Putting money in the PIIGY Bank? – Bank of Ireland

I have not had much time to write recently for many other reasons. In any case, I have not had a huge amount to write about. The market chugs ever onward and apparently, Apple is the only fruit worth eating. While I should be pleased, as my equity investments have performed well, I must admit that I did not expect to have made such a return so quickly when I returned to the equity markets last year. Also, I am no where near full invested in equities, so asset allocation will have dampened my total portfolio return.

As a student of valuation and market cycles, I hope to invest at the point of maximum opportunity. One of those points was last August/September, but it is not my view that it was the ultimate valuation low in the present cycle. As I have elaborated on in the past, my central belief is that we are in a cyclical bull market in within a broader secular bar market. While stock picking is important, I believe that an appreciation of market cycles and asset allocation is more important.

As a advocate of the secular bear market/sideways market belief, I really should question as to whether I should be a shareholder of a bank. I am a shareholder in Bank of Ireland, having purchased share last October.

Many folks will have seen and read the piece on profit margin sustainability this week from James Montier at GMO. The research is focused on how high US profit margins are relative to history, and that if margins and valuation begin to mean revert then that has implications for total returns from the stock market. My ideal investments all focus on mean reversion. I am principally interested in investing in the equities of companies that have room to grow valuation, revenue and margins. Bank of Ireland to my mind has an opportunity over the next five to ten years to grow profitability and valuation, however in a balance sheet recession banks and wider society are forced to delever. If this is the case, maybe the shrinkage from deleveraging will offset the gains from margin expansion, and I will be left with a pretty poor investment? That is why I am forcing myself to re-evaluate this particular investment.

Bank of Ireland plc 

The purpose of this post is to question the sanity of such an investment in the current market, and to cross check how BKIR is doing versus similar banks in the UK, Scandinavia and continental Europe. The core of this analysis is as follows:

  • How is Bank of Ireland capitalised?
  • How is Bank of Ireland funded?
  • How likely is it that Bank of Ireland will earn a 10% Return on Equity?
  • What does the present valuation imply?
  • Should I own any banks?

As a starting point, before going onto risk weights and Tier 1 ratios I believe that it is important to look at a simple equity/assets ratio. I do this because I believe that the concept of risk weighting assets with weightings less than 100% is fundamentally flawed and is in part to blame for the banking crises of the past few years. To my mind the BIS risk weighting methodology allowed banks (and shareholders) to believe that balance sheet growth was significantly smaller than was actually the case. The issue is important, because although assets can be risk weighted, liabilities (or funding) is not. So, whether a€100  loan on a banks balance sheet has a weighting of 50%, 75% or 100%, it still requires €100 of liabilities to fund this asset. So to look at a balance sheet in any other manner is to my mind delusional.
The table below presents the simple equity/assets ratio of many of the largest banks operating retail and commercial banking in Europe.
Bank Equity Total Assets Equity/Assets
Bank of Ireland 10200 155000 6.6%
RBS 74819 1506867 5.0%
Lloyds Banking Group 45920 970546 4.7%
Societe Generale 47067 1181372 4.0%
BNP Paribas 75370 1965283 3.8%
Credit Agricole 42797 1723608 2.5%
KBC 16255 285382 5.7%
Banco Santander 76414 1251526 6.1%
BBVA 38165 597688 6.4%
Baco Popolar Espanol 8282 130926 6.3%
Banco Sabadell 5887 94550 6.2%
Commerzbank 24104 661763 3.6%
BCP 3889 93545 4.2%
BES 5604 80237 7.0%
Intesa San Paolo 47040 592181 7.9%
Unicredit 64224 929488 6.9%
UBI Banca 10979 130559 8.4%
Monte de Paschi di Sienna 17303 244279 7.1%
Banca Popolare di Milano 3660 51927 7.0%
Danske Bank 125795 3424403 3.7%
DNB NOR 117815 2126098 5.5%
Svenska Handelsbanken 94524 2454366 3.9%
Nordea 26034 716204 3.6%
Erste Bank 13585 205938 6.6%
Average 5.5%
What one will notice is that high equity/assets ratios have been no saviour to the equity investor in terms of share price performance. Some of the best performers (the Scandinavian banks for example) have the lowest equity/asset ratios in the sample group. Poor performers such as the Irish and Italian banks have reasonably high equity/asset ratios. It is not enough that the bank has sufficient capital relative to its assets, those assets must be sound and have a low probability of impairing the capital base. Given the property loan portfolios of the Irish banks and the Italian Government bond portfolios of the Italian banks, the markets has taken a view as to the underlying value of those assets.

What I can say, is that relative to its peer group, Bank of Ireland appears well capitalised. This should not be a surprise given that the bank has raised equity from shareholders and liability management exercises many times over the past three years. What I need to look at is, how does the bank look at in an absolute sense of capital adequacy.

For a bank, capital exists (in part) as a buffer to loan losses. Since the 2008 financial year, Bank of Ireland has realised impairments and loan losses of €12.6 billion on an asset base of €194billion and a loan portfolio of €134 billion at the height of the market.

To put that in context, almost 9.5% of the peak balance sheet loan book has been impaired thus far.

Problem Banks Accumulated LLPs 2008 Loan Portfolio Writedown
Bank of Ireland 12631 134000 9.4%
Lloyds 48588 677958 7.2%
RBS 39936 874722 4.6%
Danske Bank 64767 1127142 5.7%
Banco Populare Espanol 5115 91705 5.6%
Banco Sabadell 3398 65629 5.2%
So it would seem that on an absolute and relative basis, that Bank or Ireland has more capital than its peer group average, and that its most recent destruction of capital by way of loan losses have been similarly large. Will this prove to be sufficient given the current state of the loan portfolio and impaired loans?
Current loan portfolio and impaired loans:
During the summer of 2011, BKIR began a large rights issue that would ultimately raise sufficient capital to meet the requirements set out by the EU and ECB in terms of banking stress tests. As part of the rights issue prospectus, the Bank published details of the adverse stress test scenario carried out by Blackrock.
Source: Bank of Ireland Rights Issue Prospectus, 2011.
As part of the stress test, Blackrock Solutions  estimated that Bank of Ireland would require additional provisions of €6.6bn to cover a worst case scenario in terms of loan losses between 2011 & 2013. Since then, Bank of Ireland has reported its 2011 full year figures, where they recorded an impairment charge of €1.96 billion. While this would put the bank inside the run rate of the Blackrock stress test, the recent results did show a deterioration in credit quality across several loan books.
I have used the most recent accounts to come up with my own stress test.
Irish Mortgage Portfolio
The model assumes that
  • house prices fall 20% in the next three years.
  • provisions required are calculated after stock of existing provisions and collateral (after price falls)
Loan Book NPDOI Past Due Impaired Total
Irish Residential Mortgage Book 18458 1823 582 20863
Irish Buy to Let Mortgage Book 5398 828 765 6991
Total 23856 2651 1347 27854
Total Provisions 1026
Provision Coverage 0.0% 0.0% 76.2%
Avg LTV 100% 125% 125%
House Price Fall (2011-13) 20% 20% 20%
% of portfolio to go into arrears. 20% 50% 100%
Total Bad Loans 4771 1326 1347
Existing Provisions 1026
New Loan Loss 4771 1326 321
Collateral after 20% price fall 3976 914 0
Provisions Required 795 411 321 1528
*NPDOI = Neither past due or impaired
This model assumes that the Irish mortgage portfolio will generate a futher €1.5bn of provisions, which I assume will be applied between 2012 & 2014.
Property and Construction Loan Portfolio

Property & Construction 11915 1042 7623 20580
Provisions 3205
Assume Default Rate 20% 50% 100%
Loan Losses 2383 521 7623
Collateral  (Guess work) 1787 313 3049
Provisions Reqd 596 208 1369 2173
Consumer Loan Portfolio
Consumer Loans NPDOI Past Due Impaired Total
Other Consumer Lending 2818 158 338 3314
Provisions 278
Assume Default Rate 10% 40% 100%
Loan Losses 282 63 338
Provisions Reqd 282 63 60 405
UK Mortgage Portfolio
UK Mortgage Portfolio NPDOI Past Due Impaired Total
Standard Mortgages (£m) 10407.0 487.0 11.0 10905.0
Buy To Let Mortgages (£m) 9232.0 511.0 83.0 9826.0
Self Certified Mortgages (£m) 3449.0 563.0 12.0 4024.0
Total (£m) 23088.0 1561.0 106.0 24755.0
Total Provisions
Provision Coverage 0.0% 0.0% 0.0%
Avg LTV 87% 87% 87%
House Price Fall (2011-13) 15% 15% 15%
% of portfolio to go into arrears. 10% 35% 100%
Total Bad Loans 2309 546 106
Existing Provisions 129
New Loan Loss 2309 546 -23
Collateral after 15% further price fall 2264 536 0
Provisions Required 45 11 -23 33
Provision Reqd (€m) 39
The UK Portfolio will according to my model generate almost €39m in further provisions.
Commercial Loan Portfolio

Other Commercial Loans 22245 430 4043 26718
Provisions 1723
Assume Default Rate 5% 30% 60%
Loan Losses 1112 129 2426
Collateral  (Guess work)
Provisions Reqd 1112 129 703 1944
The total level of loan losses over the next three years from my stress test would be €6.09billion.
On the basis of the existing level of pre-provision profitability (excluding exceptional gains) of €500m per annum, it would seem reasonable to assume that €1.5 billion of total pre provision profitability could be generated over the next three years.
This would mean that €4.5 billion of capital would be required to cover loan losses. While I think that this would a pretty extreme scenario, it is not unlikely given any likelihood of a renewed recession.
This would leave the Bank with less than €6 billion of equity, in other words the bank may lose 45% of its equity if loan losses continue to deteriorate from here.
The capital ratios at that time would be dictated by the amount of assets on the balance sheet at that stage, but at a level of €5.5 billion of equity Bank of Ireland would have an equity/assets ratio of 3.7%. This would require a further equity raising in my opinion.
I should remind readers that there is a €1 billion of contingent capital that would convert to straight equity if core tier 1 ratio falls below 8.25% (42% below the current level).
What this all means is that Bank of Ireland may have sufficient equity, but that a further capital raising exercise should not be ruled out. The present core tier 1 ratio at Bank of Ireland is 14.3%. This is excessive by historical norms, and it exists to cover the likelihood of increased loan losses in the foreseeable future.
It is my view that regulators, policy makers and the media are overly obsessed with the levels of capitalisation at many banks, and are not nearly as focused on funding.
At a very simplistic level, risk weighting of assets contributed in part to the rampant growth of the asset side of balance sheets in many banks in many countries.
This growth had been funded through the growth in the shadow banking system (effectively non deposit funding). With the collapse of the banking debt market, this funding is now by and large being met through central bank funding. So, private shadow banking has been replaced by a public funding market.
Unless banks can get to a balance sheet that can be funded through stable funding, then the future in terms of credit provision looks bleak. This is particularly an issue for the Irish banks.
The bank of Ireland Balance sheet is funded as follows:
Balance Sheet & Funding 2011 2010
Customer Loans 102 114
Customer Deposits 71 65
Loan to Deposit Ratio 144% 175%
Wholesale Funding 51 70
 – Monetary Authority Funding 23 33
 – Covered Bonds 6 7
 – Securitisations 4 5
 – Private Market Repo 7 8
 – Senior Debt 9 13
 – Bank Deposits 2 3
 – Comm Paper 1
 o/w > 1 year 27 22
 o/w < 1 year 24 48
Central Bank Funding 22 31
There are several issues in terms of funding for Bank of Ireland:
  • The company is covered under the Irish state Eligible Liabilities Guarantee (ELG) scheme.
The ELG is the Irish state guarantee of certain debt securities as well as deposits in excess of €100,000. It is a very expensive insurance scheme, with the cost during 2011 up 31% to €449 million. That is equal to 100% of pre-provision operating profit during the year.
The sooner the bank returns in a meaningful way to the unguaranteed funding market the better. Initially they will be required to pay up for funding (corporate deposits or debt). It will be worth it in my view. In terms of milestones, unguaranteed funding will be the most important issue for me going forward. During 2011, a total of €44 billion of liabillities (funding) was covered by the guarantee scheme at a cost in excess of 1%. This compares with €69 billion in 2010, but at a cost of 50bps.
Of note during 2011, was the issue of €4.2billion of unsecured collateralised funding (of the UK mortgage assets) at a cost of 250bps over 3month Euribor. I am assuming that these assets we over-collateralised to some degree. However it is progress ad I will be looking for further evidence of access to the unguaranteed funding market during 2012.
The following chart illustrates the pressure that the present funding arrangements are having on profitability.
Margins on lending (the asset margin) is expanding, but all of that is being eroded by a significant increase in the cost of funds.
I should mention that some of the margin erosion over the past four years has been down to prevailing low interest rate environment. Many banks have deposits that pay little or no interest. The impact of this is greatest when interest rates are high (it is known as the free funds effect). As interest rates fall, the absolute amounte charged for lending falls, and the advantage of free funds falls in tandem.
  • Under the Prudential Liquidity Assessment Review (PLAR) the bank has to deleverage its balance sheet within a prescribed timeline in order to reduce reliance on short term funding and central bank liquidity support. The bank has successfully competed 86% the 2011-13 deleveraging mandated under the PCAR.
While they are to be commended for this. However the balance sheet is still significantly reliant on central bank/monetary authority financing.
Monetary Authority funding amounts to €23billion for 2011 (down from €33b in 2010). This amounts to
The principal issue around deleveraging, is that it is difficult to take advantage of opportunities as you delever. In the case of the bank, we know not what type of profitable lending opportunities that must by turned away due to the focus on slimming. I have said before that you cannot shrink to greatness. 
While the cost of monetary authority funding is highly favourable, it does have implications implications  for the cost of other financing raised by a bank, as it pledges assets as collateral against the borrowing. Furthermore, it is a sign of weakness and as such may act to dissuade potential funders from doing business with the bank. There are advantages, principally that banks funding is now less questionable than it was before the latest ECB Long Term Refinancing Operation (LTRO).
Funding at BKIR has improved, in that funding is now more secure than it has been in a number of years due to:
  1. Lower LDR,
  2. Lower quantum of funds being guaranteed (albeit at a higher cost),
  3. €7.5bn of LTRO plus an equivalent amount of NAMA bonds,
  4. Some (small) return to the unguaranteed funding markets.
What will be interesting in 2012 is that almost €23 billion of funding is within one year. I will be watching for how this funding is replaced and at what cost.
Return on Equity
I have run a simulation in order to help me ascertain, what type of assumptions are needed in order for the bank to reach a 10% Return on Equity. This is not an estimate or prediction of future returns or profitability – that would be an exercise in futility. In any case, future returns are more than likely to be off a lower level of capitalisation, as loan losses in the next few years eat into the current equity capitalisation.
Bank of Ireland 8% RoE 10% RoE 12% RoE
Net Interest Income 2665 3165 3665
Net Interest margin 1.97% 2.34% 2.71%
Net Insurance Premium 929 929 929
Net Fee Income 500 500 500
Net Trading Income 0 0 0
Life Assurance Investment Income 247 247 247
Other Operating Income 196 196 196
Non Interest Income 1872 1872 1872
Total Operating Income 4537 5037 5537
Insurance Claims and Liabillities -1089 -1089 -1089
Total Income 3448.33 3948.33 4448.33
Operating Expenses -1793.1 -2053.1 -2313.1
Cost Income Ratio 52.0% 52.0% 52.0%
Pre Provision Operating Profit 1655.2 1895.2 2135.2
Impairment Charges -695.2 -695.2 -695.2
Operating Profit/(Loss)
Share of JVs after Tax
Loss on Disposal
Profit/(Loss) before tax 960.0 1200.0 1440.0
Taxation -144.0 -180.0 -216.0
Net Profit/(Loss) 816 1020 1224
Total Assets 135000 135000 135000
Loans to Customers 99314 99314 99314
Shareholders Equity 10200 10200 10200
RoE 8.00% 10.00% 12.00%
RoA 0.60% 0.76% 0.91%
The simulation works as follows:
  • A level of returns (8%, 10% and 12%) are specified,
  • The equity base is assumed to be €10.2 billion and the asset base is assumed to be €135 billion.
  • The net income is then calculated ( Net Income = RoE * Equity)
  • Pre Tax income is then calculated assuming a tax rate of 15%,
  • A Loan Loss Provision rate of 70bps is assumed (that is equivalent to the 20 year average, with the range being -3bps to 4.0%),
  • This figure is the grossed up to derive Pre Provision Operating Profit,
  • A cost income ratio of 52% is then assumed,
  • From this the level of Total Income is calculated,
  • The level of non interest income is calculated as average over the past 5 years,
  • Then the balancing figure is the Net Interest Income,
  • From the Net Interest Income, the Net Interest Margin is calculated.
So in order to get a 10% RoE from the assumptions that I have used, one would need a 2.34% net interest margin. While this is 88% greater than the present level of net interest margin, I think that it is worth recalling that NIM used to be in excess of 2.5% for much of the period between 1991 and 2007. In fact margins declined over the 17 year period to 2007 as the shadow banking market allowed access to cheap funding and leverage. I have a suspicion that the next cycle will see an expansion of banking margins as rates eventually rise, risk pricing returns to lending and a more prudent approach to funding is mandated.
So margins required to meet a 10% RoE target may seem excessive by today’s level, but it is entirely within the bounds of probability on the basis of 20 years of net interest margin history. The reality will be different from my simulation – I have run it simply to sanity check whether these guys can achieve a 10% RoE again. I believe that they can, but it is unlikely to occur within the next 3 years at a minimum.
Valuation (Share Price €0.13)
Valuation is problematic.  The present book of €0.34/share also includes over €1.5 billion so it needs to be amended, to €0.28. More importantly though is that while the bank is trading at a large discount to book value – this discount is very likely to be eroded over the next three years as loan losses eat into profitability (and the gains from bind buybacks are not repeatable).
Share Price 0.13
P/E 97.9
P/B 0.46
Dividend Yield 0%
P/PreProvOpProfit 1.7
G&D PE 6.9
Mkt Cap/Deposits 5.6%
I notice that Davy Stockbrokers, are forecasting a €0.22 tangible NAV by the end of 2013. I am going to assume that my stress test losses of almost €4.5billion over the next three years actually come to pass. This could push the book value/share down €0.16.
If this comes to pass, then I would be prepared to purchase more shares in bank of Ireland at a P/B of 0.5x or €0.08. I believe that at that level, my margin of safety is sufficient from both a risk and reward stance. To buy any higher means that I leave too little upside relative to the ongoing risks that go with investing in banks during a balance sheet recession.
As usual, comments and critiques welcome.

Portfolio Update

A quick portfolio update.

I started this blog during the summer of 2011, in an attempt to keep track of my equity investments and research, to hold myself accountable to the discipline of publishing my thoughts publicly and to hopefully illicit response and engage in debate.

Prior to the summer of 2011, I held very little of my savings in equities, largely as I felt that there was very little that was of value.

I purchased my first equity for this portfolio on 12 November 2010, which was my holding in FBD. My all in cost was €5.88.

Since then I have added further equities which have been detailed in my various blog posts.

The portfolio now looks like

Stock Purchase Price % P/L Weight
FBD 5.879 51.5% 12.8%
CRH* 11.774 40.3% 16.6%
Total SA 32.515 32.0% 12.3%
Bank of Ireland 0.117 15.2% 4.3%
Total Produce 0.401 12.3% 16.1%
Heijmans 7.896 0.7% 4.3%
Grafton 2.611 32.1% 5.4%
Dart Group 0.652 23.2% 8.7%
Mothercare 1.482 52.6% 5.7%
Lloyds Banking* 0.32938 15.3% 13.7%
Equity Total Return   26.9% 32.00%
Other Investment   14% 68%
Total Return   18.1%  

* Lloyds Banking Group and CRH plc were sold from the portfolio on 20 February at 36pence and €16.42 respectively.

My direct equity weighting (prior to that sale) was low at 32%, and this was significantly lower this time last year. The remainder of my investments are a mix of cash and investment funds that I have switched between over time. It is not particularly important to me what I have achieved in such a short time relative to various indices. I am pleased that I have achieved a generous total return.

The genesis of this total return is down to some factors:

(1) Luck. I managed to pick up some of my investments as the markets was bottoming,

(2) Patience: I really only invest when I feel that long run valuation is in my favour. In this respect using stock screens as a strategy tool has always been fascinating and educational for me. I continually re-run the same few screens over and over and over again. The number and quality of companies in appearing as results in my screens tells me a lot about overall market valuation and sentiment.

(3) Discipline: I know what I am looking for in an equity investment. I only invest when I see it. I am uninterested in stories. The job of a an equity share of a public company is that of a transmission mechanism. Companies exist to turn sales into profits into returns. The market eventually rewards those that are successful. But the market is also short termist in the short-term. This can lead to pricing anomalies. It doesn’t really matter what a company does. If it can turn sales into profits into returns, and these returns are being undervalued by the market, then whether it produces i-Pads or shifts mud, there is an investment return to be made.

When I began this blog, I did so as a ‘tired bear that was looking forward to hibernation.’ By that, I meant that I was hoping that valuations would come continue to de-rate and allow me to pick up some strong companies at very attractive prices.

In the very short time period since I began this blog, that is in fact what has transpired. I am now watching a portfolio that has risen in value. Furthermore, some of my small cap holdings are beginning to look technically very attractive. On the other hand, some of my large cap holdings are beginning to look a little jaded (which has helped to persuade me to sell down Lloyds and CRH). Given that sale I know hold 8 equities, which is too low. I would like to build up to between 20 & 30 over time. But I also see no reason to rush headlong into the present ‘melt up’ in markets.

Given the rally in equities, valuations have lifted, but remain at or below long run averages.

Price/Book ratio for the broader European market is now once again approaching 1.5 times. This is an average valuation excluding the bubble era of TMT.

The Schiller PE for MSCI Europe has also recovered and is over 13x 10 year average earnings, having been as low as 11 during the autumn sell off

The point of all of this is that the markets are not as absolutely cheap as they were a few months back. That said, they are hardly downright expensive either. Bob Janjuah, the strategist at Nomura known affectionately as Bob the Bear has recently decried current market conditions as being so rigged that he has no meaningful insight to offer. I find it difficult to disagree.

In my own quest for equity investments I try very hard to focus on picking companies that have a decent history of returns, where present profitability is far from peak, and that this is supported by a good balance sheet and highly appealing valuation. The stocks that I have sold, I simply wanted to take money off the table. I don’t see myself as a trader, but as an asset allocator. I may regret selling those equities, because I was confident that I invested at a highly attractive price.

Technically markets are bumping against resistance. I have no idea as to what the future direction of markets will be in the next year. I am confident that investing in strong companies on low valuations does lead to strong compounding over time. Given the gains that I have seen in the markets and my own portfolio, it wold not surprise me to see a pause for breath or a pull back. If that comes, I hope to be alert enough to take advantage of it.

I remain of the view that the secular bear market in equities beginning in 2000, has more to run. Enjoy the cyclical bull market.

I think I’m Turning Japanese . . . (I really think so)*

I have been happy to watch the markets rise for the past few months, but I must admit that I am running out of ideas for new investments in Europe and the UK. There are many stocks with the book value characteristics or P/S characteristics that I seek, but they do not have the returns or balance sheets that I am interested in.

The rally in the past few months has to my mind been a cyclical bull market rally in a secular bear market. I do not think that the great de-rating is over (particularly with regard to the average US quoted equity).

The Japanese market stands out as being different from many other stock market indices. Maybe the derating suffered by Japanese equities during their 20 year secular bear market is an image of the future for many other equity markets. Two blog posts this week by Neonomic and Valueandopportunity have reminded me to get off my ass and run some of my favourite and most trusted valuation screens for Japanese equities. Now just because a security has fallen for a prolonged period of time doesnt mean that it is now good value. Maybe the security was significantly overvalued in the first place (which was deinitely the case with Japanese equities at the end of the 1980’s). It is should be pointed out, that Japanese equities have proven to be a value trap for many value investors. There has been very no real discernable catalyst in a country where corporate governance is generally appauling.

Some of my ex colleagues who are responsible for http://www.valueinstitute.org/ have published two very interesting articles on Japanes corporate governance or the lack thereof:

Lessonson Japanese Corporate Governance

Is Japan a Value Trap

My favourite Stock-Screens

I typically run 4 screens:

  • P/B, gearing and RoE,
  • Graham & Dodd PE,
  • P/S, Current profit margin & 10 year average margin
  • Net/Net Screen.

I use my stock-screeens to deliver a menu of delights that I typically like to dine on. From that menu, I then choose my victuals.

There are investors that are of the view that the human being is such an inferior investor that one should run scrrens that have a high probability of being successful and go long the stocks in the screen. While I agree with much of those sentiments, I do actually enjoy equity analysis, reading annual reports and building valuation models.

  • Price/Book Screen

There are four parameters in my P/B screen and all are equally weighted.

  1. P/B less than 1
  2. RoE (latest FY)
  3. RoE (10yr avg)
  4. Debt/Equity Ratio

These criteria were used to screen the 400 largest equities in Japan,

Firstly some descriptive statistics from the aggregate 400 companies screened.

P/B 1.18
RoE 8.0%
RoE 10 yr avg 7.9%
Gearing 30%

In a manner, this can be viewed as a valuation for the Japanese equity market. While the P/B ratio is low, so too is the current RoE and the ten year average RoE.  If I were viewing this as a stock that on average delivered an 8% return, I would deduce that this type of return deserved a P/B ratio of no greater than unity.

Of the 400 stocks screended, 180 of them had a P/B ratio of 1 or below.

The 25 most interesting to me are listed below (some of them are pretty small).

Ticker Company P/B RoE RoE 10y Avg Gearing Mkt Cap
9997 Belluna 0.4 9.5 10.8 4 30025
8248 Nissen 0.7 18 15.6 4 18333
9433 KDDI Corp 0.9 17.2 15.2 37 2086797
3086 J. Front 0.8 4.4 13.4 22 195592
3337 Circle K Sunkus 0.7 8.3 11.3 -47 109715
9945 Plenus Co Ltd 0.9 7 14.5 -38 50552
9432 NTT 0.6 7.7 9.5 29 4802091
6498 Kitz 0.8 8.1 12.2 32 37355
5444 Yamato Kogyo 0.9 4.2 13.4 -33 168908
9435 Hikari Tsushin 0.9 1.2 13 1 108232
3088 Matsumotokiyoshi 0.8 10.3 11 14 78033
1951 Kyowa Exeo 0.7 6 9.5 3 74784
8219 Aoyama Trading 0.4 3 5.4 -16 87868
6804 Hosiden Corp 0.6 2 8 -43 38698
9749 Fuji Soft 0.6 4.9 7.8 40 46458
5423 Tokyo Steel Mnfg 0.6 -4.2 7.7 -4 87897
8060 Canon Marketing 0.5 2.9 6.4 -39 130737
3635 Tecmo Koei 0.8 5.1 10.2 -19 53940
8233 Takashimaya 0.8 3 10.1 20 193656
8031 Mitsui & Co Ltd 1 16.6 12.6 42 2385051
9370 Yusen Logistics 1 7.3 12 -41 47441
4812 Information Services 0.6 7.2 7 -1 20462
7862 Toppan Forms 0.7 4.7 8 -22 77625
4043 Tokuyama 0.6 5 6.8 14 102995
4182 Mitsubishi Gas 0.9 11.9 10 47 214703


  • Net/Net screen

The net net filter is a particularly difficult screen in that it seeks to find stocks that trade at a discount to the value of Net Working Capital. In effect it is a seeking for stocks that are valued below the windown value of the company. The following stocks have a P/NetNet of 1x or lower:

Ticker Company Name P/NetNet
6804 Hosiden Corp 0.59
6349 Komori Corp 0.75
6751 Japan Radio 0.76
1973 NEC Networks 0.82
6839 Funai Electric 0.87
6986 Futaba Corp 0.88
8060 Canon Marketing 0.89
5901 Toyo Seikan 0.91
6581 Hitachi Koki 0.92
8130 Sangetsu 0.97
6134 Fuji Machine 1.01


  • Graham & Dodd PE Screen

With the G&D PE screen I am seeking stocks where the Price to average earnings (over the past decade is low), preferrably single digit. 

Ticker Company Name MktCap RoE(10yr) PE 10
7202 Isuzu Motors 693003 41.7 3.8
8248 Nissen 18333 15.6 4.5
6460 Sega Sammy 387630 22.4 5.8
7201 Nissan Motor 3166634 18.9 5.8
9433 KDDI Corp 2086797 15.2 5.9
3086 J. Front 195592 13.4 6.0
2168 Pasona Group 27039 18 6.1
3337 Circle K Sunkus 109715 11.3 6.2
9945 Plenus Co Ltd 50552 14.5 6.2
9432 NTT 4802091 9.5 6.3
6498 Kitz 37355 12.2 6.6
5444 Yamato Kogyo 168908 13.4 6.7
9435 Hikari Tsushin 108232 13 6.9
3088 Matsumotokiyoshi 78033 11 7.3
1951 Kyowa Exeo 74784 9.5 7.4
3635 Tecmo Koei 53940 10.2 7.8
8233 Takashimaya 193656 10.1 7.9
7453 Ryohin Keikaku 103409 15.1 7.9
6302 Sumitomo Heavy Ind 259279 14.5 8.3
2685 Point 73425 33.7 8.3
9370 Yusen Logistics 47441 12 8.3
4902 Konica Minolta 323439 13.1 8.4
9766 Konami Corp 280587 13.1 8.4
5214 Nippon Elec Glass 333291 15.4 8.4
6366 Chiyoda Corp 226455 14.2 8.5
8058 Mitsubishi Corp 2928357 12.9 8.5
6448 Brother Industries 257210 14.9 8.7
4768 Otsuka 180475 15.8 8.9
5713 Sumitomo Metal Mng 635064 13.5 8.9
9437 NTT DoCoMo 5639513 13.4 9.0
4182 Mitsubishi Gas 214703 10 9.0
8242 H2O 119442 8.8 9.1
3391 Tsuruha 96741 12.1 9.1
6417 Sankyo (Machinery) 347676 10.9 9.2
6278 Union Tool 28971 8.7 9.2
4205 Zeon 157855 14 9.3
7267 Honda Motor 4992377 12.9 9.3
1928 Sekisui House 481769 8.6 9.3
9831 Yamada Denki 514387 12.8 9.4
6839 Funai Electric 60655 8.4 9.5
3101 Toyobo 99230 10.5 9.5
5110 Sumitomo Rubber Ind 250796 11.5 9.6
5108 Bridgestone Corp 1350876 10.4 9.6
8281 Xebio 85344 8.3 9.6
6383 Daifuku 49245 8.3 9.6
7261 Mazda Motor 256676 9.2 9.8
2871 Nichirei Corp 111982 10.2 9.8
7451 Mitsubishi Shokuhin 121889 11.2 9.8

There are a surprisingly high amount of equities that are trading on low PE10 ratios that have reasonably decent returns and low leverage.

  • Price/Sales Screen

 The stocks that I have screened that have low P/S ratio, but that the historic margin seems to be undervalued by that valuation are listed below:

Ticker Company Name MktCap P/S EBIT% 10yr Margin
9997 Belluna 30025 0.2 7% 7.6%
7248 Calsonic Kansei 123535 0.1 3% 3.4%
2168 Pasona Group 27039 0.1 2% 2.9%
9432 NTT 4802091 0.5 13% 13.8%
6498 Kitz 37355 0.4 6% 10.2%
1878 Daito Trust 543244 0.4 7% 9.4%
3337 Circle K Sunkus 109715 0.5 10% 11.0%
3088 Matsumotokiyoshi 78033 0.2 4% 4.2%
9719 SCSK 118147 0.5 5% 10.2%
2282 Nippon Meat 208456 0.2 4% 3.8%
7270 Fuji Heavy Inds 409637 0.3 5% 5.6%
6770 Alps Electric 111483 0.3 5% 5.3%
9945 Plenus Co Ltd 50552 0.4 5% 6.9%
6702 Fujitsu Ltd 819574 0.3 3% 5.1%
2678 Askul 37526 0.2 3% 3.3%
4043 Tokuyama 102995 0.5 7% 8.1%
8016 Onward Holdings 101217 0.4 5% 6.5%
9861 Yoshinoya Hldgs 54636 0.3 3% 4.7%
6724 Seiko Epson 205787 0.3 3% 4.5%

The P/S screen is one that I like a lot. In general it gets much less attention than other value screens. The way I use this screen is to look at the P/S ratio and then compare current margins with historic average margins. I use a Gordon Growth type model adjusted for P/S as opposed to price to decide what is an appropriate multiple for a given level of profit margin at a static 10% cost of equity with 1% terminal growth assumption. This screen has helped me uncover many gems over many years. The idea is simple ~ as margins fall from the long term average the derating can be harsher than the margin decline. If margins are mean reverting and cyclical as opposed to the business model being impaired then one may have unearthed some treasure.


In truth I have never much enjoyed analysing or investing in Japan. There are many reason, from the poor state of many financial statements provided by companies to the fact that a lot of Japanese companies that I have looked at in the past seem to have pedestrian if not mediocre returns profiles. Then there is the corporate governance issue – however I do feel that Japan gets a poor rap here. Corporate governance in many European markets has been poor (but I do concede that it has improved notably in Germany and the Netherlands). It is my opinion that in many Spanish and Italian equities that corporate governance is not only poor, but simply non existant.

I do accept that I will not change how companies conduct business, nor is that my remit. So instead I will try and focus on what has worked for me in the past. In that regard, I was pleasantly surprised at the amount of companies that have above average returns and low valuations. A good many of these have little or no gearing on the balance sheet.

I am going to begin my analysis by looking at the telecoms operators (KDDI, NTT and NTT DoCoMo), for no other reason than they appear across all of my screens. In generaal I am wary of telco’s given that I believe they are deflationary and highly regulated. Being a bear on China, I wouldnt mind staying clear of Japanese companies that have a lot of export related exposure to China (particularly Steel). So in this regard, looking a domestic plays seems like a good place to begin (I may find out that these guys have a lot of foreign exposure).

*Apologies to The Vapours

Dart Group PLC – Is this a bullseye stock?

In a previous post I had a quick look at Dart Group PLC. An initial glance at the company suggested that a very defensive balance sheet that generated reasonable returns lay behind a very low valuation.

To be honest, I had forgotten to go back and do some in-depth research of the annual reports. There were three principal reasons as to my neglect:

(i) It has been a favourite of the value investing blogosphere, and has been covered in great detail at ExpectingValue and Valuehunter.

(ii) The company generates much of its returns from its airline division. In the airline industry companies with returns such as Ryanair have been the exception rather than the rule. It has been a dreadful sector for investors.

(iii) I was wary of the momentum. The stock has not participated at all in the risk on/value rally of the past three to four months. It just drifts downwards in a reasonably well-behaved downtrend.

A recent post at Kelpie-Capital has put the stock back on my radar screen once again.

Who are Dart Group plc?

Dart Group PLC is an aviation services and distribution company. The Company is specialized in the operation of leisure aviation services throughout Europe, and the distribution of fresh produce and temperature-controlled and ambient products to supermarkets and wholesale markets throughout the United Kingdom. The Company operates in two segments: Aviation and Distribution. The Aviation division consists of its leisure airline, tour operation and associated commercial activities, trading under the Jet2.com and Jet2holidays brands. The Distribution business, Fowler Welch, is a logistics provider serving the United Kingdom retailers, importers and manufacturers. During the fiscal year ended March 31, 2011 (fiscal 2011), the Company operated over 800 passenger charter flights. Its subsidiaries include Fowler Welch-Coolchain Limited, Jet2.com Limited and Jet2holidays Limited.

Market Capitalisation: £85m

Share Price: 62p

Freefloat: c. 27%


Dart Group is interesting in that the equity has de-rated pretty significantly despite profitability and returns remaining in line with the long run average. It would seem as if this is a stock that has simply been forgotten by the market.

I was initially wary of the industries that the company operates in. Both airlines and distribution are extremely competitive with very low barriers to entry. Return on assets has remained reasonably stable over time, while the return on equity of almost 12% is decent given that the balance sheet has been de-leveraged and now runs with a net cash position.

The spike in returns in 2009, I fear was an aberration. In that year the item called ‘other direct operating costs’ fell to £28m from £46m in the prior year. The company reported this at the time as strong cost management. Results since then would suggest that it was a one-off gain rather than a structural improvement in the cost base of the company.

Dart Group plc 2008 2009 2010 2011
EBITDA Margin – Distribution 5.2% 4.8% 6.9% 3.2%
EBITDA Margin – Aviation 12.1% 20.0% 14.2% 14.9%
EBIT Margin – Group 3.1% 9.2% 5.2% 5.0%

The company maintains a decent return on equity and has grown its book value repeatedly.

Dart Group PLC 2007 2008 2009 2010 2011 10yr Avg
Net Margin 3.9% 2.0% 6.3% 3.6% 3.2% 3.8%
Asset Turnover 145.8% 157.5% 151.6% 128.0% 115.5% 139.7%
Assets/Equity 339.7% 366.4% 310.2% 293.9% 317.8% 325.6%
RoE 19.1% 11.7% 29.4% 13.5% 11.7% 17.1%
Book Value/share 0.50 0.52 0.65 0.79 1.00  
BV Growth 18.5% 3.2% 24.2% 21.8% 27.2% 17%

When I began to disaggregate the moving parts of the company, it struck me that much of the fall in returns has been down to a declining asset turnover ratio. Initially I assumed that this was down to the business becoming increasingly asset intensive. However it is not so simple.

Dart Group PLC 2007 2008 2009 2010 2011 10yr Avg
Sales/Fixed Assets 1.90 2.10 2.20 2.16 2.18 2.26
Current Assets/Sales 15.9% 15.8% 20.5% 31.8% 40.8% 22.9%

The real driver of lower returns has been the build up of cash on the balance sheet. At the recent interim results for the half-year ended September 2011, Dart Group plc reported a balance sheet that contained the following data:

Total Assets £423.1 m

Total Equity £263.8m

Net Cash £85.4.

I am a big fan of a prudent balance sheet, but it do shareholders really benefit from the hoarding of cash on the balance sheet? I readily concede that much of this cash build up is actually deferred revenue – in this respect this cash is not readily available for distribution to shareholders. It exists to pay future costs and generate future profitability.

This begs the question that if more of the revenue is being generated by forward booking of holidays by customers, then maybe there are consequences in terms of returns for that revenue visibility?

Aviation Division

 This business has evolved from being a low-priced airline carrier (Jet2.com) focusing on flying out of destinations in the North of England and Scotland to also having a direct package holiday sales business(http://www.jet2holidays.com/). As was pointed out in the post on Kelpie Capital, the company has benefited superior yield. management compared to much of the industry.

Our revenue and IT teams work closely together to deliver additional customer focused services including choice of seating, meals, onboard entertainment and car hire. Together, these yielded £25.39 in additional retail revenue per passenger during the last financial year (2010: £21.12).

Source: 2011 Annual Report

The company carried 98,000 customers on package holidays in the 2011 fiscal year. The goal is to double that this year. Dart Group is the owner of 30 airplanes and leases 8 others. During the 2011 year, the company carried 3.6 million passengers, with 5% of these being package holiday customers also. The company comes across as opportunistic and entrepreneurial.  Eight of the planes are what are terms Quick Change planes. The interior of these planes can be re-configured quickly in order to fulfill first class mail delivery for the Royal Mail.

While I know very little about aviation, I am wondering, that while this is earning two revenue streams from the same asset, does this go some way to explaining why average depreciation is about half of capex in the cashflow statement. Much of the capex is related to airline maintenance.

Source: 2011 Annual Report

I would rather not be a cheerleader for a company and I must remind myself that both the airline and holiday industries are incredibly competitive with a litany of failed companies and sore shareholders. The interim report mentions that aviation division margins have declined due to cost growth exceeding revenue growth (particularly in relation to Jet Fuel prices).

It should be noted that the company has reported a contingent liability of $2.5m, as a result of being involved in litigation against two US companies (Sutra Inc and Noavk Niketc).

Distribution Division

Fowler-Welch, the distribution business owned by Dart, is a leading UK ambient and chilled produce distribution company.

Source: 2011 Annual Report

This is a standard distribution business. The company explains that the profit decline during the year was principally due to the opening of a new distribution hub (Manchester) and the closure of the Felixstowe site. This has not reversed in the interim results (for half-year ended September 2011). Profit margins have continued to slide on the back of a weak container market.

Given that this business transports produce from manufacturers to retailers, it should not be surprising that conditions are weak given what we know about the state of UK retail. The company claims that the new Manchester hub opened last year is now operating at a break even rate.

Cashflow & Working Capital

I have chosen to analyse the cashflow statement using the % of sales methodology over a ten year time period. The recent strong cashflow generation would appear to be related to a combination of a large working capital inflow as well as a reduced level of capital expenditure. The spike in working capital is due in part I think to a relatively new strategy of pre-selling direct holidays to the client base. I am not banking on such a large working capital inflow every year.

Cashflow as % of Sales 2007 2008 2009 2010 2011 10yr Avg
Group Operating Profit 5.3% 3.1% 9.2% 5.2% 5.0% 4.6%
Depreciation & Amortization 6.1% 7.1% 7.0% 7.6% 6.9% 7.0%
Share Based Payment 0.0% 0.0% 0.0% 0.1% 0.1% 0.0%
Other Movements 0.0% -1.8% -1.1% 0.7% -0.3% 0.0%
Chg in Work Cap 6.3% 1.5% -1.0% 4.2% 10.3% 4.5%
Operating Cashflow 17.7% 9.9% 14.1% 17.8% 21.8% 16.1%
Net Interest -0.3% -1.0% -0.6% -0.6% -0.3% -0.5%
Taxation -0.3% -0.1% -0.1% -0.4% -0.6% -0.5%
Net Operating Cashflow 17.1% 8.8% 13.4% 16.8% 21.0% 15.1%
Capex -19.6% -9.0% -6.4% -7.5% -12.5% -13.6%
Free Cashflow -2.5% -0.2% 7.0% 9.3% 8.4% 1.5%

The interim results paint a picture where profit margins are under pressure from cost increases as opposed to revenue declines. My worry would be that one has cost pressures in tandem with revenue declines. It does not appear that we are there (just yet).


  Trailing Median Peak
Share Price 0.62    
P/E 5.3 9.2 20.6
Graham & Dodd PE 7.8    
P/B 0.62 1.34 2.64
Div Yield 2.6% 2.4%  
P/CEPS 0.8 1.5  
FCF Yield 50.0% 6.4%  
P/S 0.17 0.26 0.53








 Implied Book Value

RoE 13.3%
G 0%
Ke 10%
Implied P/B 1.33
Current P/B 0.62
Upside 115%

This, I believe is a reasonably conservative assessment of value given that I use a 10% discount rate with a zero growth perpetuity assumption.

DCF Analysis

The use of a DCF in valuation is a controversial one, in that the analyst can get any result you want (within reason) by simply playing around with the assumptions.

I am going to use the 10 year average figures.

Revenue (12mth trailing) 648.2        
FCF as % 0f Sales 1.50%        
Assumed FCF 9.72        
Growth Rate 0%        
Cost of Equity 8% 10% 12% 14% 21%
Implied Valuation 121.5 97.2 81.0 69.5 46.3
Net (Debt)/Cash 45.3 45.3 45.3 45.3 45.3
Market Capitalisation 91.6 91.6 91.6 91.6 91.6
Enterprise Value 46.3 46.3 46.3 46.3 46.3
Upside 162.2% 109.8% 74.8% 49.8% -0.1%

 In plain english, using the assumptions that I have used, the current valuation is implying a 21% cost of equity. I think that this is excessive, unless the cashflow profile of the company in the future begins to deteriorate markedly.

Technical Analysis

The stock has been a dog for most of the past five years. As I mentioned in the opening, it is worrying that the stock did not really participate in the market rally of the past few months (especially as this rally has been particularly favourable for beaten up value stocks).

In terms of main indicators, Dart trades below its short and intermediate moving averages. The weekly MACD and RSI indicators are beginning to register some slight positive divergences.

The reality remains that Dart Group remains in a well-behaved downtrend of lower highs and lower lows. There is significant resistance about 10pence below the present price level. The line of least resistance is toward that level.


There is a lot to like about Dart Group as a value investor. The business is operated by an owner manager that has managed to sustain reasonably decent results through the past decade in what are highly competitive industries. There are few enough business that generate double-digit returns on equity on a strong balance sheet that trade at a significant discount to book value. This would appear to be one.

I believe that the valuation is highly supportive and unjustifiably low. In terms of momentum, the technical picture is pretty anemic to say the least and I have no idea what the catalyst for a re-rating will be. Perhaps valuation will be sufficient.

Investing is really about the numbers. Regardless of the attractiveness or otherwise of the business, a company has an ability to earn a decent return or it doesn’t. If it does, then over time the market will recognise this. I am beginning to think that Dart certainly fits that bill. 

 On the grounds that I find it extraordinarily challenging to find cash generative businesses that have double-digit RoE’s trading below book value with an undergeared balance sheet, there is enough here for me to invest in Dart Group plc. I will take a small position in the stock and evaluate before increasing that position to say 4-5% of my own fund.

Marks & Spencer

As I screen markets for opportunities, I find that much of the value on offer is clustered in Banks, Insurance, construction and Retail. A lot of the retail stocks in particular suffering from a combination of a cyclical downturn and a secular shift toward internet retailing. Many have gearing levels that threaten future viability.

 Marks & Spencer looks and feels different. Returns by most metrics are reasonably high, cashflow has been strong and the dividend seems to be very well covered by both cashflow and earnings.


The fundamentals of almost any business can be analyses by looking at sales, margins and returns.


Revenue has grown at an average of 4% in the past five years, while operating margins have declined from 12.2% to 8.6% during the same time period (2007-2011).

M&S plc 2007 2008 2009 2010 2011
Gross Margin 38.9% 38.6% 37.2% 37.9% 38.2%
Operating Margin 12.2% 13.4% 9.6% 8.9% 8.6%
UK Margin 12.0% 11.7% 8.0% 8.2% 7.8%
Intl Margin 14.3% 16.3% 12.9% 14.7% 14.6%

The mix effect between revenue growth and margins has meant that Operating Profit of £1304m at the end of the last fiscal year (FY11) is broadly similar to the figure in 2007 (£1328m). During this time period, the capitalised value of operating leases has increased from £2983m to £4682m*.

* I arrive at this conclusion by noting that the annual lease rent bill has increased from £373m to £585m between 2007 and 2011. I capitalise this using a multiple of eight times, in order to arrive at a capitalised value for operating leases.

I am not overly worried by the M&S plc balance sheet, it is in reasonable condition. I am more perturbed by the fact that a 56% increase in the cost of property produced almost no increase in profitability. This is not what I had hoped to see at M&S.

I am not suggesting that this has all been rent inflation or floor space expansion – the reality is that it has been a bit of both. The point that I am getting at, is that this is a legitimate business cost (an investment so to speak). However, it has produced a pretty poor return. Given the decline in UK margins, I am going to presume that this is mainly a UK issue. Like many retailers with significant UK exposure, profitability has been pressurized.

In five years UK Operating Profit has fallen by 29%

Over the same time period, International profits have grown by 68%.

Net profit is unchanged in almost a decade, so while I am not saying that M&S will never grow again, it is best not to build in the expectation of growth.

Balance Sheet Metrics

Piotroski F Score = 6

M&S plc 2007 2008 2009 2010 2011
Gearing 1.18 1.47 1.16 0.95 0.71
EBITDA/Interest Cover 12.2 18.6 7.8 8.6 23.2
Net Debt/EBITDA 1.5 1.9 1.9 1.6 1.5
Net Debt(incl Leases)/EBITDAR 3.7 4.2 5.1 5.0 5.0
Fixed Charge Cover 3.5 3.8 2.6 2.6 3.0

When I look at the direction that the on and off balance sheet liability profile has taken in the past five years, I am left wondering if M&S is making the same mistakes in terms of floor space expansion that the likes of Home Retail Group have made?


Cashflow as % of Sales 2007 2008 2009 2010 2011
Operating Profit 12.2% 13.4% 9.6% 8.9% 8.6%
Depr & Amort 3.3% 3.5% 4.5% 4.5% 4.8%
Share Based Exp 0.3% 0.3% 0.2% 0.3% 0.3%
Other Cashflow -0.1% -1.4% -1.4% 0.6% -0.6%
Net WC 1.1% -2.2% 2.3% 0.5% 1.1%
Operating Cashflow 16.8% 13.7% 15.1% 14.8% 14.2%
Interest Paid -1.4% -1.0% -2.2% -1.7% -1.5%
Taxation -1.8% -1.8% -0.9% -1.3% -1.9%
Net Operating Cashflow 13.6% 10.9% 12.1% 11.9% 10.9%
Capex -8.1% -10.3% -6.7% -4.3% -4.6%
Free Cashflow 5.5% 0.6% 5.4% 7.6% 6.2%


In the past five years, M&S plc has delivered median cashflow of £490m per annum. Looking at the cashflow as a % of sales reveals that cashflow stability has been driven by declining capital expenditure as opposed to stability of profitability.

If I value the company using my traditional no-growth dcf, then the present market capitalisation implies an 8.7% discount rate. This is hardly the level of deep valuation discount that I usually seek. In fact, this is where I think the average company should trade.

Technical Analysis


A few observations:

  • MACD (Weekly) is improving.
  • Stock is trading above short and intermediate moving averages for first time in 9 months, plus there is an MA  bullish crossover.
  • The lows in early September 2011, were not breached in the pre-xmas lows.
  • So all in all, momentum is improving.




Share Price 320p
G&D PE 9.0
PE 8.5
P/S 52.3%
RoCE 12.8%
RoE 22.4%
FCF Yield 11.9%
Div Yield 4.9%

(These are all trailing figures.)

I think that M&S is fairly priced at present. There are attractions, namely that returns are robust (but deteriorating) and cashflow has been stable. I am not sure that these are sufficient given the risks to the UK business in particular.

For the present, it is a watchlist stock.


There is not enough here for me to get my teeth into. It is a steady stock, where cashflow improvements have been garnered from declining capex. The balance sheet is far stronger than very many European listed retailers, however the balance sheet was much stronger a few years back.

The dividend is well covered by cashflow, so maybe that could be interesting.

I am not so sure that (i) growth will resume in next few years and that (ii) margins will improve.

Not one for my book.

Retail – Sale on Now Big Discounts in all departments!!!

In the past week a growing proportion of retail stocks listed in Europe reported some headline figures in relation to like for like growth. Much of what was reported has disappointed Mr. Market. Tesco’s share price declined by 15% on January 12th, while Delhaize slid by over 10%. Added to this we have had the usual tales of woe from Home Retail Group – where in my view managements ability to keep running this company must be surely questioned by those that remain as shareholders. I won’t even get into Game Group, the business model is broken. There is no price at which I would be interested in buying this stock.

When I have run various stock screens, invariably they are peppered with retailers. Cheapness has not been a salvation, in that the stocks continue to de-rate as the business fundamentals show very little sign of improvement. That Tesco has now fallen so much (on the back of a 4 week lfl sales figure) has prompted me to go back to my spreadsheets, and ask are there opportunities amongst all of this gloom.

Mothercare plc (168.5p)

I have written at length about Mothercare in the past. Disclaimer: I am a shareholder in Mothercare plc.

This has been the only retailer that I have parted with hard cash to purchase shares in, whereas I am merely a customer of Argos, M&S and Tesco. While speculative, I am attracted to the large and profitable foreign franchise operation which is seriously undervalued in the present share price.

The 3rd quarter trading statement was released on Jan 12. 

Sales +3% lfl

International Sales +15% lfl

UK Sales -3% lfl (and -6.9% in total due to planned closures).

I rarely follow trading statements, as in general the mean nothing in themselves. However the piece in the interim statement relating to planned store closures stood out. To my mind there are two reasons to own Mothercare: (i) the undervaluation of the foreign operations which now make up all of the groups profitability and (ii) the company has the opportunity to exit 90 leases in the next two years or so. Unlike Home Retail, the management (Chairman) of Mothercare is not sitting idly by and praying for a cyclical recovery. They are tackling the issue of a secular change in the retail landscape, and unfortunately that means that they have (in the UK) to shrink to greatness.

The company presently trade at P/S of 0.19 and a PE10 of 12. P/B is 0.76.

Home Retail Group (84p)

I get really annoyed when I think of this company. I have shopped in Argos at many times and I can see value in the franchise. The company has gotten to grips with the rise in the internet, but like a girl on the first date, they have not gone all the way. The past 5 years has seen a store expansion programme that defies logic, in that it was unnecessary and puts the balance sheet at risk.

As most people are now aware, lfl sales at Argos and Homebase were -8.8% and -2.6% respectively. Gross margins in the Argos format declined by 0.5%, while increasing by 0.25% at Homebase. These results are particularly revealing in that the comparison period is the lead up to Christmas 2010, when much of the UK and Ireland was covered in a deep blanket of snow and ice that prevented shoppers actually getting out and about.

Home Retail management have presided over a company that has a crazy level of store density, particularly in the major cities. Furthermore, there is an astonishing amount of store overlap. In Dublin, there are two stores within 200 meters of each other. Store overlap is an issue in London, Birmingham and Manchester – I am assuming that it is a factor in many smaller cities also.

This company needs to fund an aggressive store closure programme. I am not saying that this is a trivial exercise, it is not. However, I remain of the view while there is a definite cyclical element to the downturn in sales, there is also an equally important secular shift toward online retailing. Argos needs to go all the way – close more stores and buy home delivery trucks. The company has assets, such as the £400m + loan book that could be looked at as a source of funds. Reality is that a rights issue as well as new management are likely in order to arrest the decline and change strategy. At the present rate of decline and margin attrition, I calculate that Fixed Charge Cover will fall from 2x to almost 1.6x. Free Cashflow in the period has fallen from £1115.8m last year to £20.8 recently.

Home Retail has almost £80m of dividend payments and £67million of capex in the first half of the year. The business can no longer afford the dividend and what they are spending that level of capital expenditure for is simply beyond me (and I have been in their stores).

In the next two years, Argos will have leases accounting for almost 8% of its stores than can be broken. This is unfortunate, and it will be the rock on which this ship perishes unless they look to exit leases at whatever penalty applies (probably rent foregone). 

If I saw that the company was about to embark on radical surgery (and maybe a rights issue/sale of loan book to fund this) then I would be highly tempted to add a position. Until then it stays a hope stock.

Tesco plc

On Jan 12, Tesco management surprised the markets by announcing lfl sales over the Christmas period that were well below market expectations. Group sales actually grew, by 4% (excluding petrol, at constant exchange rates). So why all of the fuss?

Well, investors and traders are less interested in actual sales and more interested in like for like sales. This measures the return on new floor space added. In the UK, lfl sales declined by 1.3%, which given that 2010 had very poor weather versus 2011 represents a poor sales outcome during the year. Like for like sales were modest in Asia (impacted by the Thai floods) and were 1% stronger in Europe.

All in all, do these figures justify a 15% fall in the share price on one day. Well by themselves no, but that is only part of the story. As many people will be aware, Tesco is a Buffett stock. This may have led to some Buffet premium building up in the stocks valuation.

Tesco 03-Jan 12-Jan
Share Price 411 320
P/S 0.55 0.43
P/E 12.5 9.8
P/E (10) 19.7 15.3
P/B 2.01 1.57

Tesco is now beginning to look more appealing in terms of valuation, and maybe worth investigating. It would appear that the stock trades on a FCF yield of 8%. 

I do think that the present price action has not played out yet. For those folks that appreciate technical analysis – the pattern of lower highs and lower lows which began in mid 2010 remains valid. The line of least resistance to my mind is down. I will wait to see if the stock begins to hit resistance (circa 310p).


Delhaize is a retailer listed in Belgium.

Delhaize Sales EBIT
USA 68.10% 71.20%
Belgium 23% 22.30%
Greece 7.50% 6.00%
Other 1.40% 0.50%

The company has appeared in many of my value based screens, and I have been tempted to take a closer look.

On January 12, Delhaize disappointed the market with a release of revenue figures that were below expectations. The stock closed down 10%, to leave the valuation as follows:

P/S 0.2
P/E 7.4
PE10 11.6
P/B 81%
RoCE 6%
RoE 11%

I think that Delhaize looks potentially interesting, but it has much lower returns than say Tesco or for that matter Marks and Spencer plc. However, given the eroding valuation I will do a bit more work on the stock. The cashflow profile is very interesting, with Delhaize trading on what at first glance would appear to be a very enticing 11% FCF yield (trailing 12 mth).

Marks and Spencer

I like M&S. I like the food offering. I am wearing M&S cotton socks as I type. The reason that I like their socks so much is that you can purchase socks in a 7 pack ordered by the days of the week. The stock has returned -17% in the past year, and trades at less than half of its 2007 value.

Growth has been pedestrian, but cashflow has been reasonably stable, with the company generating approximately £600m per annum over the past five years. In the past twelve months, M&S has generated £531m by my calculations. This puts the stock on a FCF yield of 10.5%. It is a fine cash yield but hardly spectacular – what is interesting is that cashflows have been reasonably stable.

G&D PE 9.3
PE 8.43
P/S 51.8%
RoCE 11.7%
RoE 22.4%

From a quality and income viewpoint, Marks and Spencer is definitely deserving of my attention. For the moment, it is where I will be concentrating my research endeavours.


It is unchallenging in the present market environment to find retail stocks that are trading on low valuations. There is both a cyclical and secular influence at play on retail presently. Given the valuations, it is a sector that out of pure contrarianism that I am attracted to. Yet the balance sheets of many companys are weak when the off balance sheet liabillities are included. The cashflow position of many firms are also questionable. There would seem to be some opportunities at the more boring end of the spectrum, where cashflow appears at first glance to be stable and balance sheets are not so stretched.

Are Eurozone Equities good value (Part 2)

Following on from my previous post (part1) looking inside the main indices to ascertain what is driving the valuation of European markets, I will turn my attention in the post to the four major equity markets in the Eurozone.

The price/book multiple for the European equity market has been de-rating for almost 11 years now. I am hoping that it is not simply the very low valuation attaching to financial equities that is driving this de-rating.


G&D PE: 17x

P/B: 1.27x

The DAX index had a pretty poor 2011, closing down 12%. In general, many of the equities quoted on the DAX are pretty expensive in terms of long term valuation metrics. There are only six stocks with PE10 in below 12. Three are financials (Allianz, Deutsche Bank & Munich Re) Heidelberg Cement, E.On & RWE make up the remainder.

I may have a deeper look at EOn at some stage, having already undertaken some initial research on the stock. RWE, I simply do not like the look of the balance sheet. It is unsurprising to find that Heidelberg Cement among the cheapest stocks in the index.

There are many stocks in the index that are trading on very high Graham & Dodd PE’s and P/B ratios for what are essentially cyclical industrial stocks.  To my mind, stocks such as Volkswagen Group (93% gearing by my calculations) are an accident waiting t happen. Bayer, BASF and Siemens all seem to trade on P/B multiples greater than 2x and have PE10 ratios that are 20x or greater. These multiples require that these stocks need to register strong growth and generate high returns simply to justify these valuations. I would be sceptical that this is achievable.


G&D PE: 13.6x

P/B: 1.07 x

Of all of the markets in Europe, the French index probably has the most depth and breadth in terms of the industries represented. There are twelve stocks with PE10 ratios of 10 or less.

Two are the automobile manufacturers:

Renault: 3.6x

Peugeot: 4.3x

I have never been attracted to automobile companies as an investment. The balance sheets are generally a mess, and returns even with the use of leverage are way too low for my liking.

There are four financials, which is to be expected:

Axa: 8.3x

BNP Paribas: 6.8x

Credit Agricole: 4.5x

Societe Generale: 4.7x

I have no real desire to add to my speculative holdings in financials presently.

Two are construction related:

Lafarge: 7.3x

Bouygues: 10x

I already own CRH plc, but would be minded to add more construction stocks. However, I think that Groupe Bruxelles Lambert (a Belgian listed conglomerate/financial holding company) may be a smarter way into Lafarge.

The remainder are:

France Telecom: 8.1x

Vivendi: 4.8x

Veolia Environment: 6.4x.

Carrefour: 8.4x

These maybe interesting, in tha they are dividend and book value plays as well as having a low thru the cycle PE multiple. However, all are carrying more leverage than I like. Carrefour, may turn out to be interesting. It is certainly worth a closer look. Profitability recently is significantly below what it was in the middle of the decade. I want to take a look to see why this is? There are several companies trading on the Paris bourse that enjoy high valuations, such as LVMH, Pernod Ricard and Groupe Danone, to name a few. These are all high return franchise businesses. Their rating to some degree are deserved given the shape of the returns, balance sheet and profitability. I am not likely to rush out and buy them here and now – but the market is volatile, and some day they may well trade on a lower (& possibly undeserved multiple).


G&D PE: 11x

P/B: 1.17x

To go through each stock in every major index seems like an utter waste of time. I found myself questioning why it was that I put myself through this. The reward is the richness of detail one gleans from even looking at just historical profit, current net debt, most recently reported book value and market capitalisation. Spain has rewarded me for my endeavour. The reward is wariness rather than a rush to invest.

In fourteen years as buy-side equity analyst and investment fund manager I have never come across a market that is as leveraged as the Spanish market is. In general, Spanish companies are up to their eyeballs in debt. If one excludes financials from the index equity calculation, then the remainder of the IBEX index has a debt/equity ratio of  151%. Just to put this into some context, the net debt/equity ratio for the CAC and DAX indices (excluding financials) is 53% and 72% respectively. These figures are calculated using the most recent balance sheet date. (Caveat here is that interim balance sheets may not be audited). Ireland, a country that has had a massive flirtation with debt, is in a situation where the stock market (ex financials) has a gearing ratio of 38%. These are all headline figures. It may well be the case that there are off-balance sheet assets and liabilities that lead to the true calculation being different.

Spain is a massive rights issue waiting to happen in my humble opinion. Either that or it is a great trade on increasing risk appetites in the financial markets.

There is the usual host of Banks, Utilities and Construction companies propping up the valuation tables. The construction sector in Spain is significantly more leveraged than many of the other construction stocks that I have examined. Some of this stems from the concession nature of the revenue stream, but to be candid, the days of that type of leverage are over.

Spain’s Dangerously Cheap Construction Sector

Company P/B Gearing ROE G&D PE
Sacyr Vallehermoso 0.4 285% 8.3% 4.8
FCC 3.2 1053% 51.6% 6.2
ACS 2.0 279% 27.7% 7.3
Acciona 0.8 124% 9.8% 7.6
Ferrovial 1.4 425% 10.9% 12.8

Despite my wariness regarding many of the companies in the index, a few do stand out as being worthy of some investigation.

Company P/B Gearing ROE G&D PE
Mediaset Espana Comm. 1.2 -6% 51% 2.4
Gamesa 0.4 48% 10% 4.3
Endesa 0.9 33% 15% 5.8
Indra 1.6 49% 12% 13.7
BME 3.8 -76% 24% 14.4

Of the financials appearing I am attracted to Banco Popular Espanol on the basis that it continues to have a very high level of pre provision profitability. At some time in the future when the level of provisioning begins to decline (years away at this stage potentially), then this bank could well be one of the banks with the highest Return on Assets in Europe. That alone makes it an interesting proposition.

Spanish Financials

Company P/B Gearing ROE G&D PE
Banco Popular 0.56 1604% 9.9% 5.7
Banco Sabadell 0.64 1622% 8.7% 7.3
Banco Santander 0.67 1722% 8.2% 8.1
Caixabank 0.69 1276% 4.1% 8.5
Bankinter 0.71 2021% 5.6% 8.8
Mapfre 1.09 755.6% 7.6% 12.9


G&D PE: 10x

P/B: 0.77x

The Italian market would appear to offer more value than any of the other national large cap stock indices examined. 

Italian financials are among the cheapest of any that I have looked at (but this has been the case for much of the past three years).

Company P/B Gearing ROE G&D PE
Banco Popolare 0.1 11.6 3.3% 3.8
Banca Monte di Paschi 0.1 15.4 4.5% 2.9
Banca Pop Emil Romagna 0.5 18.4 3.8% 6.4
Banca Pop Milano 0.2 14.2 4.4% 5.1
Generali Ass 1.1 26.9 8.8% 13.0
Intesa San Paolo 0.3 11.6 4.5% 6.8
UBI Banca 0.2 11.8 2.6% 5.9
Unicredit 0.2 15.9 4.7% 4.2

 It should be said that in general, Other than Intesa SanPaolo and Unicreit, many Italian financials are popolare banks. In practice this means that a local municipality holds a stake and the bank is not fully run for profit, but also for the benefit of the locality. Banks in Italy have very very low return on assets due to very very high cost/income ratios. The combination of low leverage and high cost base condemns Italian financial institutions to perpetually low returns versus many other banking systems.

Also, Italian finance is intensely political. There are an intricate web of cross shareholdings and local municipality shareholdings that all vie for their own agenda – more often than not at the expense of shareholders in general. There is no corporate governance culture in Italy that is recognisable to most investors.

That said, many of these institutions now trade at distressed multiples. Unicredit for all of its issue in regards of various exposures trades on a deeply distressed multiple. The rather astute Value and Opportunity has an interesting piece on it at present. I am loath to add more financials, but may simply have to take a look at Unicredit and Intesa SanPaolo. Italian banks entered the financial crisis with lower levels of leverage than many banks in the pan European universe. Despite this they have been amongst the poorest performers (relative to the highly leveraged Nordic banks for example). A salutary lesson for investors here. It is not only the amount of capital that one holds, but the quality of the asset base that capital is supporting.

Of the other companies trading on extremely low multiples, they all have an unattractive returns/gearing profile for me (apart from ENI maybe).

Company P/B Gearing ROE G&D PE
Finmeccanica 0.26 87% 8% 3.3
Mediaset 1.36 132% 23% 5.9
ENEL 0.75 128% 11% 7.0
ENI 1.23 53% 14% 8.9
A2A 0.68 122% 7% 9.5


This has been a tedious exercise, but it has had its rewards. It has revealed a lot to me, particularly regarding the make up of valuation in European equities. When I calculate the PE10 ratio for the European markets I get a ratio of 13.7x.

I will concede that searching for PE10 (Schiller PE or G&D variant) of below 10 times is looking for an extreme condition in terms of valuation. Some of what one finds on these distressed valuation multiples are distressed because they are either going out of business (ie some retail stocks) or that the balance sheets are unsustainable (too many banks fall into this category). I use it as a sanity check in order to find some gold amongst the mud in the hope of maximizing my investment returns.

I have often been baffled that many value investors view value as buying the cheapest securities available without ever asking the question, “Is the overall market conducive to generating high compound average returns from the present level of valuation?”

The proportion to which I invest in equities is in direct proportion to the overall attractiveness of the market in terms of valuation. On the surface of it, the European equity market appears to offer much better value than many other equity markets, in particular the US equity market.

I had a thesis that this value opportunity was actually been driven by the cheapness of the banks, utilities, construction and insurance companies. Outside these sectors there would not appear to be too much in terms of value present. So many of the companies with the types of characteristics that I am seeking in terms of value creation, cash generation soundness of balance sheet are not the ones on very low valuation multiples. (I dont expect companies with sustained high returns to trade on very low multiples in general, but sometimes they might).

I am then left with a predicament.

(i) To invest in value I must in general veer toward banks, construction and utilities/telcos,

(ii) I must relax my view of what is value,

(iii) or I should be patient and simply wait for more high return companies to de-rate to levels whereby they are attractive.

My bias is that I have enough banks (Bank of Ireland plc and Lloyds Banking Group). I will continue to add construction stocks (only have CRH plc at present). After that, I will wait for better valuation support to invest in the equity of higher return companies. Cigar butt investing has never been very successful for me.

ps: I am embarrassed to say that I forgot to look at Finnish equities. I will remedy that when I do a similar piece on Nordic markets.

Are Eurozone Equities good value? Part 1

In many of my posts thus far, I have commented that the European equity indices are becoming more attractive in terms of long-term valuation – specifically in terms of P/B and Graham & Dodd PE. In spite of this apparent value, I am not anyway near fully invested with my own funds. The reasons for this are simple:

(i) I am of the view that we remain in a secular bear market for equities that began in 2000. In secular bear markets, equities typically spend at least a decade if not 15+ years de-rating until the valuation is low enough.

(ii) On the basis of prior valuation lows, I am not sure that we are there yet in terms of overall market valuation. Getting there, but not there.

(iii) I have had a suspicion that the reason European indices look so attractive from a valuation stance is that financial equities still make up a large proportion of many European regional/country indices. If much of the valuation of European equity indices is being driven by a combination of the weigting of banks in the index and exceptionally low valuations for banks, then it might just be the case the a valuation argument for European equities in general is illusory.

The purpose of this post is to ask, do European equities represent good value? The first post will concentrate on Austria, Belgium, Ireland, the Netherlands and Portugal. The second post will look at the major equity indices in Germany, France, Spain and Italy. Greece is not represented, simply as I do not want to take the currency risk that I feel is coming their way. There will be a time to look at Greece.

As it stands today, the P/B for MSCI Europe is 1.3x and the Schiller PE is 12x.

Source: Morgan Stanley, European Equity Strategy, 28 Nov 2011. Secker, Carr, Garman & Lim.

It would appear that we are at or below average valuations for Europe. The P/S graph reproduced from the Morgan Stanley strategy report is interesting. It specifically excludes financial stocks, revealing that MSCI Europe is trading at its long run average multiple. The Schiller PE is below average and includes financial equities. This supports my assertion that when the stocks of Banks and Insurance companies are excluded, that the average European equity is not compelling in terms of valuation.

Country Analysis


Graham & Dodd PE: 12x

Price/Book: 0.8x

(This portion of the post has been edited. An eagle-eyed reader has pointed out to me that some of the valuation data for some previously mentioned Austrian stocks was incorrect. Having checked this I have found that the feed for market capitalisation that I used only accounted for the protion of the market cap in the index, which differed materially from the actual market cap. Apologies for this).

Of the seven stocks with single digit PE10 ratios, there are two banks (Erste & Raiffeisen), two are construction stocks (Strabag & Wienerberger), the remainder are utilities and energy companies. MOV maybe worth a look at. But I am not that interested in adding Austrian banks to my research list presently. Other than these stocks, which also appear on the low P/B list – the other low P/B stocks in Austria are predominantly real estate vehicles.


Graham & Dodd PE: 13.2x

Price/Book: 0.99x

Stocks with lower PE10 ratios than the market include:

Dexia 0.4
KBC 2.9
Solvay 8.1
Belgacom 10.0
Mobistar 10.3
Ackermans Van Haren 11.9
Bekaert 11.9
GBL 12.5
Delhaize 12.8

 Two of these stocks are financial holding companies, two are banks, two are telecom operators.

In terms of P/B multiples, we get the following picture,

Dexia 0.08
KBC 0.18
Ageas 0.40
GBL 0.54
GDF Suez 0.71
Cofinimmo 0.81
Solvay 0.81
Befimmo 0.81
Delhaize 0.88
Bekaert 0.99

Three stocks here catch my eye, namely Delhaize, Solvay and GBL (Groupe Bruxelles Lambert). It would appear that Solvay and GBL have large net cash positions and are trading on low book and earning multiples.


Graham & Dodd PE: 15.2x

Price/Book: 1.2X

The Irish market was one of the strongest performers in Europe during 2011, recording a 0.6% decline on the year. Not bad considering that many markets fell over 10% during 2011.

I terms of what stands out is that Ryanair, Kerry Group. ARYTZA and Paddy Power all trade on a PE10 of greater than 20x. Hardly appealing in terms of valuation. Many of the companies have grown successfully over the past decade. This growth in revenue and earnings is naturally reflected in a higher rating. Much of this is deserved, but how much I don’t know.

CRH is valued at 1.1x P/B and a PE10 of 13.2. Significantly more appealing in terms of valuation.

The real bargains in the Irish market are to be found in financials, where Bank of Ireland is presently trading on a P/B of 0.31 and a PE10 of 4.3. The leading Irish non-life insurer, FBD Holdings is trading on a P/B of 1.2 and a PE10 0f 3x.

Elsewhere , Grafton Group, Independent News and Media, Total Produce and Abbey all trade on single digit Graham and Dodd PE’s.


Graham & Dodd PE: 13.2x

Price/Book: 1.39x

Once again the low PE10 ratio stocks are dominated by financials (Aegon, ING Group and Corio).

Aegon 3.8
ING Group 5.1
ArcelorMittal 8.7
KPN 9.1
Corio 9.8
Philips 9.9
Wolters Kluwer 10.4

At the other end of the valuation spectrum there is Heineken NV (23x), Fugro (24x), Unilever NV (31x) and ASML (48x). All in all, there are some fine companies in the main Dutch index, but there is nothing that I am particularly attracted to.


The Lisbon Index finished 2011 down 19%.

Graham & Dodd PE: 16x

Price/Book: 1.03x

The high PE10 for the Portuguese market is down to the high weighting and high valuation of retailer, Jeronimo Martins in the index (PE10 = 65).

What is immediately striking about the Portuguese market for me, is that other than the banks, many of the non-financial equities are very highly leveraged.

Company P/B Gearing ROE G&D PE
BCP 0.14 1439% 7% 2.11
BPI 0.55 5051% 24% 2.31
REN 0.52 237% 11% 2.81
Banif Financial 0.19 1687% 4% 4.24
Semapa 0.64 108% 14% 4.44
BES 0.29 1334% 6% 4.85
Mota Egil 0.54 287% 10% 5.49
Sonae 0.70 218% 11% 6.28
EDP   1.11 214% 18% 6.34
Brisa 0.94 142% 14% 6.65

Of the 10 stocks with single digit Graham & Dodd PE’s, 4 are banks (BCP, BES, BPI, Banif). REN and EDP are utilities, (as is BRISA for that matter). Given the low through the cycle RoE combined with high amounts of leverage, there is nothing that stands out to me as being particularly appealing.


In terms of secondary equity markets in Europe, only Austria as an index offers highly attractive valuations across the board. The other indices are trading close to or at a premium to the MSCI Europe average. This post, is not however about trying to ascertain what is cheap relative to a particular index. Instead, its purpose is to lift the lid of the index, and find out what is driving the valuation. In remain with the impression that it is largely financials, telecoms/utilities and construction stocks that are responsible for the low valuation present in European equity indices.

There is nothing necessarily wrong with that. Many value investors will choose to simply follow the value. In this regard however, it is worth recalling that financials typically trade at a discount to the overall market due to wafer thin profit margins and the highly leveraged nature of the business. This is not a recent phenomenon, but a historical one. The question for investors in financials to answer is that has the level of discounting been overdone and what are the risks to the business case going forward.

In terms of other areas, the amount of construction stocks appearing is a constant. I accept that they are cyclical in nature, but that does not mean that the businesses are inherently low quality or highly risky per se. Unless I see another compelling stock in the construction arena, I will more than likely add Heijmans NV to my portfolio. I am also keeping a close eye on Grafton Group plc and Morgan Sindall plc.

On the basis of the screens undertaken thus far, I am minded to do some more digging around in the following

Group Bruxelles Lambert – Belgian holding company with significant cash firepower trading at deep discount to book value.

Delhaize – Belgian retailer with a presence internationally. Appears to offer reasonable value and a good track record.

Solvay – Belgian listed chemicals company with low valuation, reasonable returns history and strong track record.

Part 2 of this post will look more deeply at the valuation of stocks in Germany, France, Spain and Italy. Some of these markets in particular have some very high weighting of financials in the index. Hopefully there is more on offer to a value investor than some bombed out European banks.

Bricks & Mortar Part 4 – Heijmans NV

Following on from a recent post it is time that I did some more research on Heijmans NV. The company like many in the construction industry was ill-prepared for the economic downturn beginning in 2008. Similar to many, cyclical companies they made the mistake of gearing up late in the cycle. The combination of operating leverage and financial leverage heading into a recession is rarely successful. The Chairman resigned in early 2008, once it was obvious that the writing was on the wall. A rights issue followed in 2009 to reduce the leverage.

Heijmans Valuation

P/B 0.28

P/E (10yr) 3.0

P/E 8.6x

Yield 4.6%

Who are Heijmans N.V.?

The company is incorporated in the Netherlands & has a history that spans over a century. Heijmans is focused across a wide range of construction & property related business, predominantly in the Netherlands, but also in Belgium, Germany and Britain.

According to the 2010 Annual Report, the revenue split is as follows:

Property Development                         14% (0% of operating profit)

Residential Building                           14% (22% of operating profit)

Non Res Building                                  8% (1% of operating profit)

Technical Services                                7% (7% of operating profit)

Infrastructure                                   25% (45% of operating profit)

Belgium                                           7% (4% of operating profit)

UK                                               14% (9% of operating profit)

Germany                                          11% (12% of operating profit)

The company would seem to be in the midst of retrenching from foreign markets, with the exception of Belgium.

With the resignation of the Chairman in 2008, Heijmans recruited a new leader in the person of Rob Van Gelder. I have a long and fond memory of Mr. Van Gelder, in that as a young & inexperienced  equity analyst many years ago, I had opportunity to meet with him several times as I pursued what turned out to be a very good investment in his company,  Royal Boskalis Westminster. My memory of Van Gelder is that he runs a tight ship and is highly focused on margins and cash returns. In my dealings with him over a decade ago, I found him to be straight talking, patient and informative.  Since his appointment, Heijmans has begun focusing on margin over revenue. This may sound obvious, but so many construction and infrastructure companies lose sight of profitability in the quest for iconic projects.

Crisis Timeline

  • A 3% fall in revenue during 2008 leads to a gross profit contraction of 30%,
  • During 2008, Heijmans records a €13.6m operating loss (from a profit of €88m during 2007),
  • EBITDA/Interest Paid coverage falls to 1.2x (Gearing stands at 103%).
  • Chairman resigns & is replaced by Rob Van Gelder,
  • Company announces it will launch a €100m rights issue,
  • Heijmans begins to retreat from overseas markets and begins to refocus on its home market of The Netherlands (plus some business in Belgium).
  • During this time the share price has fallen from €123 in late 2007 to approximately €10 in 2008.
  • Dividend was suspended.
  • 2009: Rights Issue completed and reverse stock split announced. Company makes a further loss during 2009.
  • 2010: Disposal of UK subsidiary, Leadbitter.
  • 2010: Return to profitability. Dividend re-instated. Van Gelder steps down as Chairman and takes up a position on the Supervisory board.

Heijmans ambition is to become the market leader in terms of sustainability, quality and profitability by 2015.

While that is rather prosaic, the reality of the challenge facing management is that revenue in the past year was €2600 million, which was similar to the revenue earned during 2004. Operating profit last year amounted to €48million versus €81million during 2004. The company needs to move ROE from 3.5% to the 11% earned some seven years ago. On an unleveraged basis, returns during 2004 were twice those in 2010.

Can profitability improve from here?

What is interesting about the firm is that the UK has been exited, but it would seem that at a very cursory level, the main drag on profitability would seem to be Property Development and Dutch Non Residential Construction. Both of these areas are barely profitable (if at all). So where are margins, and can they be improved on from here?

Property Development

 Profitability in this division has imploded from 8% during 2007, to break-even during 2010. Profitability depends on the timing and success of projects. During H1 2011, losses increased by €1m from the same time last year to (€4m). The company comments that the market is difficult. This is not unexpected given the broad uncertainty surrounding many European economies at present. Indeed it would be surprising if the any property development business was doing well in the present climate.

The number of houses sold has fallen by 7%, but the inventory of unsold homes has fallen marginally yoy. Inventory of houses under construction stands at 333 as opposed to 377 at the end of 2010.

The issue then is, how much risk as attached to this division until the broader situation improves? In this regard, the financial statements and notes are not much use. As part of the strategy forwarded by management, this division is likely to become a smaller into the future. In many of the financial releases from the company, commentary on the Property Development division seems to blend with commentary on Residential Construction.

Construction (Residential & Non-Residential)

I have looked at these two divisions together as it seems that the company only began splitting them out in 2009. During both 2007 & 2008 this division recorded almost €1bn of turnover in each year. On the back of this turnover margins were -5%. The combined turnover of the division has fallen to €620m in 2010, but the operating margin has improved significantly to 2.9%. The divisional split contained in the 2010 Annual Report reveals that it has been the Residential Construction division that has recovered most. Operating margins have increased from 1.85% to 4.15% between 2009 and 2010. Meanwhile, at the Non-residential side of the business, margins have improved from a loss of 0.9% to 0.4% profit margin. Given the lack of divisional split over the years, I simply have no clear picture as to where these margins stand in relation to their historical trend.

In terms of continued progress during 2011, there has been none really. Residential Construction has made an operating profit of €10m at the H1 stage, which is the same as in 2010 – this is especially impressive given that turnover declined by 15% during the year. At the half year stage operating margins in residential construction stood at 5.6% as margin was prioritized over volume.

The non-residential division has gone from a small profit in H1 2010 to break-even in H1 2011. Revenue has grown by 5% yoy while profitability has gone into reverse – does margin over volume not apply in this division?


 The infrastructure division has actually improved its operating margin in the past 5 years. From a margin of 3.8% on €945m of revenue in 2005, the division now has a margin of 4.8% on revenues of €714m during 2010. Further improvement in the level of profit was recorded at the half way stage this year, with operating profits of €14m versus €10m in the last year, while margin has continued to increase yoy. Turnover has risen by 23%, down to good weather leading to efficiencies in road building). The order book is down.

Technical Services

 As a division, Technical Services appears in the annual reports about four years ago. Since then, the unit has remained profitable. Operating profit margins have fluctuated between 2.4% and 5%. Margins at the half way point this year were 1.1%, which while ahead of H110 margin of 1% are behind the full year margin of 2.4%. Turnover fell by 25% during 2010 and continued to fall this year, with a 9% decline yoy during the H1 results. I can find very little information regarding this division, which is mildly off-putting to say the least.


 The international division used to contain business units in Belgium, Germany and the United Kingdon. Given the exit from the UK division (Leadbitter) the business is now focused on Belgium and Germany. Any infrastructure work in Belgium will be undertaken through the overall Infrastructure division as opposed to the Belgian division.

The UK division has been sold to a JV of Leadbitter management and a French company (backed it would seem by Bouygues. The division has been consistently profitable throughout the past 6 years, with margins improving from 2.3% in 2005 to 3.3% in 2010. Leadbitter has been sold for €47m, which was recognised as a working capital receivable until the sale had completed. Consequently year-end working capital was over stated, and year-end cash was understated by the proceeds of the sale. The sale of Leadbitter has led to a €6m gain on the disposal over the value in the Balance Sheet.

The combined business units of Belgium and Germany generate revenue of approximately €529m at a margin of 2.3%. Similar to other business units within the company, this is a higher margin on lower turnover when compared with 2009. The combined level of operating profit during the first half of this year amounted to a fat zero (from €1m of profit during H110). While Belgium moved back into profitability (2.8% operating margin), Germany reversed its way into a loss.

In the past 6 years, peak margins for both Germany and Belgium are north of 3%.

In terms of profitability, the key to overall group margins improving to the average achieved in the past decade would be for margin uplift at Property Development and Non Residential Construction, followed by improvements in Technical Services and Germany. If this can be achieved there is no reason why Heijmans cannot achieve a group operating margin of 3%. The reality is however that given the state of the property market, it is unlikely that Property Development will attain historic margins anytime soon.

Balance Sheet – P/B implies Asset Overvaluation?

With the stock trading at €7.65 per share, this implies a P/B of 0.28. Such a level of valuation implies that the net assets on the balance sheet are overvalued to a significant degree – is this the case?

Balance Sheet – H1 2011

Fixed Assets 399
Working Capital 338
Invested Capital 737
Equity 458
Provisions 39
Debt 240
Capital Employed 737

I am going to revalue the balance sheet using reasonable discounts to achieve a stressed fire sale price that considers the amount of accumulated depreciation that has already been put through the books.

Heijmans – Balance Sheet  Carrying Value Discount Value
Intangible Assets 181 100% 0.0
Property, Plant & Equipment      
        o/w Land & Buildings (i) 51.0 0% 51.0
        o/w Machinery  42.0 25% 31.5
        o/w Other PPE (ii) 42.0 25% 31.5
        o/w Land under Construction 4.5 10% 4.1
Real Estate Investments (iii) 6.5 25% 4.9
Investment in Associates (iv) 3.4 50% 1.7
Other Investments (v) 70.9 25% 53.2
Current Assets      
      o/w Strategic Land    356 15% 302.6
     o/w Property Work in Progress 160 10% 144.0
     o/w Other Inventory 54 10% 48.6
     o/w Construction Work in Progress 187 10% 168.3
     o/w Income Tax Receivable 7 0% 7.0
     o/w Trade & Other Receivables 377 5% 358.2
Current Liabillities      
        o/w Trade & Other Payables 496 0% -496.0
        Other Current Assets 303 0% -303.0
Capital Employed      407.4
Net Debt     239.0
Implied Equity Valuation     168.4
Current Mkt Cap     124
Difference     36%
(i) Land & Buildings has been depreciated by €43m from the gross B/S value.  
(ii) This relates to PPE beneficially owned under finance leases. They have been depreciated over 3-10 years.  
(iii) Have seen €2.6bn of accumulated deprecation & €0.5bn of impairments.
(iv) Value is the actual equity value, as opposed to B/S carrying value.
(v) Loans to JV’s & other associates.      

I used the Eurostat Property index to judge what type of discount that I should apply to property related inventory. According to this (experimental) index, with the index starting in 2005, the index value for Dutch residential property is 103 currently.

Like any valuation methodology, I will concede that I could use any arbitrary value to fit my thesis. There is no doubt that I could have been harsher. Using the assumptions that I have used I have derived a figure that shows some reasonable upside. What is interesting is the Heijmans closest competitor, Royal BAM Group, trades at 0.55x P/B on a Balance Sheet that contains significantly more debt than does Heijmans. To be fair it would seem that historical ROE’s at BAM are somewhat higher than at Heijmans (but this is not presently the case).

All in all, there is a lot to like about Heijmans in that it meets my primary criteria:

(i) It is good value on which ever valuation methodology that I use,

(ii) Margins on a group wide basis are not at peak levels (though some divisions are),

(iii) The balance sheet is improving.

I will be keeping a close eye on this stock and will look for an opportunity to take a position.

Bricks & Mortar Part 3 (Grafton Group plc)

When dismissing many small cap stocks that I screened as being cheap rather than having value, I was struck by several small and mid cap building and construction stocks that appeared to have all of the characteristics that I am seeking.

For me the ideal investment has a combination of the following

(i) strong valuation characterisitics in terms of asset value, cyclically adjusted PE, cashflow yield.

(ii) a history of having earned sufficient returns and capital to make the business interesting to an equity investor,

(iii) ability for the sales & profitability to grow over time (ie far from peak margins),

(iv) a low risk balance sheet.

My view in this is that the best returns an equity shareholder achieves is when valuations, earnings and leverage are all working in your favour. If I can find many of these characteristics in construction oriented stocks, then why should I not own more of them?

To that end I will be looking at Grafton Group, Heijmans NV and Morgan Sindall plc in greater detail.

Company EV/Sales P/B Gearing G&D PE
Grafton 0.37 0.55 24.3% 5.2
Heijmans 0.08 0.26 52.2% 1.2
Morgan Sindall 0.05 1.06 -56.5% 8.8

There would appear to be a reasonable amount of value on offer. The question then must be, what are the risks? What is the margin of safety? I keep referring to the fact that the market P/B for the broad based MSCI Europe is now at pretty low levels. Now if I were to exclude financials from the market, then there are a pretty small amount of sectors that trade sub book value. Of these construction is the most obvious, in that while it is undoubtedly a cyclical sector there are very many construction companies that have a long hostory of generating strong returns over the cycle. So, it would seem that a P/B of 1 should be a valuation floor as opposed to ceiling. I am not so sure that the same can be said for sectors such as utilities, pulp and paper etc.

Grafton Group plc

I have covered this stock previously, and declined to purchase then. In this post I will take a more detailed look at the valuation and operational dynamics of the business.

The valuation opportunity that presents itself is as follows:

  • Grafton has a thru the cycle RoE of 11%,
  • The average thru the cycle RoE for peers is 5.4%
  • P/B is at 0.56, versus peers at 1.08.
  • P/S is at 0.28 versus 0.44 at peer group.
  • Graham & Dodd PE is 5 versus 22 for peers.
  • Most recent 12mth trailing FCF yield is 12.4%.

By peers I am using the simple average of Travis Perkins, Wolseley and Saint Gobain. By thru the cycle RoE I am using the average ten year earnings per share divided by the most recent book value per share.

A business with yielding 12.4% on margins that are significantly below the cyclical average (let alone) peak, is definitely interesting to me. This is trading at a similar level to many UK retailers and while it has challenges, I am not certain that it faces the same type of operational and financial challenges that many of the UK high street is facing.

Now this is reasonably simplistic level of analysis, and does require further investigation, but it leaves me with the view that if the UK division were to trade on a similar multiple to the peer group, then what you would get the Irish division for free!!

Revenue Split:

  • 71% UK
  • 29% Ireland

Operating Margins

  • UK: 2010 4.1% versus 6.1% average since 2000. H1 2011 margins were 4.5%.
  • Ireland: 2010 0.4% versus 9.1% average since 2000. H1 20111 margins were -0.4%.

The in the past 12 months the UK division has reported revenue of €1450m.

Valuing the UK at 0.4x revenue yields a valuation of €580m which is in excess of the present market capitalisation. Thus Ireland is free on a peer group valuation multiple. 

Key questions

Why is Graftons UK business not appropriately valued (or is it)?

Given the recent margin history illustrated in the chart above, it would seem reasonable to value Graftons UK business on a revenue and profit multiple that is similar to Wolseley and Saint Gobain at the very least. Below I submit a basic sum of the parts valuation. I generally dislike the SoP method as it is so arbitrary. Despite the flaw, it does help to capture the undervaluation of the Group, given that the UK business could in theory be valued at the same value as the market capitalisation of the firm. (The is a difference betwen mkt cap and EV< that in this case is about €232m.

Grafton UK Valuation €, mill Peer Multiple Implied Valuation
UK Revenue 1450 P/S 0.37 536.50
EBIT Margin 4.5%      
UK EBIT 65.3 EV/EBIT 9.45 616.71
Share of Depreciation 28.0      
UK EBITDA 93.3 EV/EBITDA 5.85 545.76
Average       566.32
Mkt Cap       564.79

To really crystalise value, Grafton must improve operating margins. While they continue to improve EBIT Margins remain at the lower end of the peer group average. Furthermore, while Grafton does not split out Gross Margin by division, it does appear that most of the heavy lifting needs to be done at the level of operating expenditure. Gross Margins are relatively unchanged from the average gross margin level achieved over time.

To put this into context, since revenue and margins peaked in 2007, Sales have fallen 37.5%, CoGS has fallen almost 36%. During the same time period Operating Expenses have fallen 24%. While the company is trying too cut costs, it does seem that the level of fixed costs is too high for the present level of revenue.

Grafton has cut out a large amount of operatig expenditure in terms of the absolute € amount of costs. Unfortunately, given the decline of revenue it has not been sufficient to fully protect margins.

Staff costs have averaged 13.8% of revenue versus 15.1% during FY 2010. This is despite €124m of costs been taken out (that means job losses – there is a human cost to all of this). SG&A costs have averaged 8.3% over time, versus 9.0% for 2010. Once again this is despite €63m in costs taken out. If I accept that the present cost bases is both fixed and necessary, then revenues would need to grow by 11% to €2.22 billion to return to the average level of margins.

There is a glimmer of hope in the the H1 2011 results revealed that revenue grew by 3% on the year (Not enough, but a start) and operating costs declined such that EBIT grew by  40%. Costs continue to be taken out of the business, slowly but surely. Despite lacking a detailed breakout of costs between each division, it would seem that the UK division is making reasonable progress toward median margins. The problems in Ireland however are not improving. The division remains loss making.

What is Ireland worth?

 Ireland now accounts for almost 28% of revenue and is presently loss-making.

  • Revenue decline since peak:           -53.0%
  • Cost decline since peak:                    -47.3%
  • Profit decline since peak:                  -98.3%

Having reported a small profit in 2010, the Irish business has slid back into loss during H1 2011 as revenue declined by 7.7%. It is too early to say whether a bottom has been reached in terms of revenue outlook. My own suspicion is that Grafton in Ireland is simply operating from way too many outlets even now. I would imagine that some serious surgery is required on the size of the retail estate.

The reality with Grafton is that upside will come from attaching a higher valuation to the Irish portion of the business.

Size of DIY Retail Estate in Ireland

2011: 2.6m sq ft

2010: 2.6m sq ft

2009: 2.6m sq ft

2008: 2.6m sq ft

2007: 2.5m sq ft

2006: 2.3m sq ft

2005: 2.2m sq ft

Now it should be said that not all of the Irish division is accounted for by the DIY division. But the fact that the size of the retail estate has not changed since the market peak while revenue has collapse, would indicate that much should be done to address the cost base. The question then becomes, can something be done?

According to the annual report, there is €900mof operating lease committment due over between 2011 & 2015, with a current year lease rental charge of €59m.  To generate a 5% operating margins from the present cost base, revenue would need to grow by 6%. It would seem that we are a while away from that just yet. During H1, one lease has been exited by the company.

Irish Outlets 2007 2008 2009 2010
Merchanting  79 79 71 67
Manufacturing 4 3 3 3
Retailing 47 48 48 49

It does appear that very little has been done to seriously address the size of the Irish estate. I find it difficult to believe that profitability can recover without rightsizing the business. If managment grasp this issue, I believe that margin and valuation upside could indeed be considerable.

Cashflow and Balance Sheet

The company has done an admirable job in defending cashflow during what has been a torrid time for the company. Much of the efforts to defend cashflow have come from impressive improvements in working capital management. Working Capital/Sales has fallen from 16% at the market peak to 11.5% in the last fiscal year. The company continues to spend on acquisitions and expansion capex (predominantly in Belgium and Poland). This is no bad thing. A reasonable balance sheet and solid cashflow profile supports this, so I see no reason as to why the company should shut up shop on that front. Grafton does split out capex between maintenance capex and expansion capex. That is useful, in that it helps me gauge what a steady state for the business maybe.

Since 2007, creditor days have expanded from 57 days to 73 days. Debtor days have fallen from 61 days to 55days, while inventory days have risen from 65 days to 72 days. All in all the amount of working capital required to finance revenue has declined by €250m. The biggest cash saving has come in the form of pushing out creditor days. I would not bet that it is possible to increase this, furthermore given that many clients are builders and developers I am wondering how much of the debtors book is impaired?

Free cashflow has declined from €194m in 2007 to €75m in 2010, while maintenance capex has declined from €52m to €6m in 2010. I could never understand just how flexible supposedly maintenance expenditure could be. What is admirable however is that the company has continued to generate positive cashflow throughout a very significant compression of business activity.

So, what is this cashflow worth?

I use an backward DCF to estimate what cost of capital is being applied by current cashflow assuming that the cashflow grows into perpetuity at a rate of 0%, 1% and 2%.

FCF 74874 Ke 10% 11% 12%
Net Debt 193376 G 0% 1% 2%
Market Cap 557711   750993 750971 751318
EV 751087   0.0% 0.0% 0.0%

I often use DCF’s as a gauge of what is being implied by a share price under as opposed to a predictive tool that depends on a series of ever increasing optimistic assumptions. SO, over time should the average level of cashflow increase and the cost of equity fall, then there could be considerable upside (. . .and vice versa obviously).

The balance sheet is in reasonable shape, with Grafton having spend much of the past 4 years reducing the amount of debt that it has.

Gearing 30.5%
Gearing(incl Leases) 127.5%
Int Cover 9.68
Fix Charge Cover 1.97

 Once lease agreements are factored in, the balance sheet is considerably less strong than first appears however. Credit is due however in that the debt outsatnding has been reduced by €230m in 4 years from cashflow despite a deteriorating operating environment. In addition to the amount of debt been reduced, the maturity of remaining debt has been extended.

Banking covenants are generous in that they allow gearing up to 85% and minimum EBITDA Interest cover of 2x, extending to three times in 2012.

Technical Position

Grafton share price chart

The chart linked above is the most recent price action on Grafton Group. There is a steady shallow downtrend that is in the process of beginning. New recent lows being opened up followed by reasonably uninteresting upmoves. There is some support between 2.15 and 2.40, but following the line of least resistance I am of the opinion to see does it trend toward that level. If that support does not hold, then that would open up the possibility of revisiting the Q1 09 lows – now that would become really interesting from a valuation point of view.


Grafton hasa lot of what I want from an investment:

  • Significant upside potential from positive operational leverage,
  • Reasonably attractive valuation,
  • A much improving balance sheet (2010 F Score was 6, and that improved to 7 on the basis of analysing the interim results).

However I am not moved to buy right now.

  • Deteriorating technical picture,
  • A margin of safety exists, but not an exceptional one given the ongoing risks in Ireland,
  • I have an issue with managemet strategy regarding the Irish retail division (but I except that similar to many retailers they are locked into expensive lease agreements).

I will remain watching, hopeful that I can pick up some stock around €2.15, if not much lower.


Heijmans NV (HEIJM:AEX)
Share Price: €8.14

P/B: 0.3

Graham & DoDD PE: 3.1x

P/S: 0.05

Gearing: 48% (Interest Cover 4.8x)

F-Score: 8

Heijmans is a listed Property Development, Residential Building, Non-residential Building, Technical Services and Infrastructure company. Outside the Netherlands, Heijmans operates in Belgium and Germany.

In many of the screens that I run, Heijmans, a small cap Dutch construction company keeps appearing. The company has had a torrid time in the past number of years, and required an highly dilutive rights issue during 2009 in order to reduce leverage and shore up the balance sheet. The company has returned to profitability and is once again producing cashflow. A Piotroski score of 8 at the last annual report date indicates that the financial postion is improving. This looks so appealing, on so many fronts.

I will need to do further research, but much of what I see thusfar is exactly what I am looking for in a stock.

Morgan Sindall

Morgan Sindall is a UK housebuilder and construction company.  While not as downright cheap as either Heijmans or Grafton, it has a fortress balance sheet and is paying out a substantial amount of cashflow in the form of dividend. Despite having a balance sheet that is heavy with net cash, the median ROE over the past decade has been 21%. All told Morgan Sindall is a stunning company. I need to delve a little further in that I have much to learn with regard to the affordable housing sector – an area that contrubutes a sizable portion of the companys cashflow and returns.

With 53% of the market capitalisation as net cash, I can purchase this company now for book value (yielding 7.6%). This is not a cost of capital business. On the vasisi of a simple DCF or reverse engineered Gordon Growth model, I see no reason why this company should not be valued at twice the present valuation.

I am thinking of Grafton, Heijmans and Morgan Sindall in terms of an investment in small cap European construction related companys. It would be my goal to purchase equal size positions in all three – the thinking being that the lower risk balance sheet of Morgan Sindall acts as a nice counterweight to the riskier ‘recovery’ plays of Grafton and Heijmans.

As usual, comments greatly appreciated.


John McElligott

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