renovation programs’ for his mostly freehold estates . This will allow exchanges to resume quickly and there is a strong possibility that demand for its hotels will remain above pre-pandemic levels as stays remain popular. Private equity firms have supported this trend with recent acquisitions of holiday parks and caravans.
The main concern is that the new variants of Covid-19 will generate continued restrictions, but Javid’s recent post has reduced that risk. Trading conditions are on the verge of improving, but caution remains.
HOLD: J Sainsbury (SBRY)
Sainsbury’s, considered one of the main targets of private equity, is focusing on its own restructuring, writes Oliver Telling.
Private equity is hungry for new deals, and UK grocers are currently among the tastiest on the menu.
With Asda snapped up and a suitor spinning now WM Morrison, attention naturally turns to bigger rival Sainsbury’s, which has also suffered years of underperformance. A festering share price near decades-long lows, combined with its vast footprint and historic brand, must tempt many buyout companies.
But following a business update this week, chief executive Simon Roberts was quick to shoot down the speculation. “If we had something to update, we would,” he dryly told reporters.
Instead, the company wanted to draw attention to its internal restructuring effort. He said the plan to put food back at the heart of Sainsbury’s has since helped it gain market share: non-fuel sales increased 1.6% year-on-year in the quarter ending June , exceeding expectations. The supermarket raised its guidance for underlying profit before tax for the full year from £ 620million to £ 660million.
Sainsbury’s is funneling some of its excess cash into a £ 50million price war with Aldi, the German low-cost supermarket that helped push its shares down when it broke into the UK market there about a decade. The British grocer’s aggressive strategy is explicitly aimed at matching Aldi on price, while delivering “Sainsbury’s quality”. If he also manages to find a buyer for his ailing bank, that could be a winning recipe.
Sainsbury’s shares have rallied since November and current investors should be eager to see if the new management can continue to implement the restructuring effort, rather than cash in at a deflated price in a capital buyout. investment.
Others might be inspired to reconsider the company, which has long been seen as one of the rotten vegetables in Britain’s stock basket. Investors’ Chronicle analysis shows that short sellers have taken more positions against Sainsbury’s than any other UK stock over the past decade, although speculation over the buyout has prompted some to pull out. Low margins and vulnerability to competitors mean that supermarkets will never dominate the UK market.
HOLD: Purplebricks (PURP)
The online-only real estate agent hopes that a two-tier pricing model and money-back guarantee will compensate for any drop in market volumes, writes Alex Newman.
Before the pandemic, the indictment against real estate agent Purplebricks included a deficient commodity and an overzealous expansion strategy. Missteps take a long time to correct. Despite high expectations after its 2015 float, the shares are still trading 12% below their listing price, against a total return of 50% from the FTSE All-Share.
Now, with its target reduced in the UK, the world has arguably turned to the company’s self-service home buying proposition. Online property visits are no longer the odd proposition they once seemed, a change that looks likely to continue even as concerns about the virus’ close transmission fade.
Unfortunately for investors, the hectic nature of the real estate market has made it difficult to verify this hypothesis.
A 14% increase in instructions in the year through April seems to be a source of hope, although this has to be compared to Purplebricks’ market share of properties sold by volume, which has fallen from 5. 1 to 4.6%. A rising tide did not lift all the boats with the same force.
Reducing volumes is therefore a challenge. Like most players in the housing market, management believes supply and demand will return to “a more balanced post-summer equilibrium” as the stamp duty holiday ends.
Managing Director Vic Darvey’s response to a tougher prospect is an overhaul of Purplebricks’ pricing strategy after a successful trial in the Northwest. This includes a money-back guarantee if a property fails to attract an offer within 10 months, and a two-tier pricing model that the company hopes to increase revenues by 20% per year.
Investors are hopeful that an equal rise in cost inflation will not follow, as margins remain tight.
Although statutory results suggest the company can fund itself through cash generation, more than half of last year’s operating profit came from non-commercial sources: a reclassification of a stake in its German counterpart Homeday and a £ 2.3million credit from canceled outgoing directors’ stock options. Another gain of £ 2.3million from the sale of the Canadian branch and £ 900,000 from positive currency movements explain the rise in net profit from £ 3.9million to £ 7.7million sterling.
Management says it is too early to quantify the benefits of the pricing overhaul for the current fiscal year. The city – which expects earnings of 1.3 pence per share in the 12 months to April 2022 and 1.8 pence the following year – will likely wait for evidence of an operational gear. We also remain cautious.
Mary McDougall: Follow the shareholder activists of investment funds
There’s an interesting struggle going on at Third Point Investors, where activist manager and investor Daniel Loeb faces a taste of his own medicine.
Third Point Investors is an investment firm with assets worth £ 736million, listed on the London Stock Exchange in 2007. It invests directly in Third Point’s largest hedge fund, which is managed by Loeb in New York and, according to its website, has generated 15% net annualized returns for investors since its inception in 1996.
A lingering frustration for the trust’s shareholders has been its persistent discount to the net asset value (NAV) over the past three years, most often above 20 percent. As a result, activist investor Asset Value Investors bought a stake and tried to persuade its board to take action to lower the haircut.
Asset Value Investors has had some success. The board of directors of Third Point Investors introduced a haircut control mechanism, setting a long-term haircut target of no more than 7.5 percent and repurchased shares to bring the haircut closer to the target.
However, James Carthew, head of investment company research at QuotedData, points out that a concession in June that allowed investors to trade in the master fund with a 7.5% discount was only possible for transactions over £ 10million, so for the most part irrelevant. The Board of Directors also accepted two takeover bids for 25% of the net assets at a discount of 2% from the net asset value if the discount is greater than 10% during the six months preceding the March 31, 2024.
This was not enough for Asset Value Investors, which owns 10 percent of the shares of Third Point Investors. On July 5, alongside three other shareholders, Asset Value Investors wrote to the board of directors of Third Point Investors, requesting an extraordinary general meeting at which the option of quarterly redemptions at net asset value less transaction costs could be put to the vote of the shareholders. This would be financed by the sale of shares in the master fund.
It’s a pretty hard-hitting request. The board has yet to respond, but it could argue that introducing an exit mechanism would compromise the way they manage money. And this can reduce the size of the trust over time, thus increasing the fixed costs relative to the market capitalization. But Mick Gilligan, head of portfolio management services at Killik, believes recent movements in stock prices suggest the market expects a positive outcome for shareholders and a tighter discount going forward.
Why should we care? It shows the influence that activist investors can have. On July 6, Third Point Investors was trading at a discount to NAV of 9%, much tighter than for years. So you might benefit from keeping an eye on activist investor activity. While their negotiations with boards tend to proceed without a public row, they can make significant governance changes that should ultimately benefit the stock prices of the trusts in question.
It can be difficult to identify who the activist investors are, but well-known discount investors include Asset Value Investors and 1607 Capital Management, and City of London Investment Management. Shareholders with reportable interests may be listed in a trust’s annual report and major changes are detailed in stock announcements.
A final point to remember as a shareholder is to vote on all resolutions at a trust’s annual general meeting and as special resolutions arise. It can be boiled down to the thread, and voting is necessary for shareholder democracy to thrive.
Mary McDougall is an investment writer for Investors’ Chronicle