Richard Beddard initiates coverage of a company, which sees it enter his top five favourite shares list, and conducts an annual review of a long-term investment.
Since last month’s article, I have investigated and ranked three companies – two of them, Bloomsbury Publishing (see Share Sleuth and this interactive investor article) and PZ Cussons, for the first time.
Although I have reviewed Alumasc annually ever since it first joined the Share Sleuth portfolio 10 years ago, it is my least favourite long-term investment of the trio.
Alumasc will not grow despite Herculean corporate activity, and its underfunded pension scheme is sucking about half of all the cash the company earns out of the hands of shareholders to plug a funding deficit.
Once a conglomerate of precision engineering companies and building materials suppliers, Alumasc has refashioned itself into a specialist premium building materials supplier through acquisitions and disposals. Long gone are the engineering firms and the more hum-drum construction-oriented suppliers (scaffolding firms, for instance). What remains is a gaggle of businesses focused primarily on the outside of buildings (the “envelope”), such as gutters, downpipes, drains and roofing systems, and a balance sheet encumbered by modest debt and more substantial lease and pension obligations.
Alumasc is not planning any more disposals, and with the reshaping ostensibly over, the company ought to be doing well. But the construction industry is in the doldrums; Alumasc’s adjusted profit fell 7% in the year to June 2019, and by substantially more if we include hefty restructuring costs the company would rather we ignored. The losses were at Levolux, one of Alumasc’s strongest brands, which supplies solar shading for buildings. A long-heralded sales drive in the US has also faltered.
Alumasc has a recovery plan for Levolux, but having watched it churn its portfolio of businesses for a decade and achieve little, I am wondering whether it will ever convert its high returns on capital into growth. Score 5.0/10.
In recent years PZ Cussons’ reputation as a stock market stalwart has been tarnished. The company still has an enviable record of dividend payments, but it stopped increasing the dividend in the year to May 2018 and it had already reined in capital expenditure. It made its last acquisition in August 2015.
Money has been harder to come by because of stagnation in some of its more developed markets, including Europe, where discount retailers are all but copying famous brands and the internet gives consumers more choice. But the collapse of profit in Africa, particularly Nigeria, after the oil price crashed in 2015 has had the most dramatic impact. A booming economy in the 2000s had made Africa PZ Cusson’s biggest market.
In recent years, though, the Nigerian economy has contracted. An efficiency drive has failed to return PZ Cussons to growth, so management has decided to throw the lever into reverse, jettisoning some of its previous acquisitions and scaling back many of its operations in Nigeria. The company expects to invest the money it makes from disposals and saves from rationalisation, to improve its personal care and beauty brands such as Imperial Leather and Original Source soaps and fake tan brand St Tropez, which are market leaders.
People are more picky about beauty products, it seems, than milk, yoghurt or household cleaning brands – products the firm will make much less of in the future; so its new strategy of focusing on beauty and personal care is probably a good one. The shares trade on a very low enterprise multiple, about 12 times adjusted profit.
Scoring 7.8, PZ Cussons goes straight into the top five ranked shares at number three. Meanwhile Dart Group has dropped out of the list as its share price has shot up following the collapse of Thomas Cook, which makes it comparatively less attractive (though it is probably still a very good long-term investment). Dart owns one of the defunct package tour operator’s erstwhile rivals, Jet2holidays, which Share Watch has long championed.
Share Sleuth’s favourite five
|Score||Name||Description||Interactive Investor link|
|9||XP Power||Manufactures power adapters for industrial and healthcare equipment||http://bit.ly/swXPP2019|
|8||Victrex||Manufactures PEEK, a tough, light and easy to manipulate polymer||http://bit.ly/swVCT2019|
|7.8||PZ Cussons||Manufactures personal care and beauty brands, in the main||https://bit.ly/swPZC2019|
|7.7||Howden Joinery||Supplies kitchens to small builders||http://bit.ly/swHWDN2019|
|7.7||FW Thorpe||Makes light fittings for commercial and public buildings, roads and tunnels||http://bit.ly/swTFW2019|
Note: Shares are scored out of 10, according to five criteria: profitability, risks, strategy, fairness and value. As at 1 November.