I have an unused account there. When I have time I will try to figure it out. Somewhat surprised that IBKR did not have access. I bought AIM stocks on IBKR before.
Thanks for this. Here in the UK, there used to be an Investment Trust called Rights & Issues managed by Simon Knott, who was a star, concentrated value investor, and this was one of his holdings for many years. It's something that was very much a 'name' with my parents' generation, but I don't hear about now.
How do you derive the maintenance capex of only 1.8m when they had depreciation (without leasing) of 2.6m in 2024 and invested 3.0m and 3.5m in the last two years?
Or put differently: Why is or why should FCF be higher than stated earnings? I normalize earnings to 4.5 million GBP or 0.69p with the old number of shares. Even cash adjusted (before leasing), I only get a PE of 7.5.
p.9 of the annual report: "The Group has recurring capital expenditure of approximately £1.8 million per year mainly related to new product investment by the Fabric Division. This compares to an annual depreciation charge of £2.6 million in 2024."
By the way, the only analyst who gives estimates assumes a fall in net income to 3.8 million for the current year and a mean for the next 3 years of 4.53 million, which matches exactly my number.
Btw. the actual average capex in the last 6 years is 2.657 million, surprisingly ;-) matching depreciation.
I would not normalize over the last four extraordinary years since Covid, but over a longer time. I did it for the last 22 years with a mean operating margin of 6.3%.
Also, it's the nature of working capital that larger swings occur, in this case in total favourably to FCF (which is admittedly remarkable, although business kept growing). I doubt that it is sensible to expect this to continue.
I'm not normalizing over last four years, I just provided the screenshot as a point of reference. Taking a mean over the last 22 years seems smart but is actually wrong. The US is higher margin and faster growing part of the business, now larger as a % of revenue than was the case back then
1.) The long term CAGR was not 3%, but 2.1% p.a., regarding the revenue as the relevant metric. So basically no real growth at all, just in line with inflation.
EBT grew by 3% p.a. due to margins currently being at elevanted margins. Btw. net income also has benefitted from lower taxes, which has anyway been a one-time event.
2.) I regard it as somewhat questionable to refer to the EV at all because the company has had net cash for years (before leasing liabilities), it even has increased relatively over time. We won't benefit from cash that's sitting on the balance sheet until the end of time. Of course, this improves your yield number, especially when you don't include leasing into the EV, but instead deduct the leasing interest from FCF. When in doubt, I prefer the more conservative approach.
2/ You have the right to adjust the cash pile if you're not trusting David to do something smart with it, but also you need to add in the interest from cash to your E calculation then. Deducting annual leasing is the more conservative approach, not the other way around
On a typical day, it's not ~5000 shares that are traded, but rather ~1000. On-exchange, it's close to zero! The reason is, that the tender offer is shown in the turnover, as are other off-book trades. Which of course skews the average turnover, which has been 16.500 GBP/day during the last year (250 days) according to my data. But if you exclude the 2.4 million GBP tender offer, it's down to ~7000 GBP per day or 1000 shares.
Nice write up. I want to dig a bit more into the assumption that they can generate £1/share in FCF in a normal year. Just looking at the EPS chart you showed, it's pretty obvious that the post-covid period has been anomalous with respect to the long-term trend (>80p vs ~40p). What has caused this, and what gives you confidence that the future will look more like the past few years and not the decades that preceded them? Thanks.
Thank you. Inflation and buybacks that occurred in the meantime provide a floor. Probably not at 1/share (in bad times) but not at 0.5/share either. As I mentioned, 3M decrease in shares outstanding is a lot
Okay, that's a pretty substantial reduction in shares and definitely explains a good bit of the increase. But still, operating margin remains significantly elevated - do you foresee this returning to the ~5-6% level they've averaged over the long-term, or remaining at more like 8% as in 2024?
(I get this is now the 30% difference that you mention - and you're right, it's still cheap either way. But 5x FCF and 8x FCF are quite different beasts, particularly in terms of 'how urgently do I need to look into this' - which is the question I'm trying to answer.)
I think 6-7% EBIT margin is a reasonable ballpark in the long-term, which easily brings you to > £1 EBIT / share on current level of sales. Probably closer to 7% than 6.
Next year's operating margin will definitely be lower. And I hope that scares some current shareholders away.
I understand haha. Probably not so urgent if you look at what the UK Gilt has been doing in the last couple of weeks, or if you take a peak at SDG's H1 numbers
Since 2002, the mean operating margin has been 6,3%, and I would use that as a best guess, especially given what you wrote about their stable margins. So, rather closed to 6%. I could agree with 7% if this really was the current number, but as you wrote, it's foreseeable that this won't last.
Anyway, EBIT is not earnings. With that, I arrive at 0,76p or a >10x multiple.
No, just taking a mean would be wrong because US is faster growing, higher margin part of the business. And is now the larger as a % of revenue than was the case then.
Btw, now adjust to FCF and add in the cash which will eventually be used
Great find!
Thanks, Joe!
Really interesting idea💡
Anyone found a broker who does let you buy this? 👀
Thanks. I believe Degiro has it but not sure.
I have an unused account there. When I have time I will try to figure it out. Somewhat surprised that IBKR did not have access. I bought AIM stocks on IBKR before.
Thanks for this. Here in the UK, there used to be an Investment Trust called Rights & Issues managed by Simon Knott, who was a star, concentrated value investor, and this was one of his holdings for many years. It's something that was very much a 'name' with my parents' generation, but I don't hear about now.
Thanks Tom. I didn't know this. Is there a link you can share?
Here's something: https://www.jupiteram.com/uk/en/institutional/rights-and-issues-investment-trust-plc/?kurtosys_download=27985
Unfortunately:
1) he retired & a different company took over. This is one of the last ARs. Seems like he owned 26% of the company!
2) His manager reports were minimal! Only way to get a sense of what he thought was to attend the AGMs.
3) To clarify, Colefax was the 'name', rather than the Trust.
If you google him & Colefax, something might come up, but he was pretty taciturn.
Great, thank you.
How do you derive the maintenance capex of only 1.8m when they had depreciation (without leasing) of 2.6m in 2024 and invested 3.0m and 3.5m in the last two years?
Or put differently: Why is or why should FCF be higher than stated earnings? I normalize earnings to 4.5 million GBP or 0.69p with the old number of shares. Even cash adjusted (before leasing), I only get a PE of 7.5.
p.9 of the annual report: "The Group has recurring capital expenditure of approximately £1.8 million per year mainly related to new product investment by the Fabric Division. This compares to an annual depreciation charge of £2.6 million in 2024."
By the way, the only analyst who gives estimates assumes a fall in net income to 3.8 million for the current year and a mean for the next 3 years of 4.53 million, which matches exactly my number.
Btw. the actual average capex in the last 6 years is 2.657 million, surprisingly ;-) matching depreciation.
I would not normalize over the last four extraordinary years since Covid, but over a longer time. I did it for the last 22 years with a mean operating margin of 6.3%.
Also, it's the nature of working capital that larger swings occur, in this case in total favourably to FCF (which is admittedly remarkable, although business kept growing). I doubt that it is sensible to expect this to continue.
I'm not normalizing over last four years, I just provided the screenshot as a point of reference. Taking a mean over the last 22 years seems smart but is actually wrong. The US is higher margin and faster growing part of the business, now larger as a % of revenue than was the case back then
1.) The long term CAGR was not 3%, but 2.1% p.a., regarding the revenue as the relevant metric. So basically no real growth at all, just in line with inflation.
EBT grew by 3% p.a. due to margins currently being at elevanted margins. Btw. net income also has benefitted from lower taxes, which has anyway been a one-time event.
2.) I regard it as somewhat questionable to refer to the EV at all because the company has had net cash for years (before leasing liabilities), it even has increased relatively over time. We won't benefit from cash that's sitting on the balance sheet until the end of time. Of course, this improves your yield number, especially when you don't include leasing into the EV, but instead deduct the leasing interest from FCF. When in doubt, I prefer the more conservative approach.
1/ It's 3% since 1998 as mentioned in the article
2/ You have the right to adjust the cash pile if you're not trusting David to do something smart with it, but also you need to add in the interest from cash to your E calculation then. Deducting annual leasing is the more conservative approach, not the other way around
On a typical day, it's not ~5000 shares that are traded, but rather ~1000. On-exchange, it's close to zero! The reason is, that the tender offer is shown in the turnover, as are other off-book trades. Which of course skews the average turnover, which has been 16.500 GBP/day during the last year (250 days) according to my data. But if you exclude the 2.4 million GBP tender offer, it's down to ~7000 GBP per day or 1000 shares.
You're right. Even better
Nice write up. I want to dig a bit more into the assumption that they can generate £1/share in FCF in a normal year. Just looking at the EPS chart you showed, it's pretty obvious that the post-covid period has been anomalous with respect to the long-term trend (>80p vs ~40p). What has caused this, and what gives you confidence that the future will look more like the past few years and not the decades that preceded them? Thanks.
Thank you. Inflation and buybacks that occurred in the meantime provide a floor. Probably not at 1/share (in bad times) but not at 0.5/share either. As I mentioned, 3M decrease in shares outstanding is a lot
Even if my valuation proves to be off by 30%, it's hard to argue it's expensive
And keep in mind I'm talking normalized numbers, not next FY
Okay, that's a pretty substantial reduction in shares and definitely explains a good bit of the increase. But still, operating margin remains significantly elevated - do you foresee this returning to the ~5-6% level they've averaged over the long-term, or remaining at more like 8% as in 2024?
(I get this is now the 30% difference that you mention - and you're right, it's still cheap either way. But 5x FCF and 8x FCF are quite different beasts, particularly in terms of 'how urgently do I need to look into this' - which is the question I'm trying to answer.)
I think 6-7% EBIT margin is a reasonable ballpark in the long-term, which easily brings you to > £1 EBIT / share on current level of sales. Probably closer to 7% than 6.
Next year's operating margin will definitely be lower. And I hope that scares some current shareholders away.
I understand haha. Probably not so urgent if you look at what the UK Gilt has been doing in the last couple of weeks, or if you take a peak at SDG's H1 numbers
Since 2002, the mean operating margin has been 6,3%, and I would use that as a best guess, especially given what you wrote about their stable margins. So, rather closed to 6%. I could agree with 7% if this really was the current number, but as you wrote, it's foreseeable that this won't last.
Anyway, EBIT is not earnings. With that, I arrive at 0,76p or a >10x multiple.
No, just taking a mean would be wrong because US is faster growing, higher margin part of the business. And is now the larger as a % of revenue than was the case then.
Btw, now adjust to FCF and add in the cash which will eventually be used