Fruit and nuts

I have been busy in the past few weeks, but thought that it would be a useful idea personally to re-run some of my favourite stock screens, in order to ascertain have any potentially new ideas arisen. Along with that, I will be taking a look at Total Produce plc, which is a small European exotic fruit distributor that trades on the Dublin stock exchange.

10 points on UK Retail stocks (or I’m nuts to be still looking at this rubbish)

The news emanating from UK retail stocks simply gets worse and worse. That is unsurprising for anyone that has been following the sector or the UK equity market for any time. However I have come around to thinking that both Mothercare plc & Home Retail Group are materially undervalued. The valuations of both are presently deeply distressed. I have a penchant for being attracted to special situations, and am of the belief that one is emerging on both of these troubled companies. The current state of sales progression and margin collapse may well mean that fixed charge cover falls precipitously low over the next few quarters, if not sooner. However the aforementioned companies have some interesting opportunities that need to be grasped to begin creating shareholder value. There is no reason that either of these companies should go down the route of JJB or HMV. Home Retail already ‘gets’ the direct sales channel, while Mothercare has a very interesting and highly profitable international franchise.

(i) Accelerate the closure of stores in UK and Ireland stores. In my analysis of the Home Retail Group I was shocked to find that in many small and medium sized UK and Irish cities that Argos has stores within 2KM’s of each other. This type of store overlap is deeply foolish I believe. In Dublin for example, Argos has outlets that are 400m apart.  

There is significant low hanging fruit in this business that can be eliminated here (but with an exit cost). This is accretive to margins and improves the fixed charge cover. Management need to realise that the UK simply has too much retail space. LFL sales are falling not only because of a poor economy but also due to a shift to direct sales. This trend is not a fad, but is entrenched and will become commonplace. As a retailer, one will need significantly fewer stores. Even if there are exit costs they more than likely should be taken as a hit on the chin. The old ways of ‘if you build it they will come’ store expansion are gone. The will not be returning any time soon.

(ii) The dividend in both companies should be eliminated in order to preserve cashflow and strengthen the balance sheet – I see this as a person who is an unapologetic income investor. A streched balance sheet cannot serve two masters. Once the operating lease committments are capitalised, the balance sheet is dangerously bloated.

(iii) Both companies needs to focus on reducing burgeoning working capital, in particular, inventory days.

(iv) Argos has an unleveraged loan book that is valued at circa £470m and is provisioned to the level of 14%. I think serious consideration must be given to monetizing this loan book (via securitization or outright sale).

(v) Mothercare has made a great deal of reducing UK stores over the next 15 months. What progress is being made on this count?

(vi) Home Retail Group,s Homebase business trades on operating margins that are significantly below that of the peer group. This type of retail outlet is a 5% plus operating margin business at Kingfisher, Travis Perkins and Grafton. Why do Homebases margins lag so materially.

(vii) Home Retail group has cash of £220m and a loan book of £470m that represent almost 90% ofthe market capitalisation of the company.

(viii) Mothercare has a highly successful international franchise operation. It accounts for practically all of the companys profutability. The company is valued at 0.18x revenue. Next and Inditex with similar international franchise operations are valued at 1.2 & 2.2 x revenue.

(ix) 46% of Argos revenue is generated from telephone and internet orders. This company should invest in a delivery service, they simply do not need stores. Other catalogue/direct retailers such as N.Brown and Next trade on 1x revenue.

(x) If you were to do a sum of the parts analysis on Home retail Group, valuing Argos at 0.25x revenue, then you would get the Homebase business for free.

In summary, I am going to purchase shares in both Home Retail and Mothercare, but I am not yet sure when. I expect that the run into the Christmas period will see some pretty poor trading. The balance sheets are weakening by the week. I think that the opportunity actually arieses from how weak the UK retail environment is. A continuation of the present trend will force the fixed charge cover so low that action have to be taken, either by the company or by someone else.  The opportunity is that things getting worse will light a fire under the backsides of management teams that I view as being way tooo complacent.  These are highly risky speculative stocks. There are many stocks in the UK retail space trading on deeply distressed valuation multiples. I can see how both of these situations have a catalyst that may force change.

My difficulty presently, is that with 20% of my investments now in equities, I am not the keen to push the boat out further at this stage. There is a balance between the valuation attractions of these special situations and my deeply held view that we have not reached valuation or price lows in most of the major global equity indices. Given an 11 year bear market, I think that it is highly likely that compound returns for the average equity will be negative until the market valuation bottoms on single digit Schiller PE’s and P/B’s of at or below 1.

Stock Screen Results

My first screeen is a simple P/B screen. This can be replicated on any free website, such as the screening tool. 

Stock P/B Int Cover Gearing RoA             (5 yr avg) RoE             ( 5 yr avg)
Arcelor Mittal 0.53 7.4 31% 5.40% 11.20%
Benetton Group 0.49 46 34% 4.80% 9.40%
Finmeccanica SpA 0.42 3.5 46% 2.60% 11.30%
Gdf Suez 0.72 5.3 40% 3.80% 9.80%
KSB 0.58 9 16% 7.20% 17.60%
Nexity 0.58 17.5 12% 2.80% 6.20%
OMV 0.85 14.7 32% 6.80% 15.30%
Saras 0.85 7.80 32% 5.20% 13.70%
Dart Group 0.66 38.4 6% 4.50% 15%
Grafton Group 0.68 3.2 33% 4.90% 11.70%
Kontron  0.89 19.6 12% 5% 21.70%
Total Produce 0.67 4.1 33% 3% 9.20%

The screen is a simple one that ranks stocks by P/B, leverage and returns. I have excluded financials and real estate from the screen. It is an interesting collection of companies. I had hoped to do some work on Kontron by now, but have not found the time. There are two oil refiners which is interesting (OMV and Saras). Given that I will be looking at Total Produce, it is comforting to see that it screens reasonably well. FInally I have excluded lots of stocks that I have already looked at in the constructiona and utility space. From this list, I will be prioritizing work on the refiners, KSB, Kontron and Dart. I have already studied Grafton, and decded that while it does represent good value, that given the outlook it is not great value at this present time.

Greenblat Screen

My second screen is a returns based screen rather than discount to asset valuation. I ammend the standard Greenblat screen to screeen for valuation anomalies when compared with 5yr average RoCE & 10yr avg RoCE. The value being provided by use of EV/EBITDA. As is normal, lossmaking companies and financials are excluded. I also exclude stocks with a market capitalisation below €100m. Why, I simply have never beeen comfortable with micro caps.

This leaves me screening a universe of 950 equities across Europe. In a greenblat screen if I recall he simply invests in the leading 30. I take the top 150 stocks from the screen and then further sort by other valuation metrics and balance sheet strength. (I use P/S, P/B, Gearing, Fixed Charge Cover). This narrows down the field from 150 to 15.

Company Name P/B P/S Gearing  FCC
BMW 1.5 0.5 -36 14.4
Dart Group 0.7 0.2 -66 1.8
Morgan Sindall 1.1 0.1 -64 1.8
Inchcape 1.1 0.2 -19 4.4
Drax 1.5 0.8 -21 14.4
Salzgitter 0.8 0.4 -32 3.4
Clarkson 1.5 0.9 -123 6.1
Skanska 2.4 0.4 -43 10.8
Sportingbet 2.1 1.1 -67 15
Total SA 1.5 0.6 24 23
Robert Wiseman 1.8 0.3 3 8.9
Dragon Oil 1.7 4.6 -64 999.9
Boliden 1.5 0.8 21 34.5
Indesit 1.6 0.3 32 11.7
Jungheinrich 1.1 0.4 -31 2.7
Balfour Beatty 1.6 0.2 -37 2.4
OMV 0.9 0.4 45 8.3
Meyer Burger 1.9 1.5 -61 13
Maire Tecnimont 2.1 0.4 -51 3.7
Andritz 3.3 0.7 -145 8.8

The last screen that I run is a Price/Net Net screen. That is the ratio of market capitalisation to net current assets plus net debt/cash. From this I get 20 stocks across Europe with a P/NNWC of less than 1.

Company Name Mkt Cap Price/Net Net
Helphire 11 0.19
SOLON 22 0.22
Phoenix Solar 36 0.23
Barratt Developments 930 0.41
PV Crystalox Solar 39 0.44
Heidelberger Druck 304 0.53
Agfa Gevaert 290 0.58
Taylor Wimpey 1301 0.63
Praktiker 156 0.66
Q-Cells 121 0.68
Findel 80 0.68
Gleeson (M J) 67 0.75
Molins 23 0.80
Abbey 114 0.83
Bovis Homes 722 0.86
Salzgitter 2071 0.89
Harvard Intl 22 0.95
Vislink 22 0.95
Redrow 402 0.98
Persimmon 1712 0.99

Many of the companies uncovered from this screen are home builders and I have decided that it is Abbey that I am attracted to from the point of view of operating metrics and management track record. However, it is not yet time I feel to take the plunge into UK home-building. Alternative energy companies such as Phoenix Solar and PV Crystrol have beendoing pretty appaulingly. There is a case for looking at the entire alternative energy sector, and includiing the likes of Vestas, Nordex and Gamesa. All have hit hard times recently – but it is worth bearing in mind that all were incredibly highly rated at one stage. 

Total Produce – Fruit that is ripe for picking or a basket case?

Total Produce is a small stock that keeps showing up in various different screens that I run for value. Despite working in the financial markets and being based in Ireland, I had noot actually heard of the stock until recently. Given how well it screens, I have decided to do some indepth work on the stock. Despite many defensive food & beverage stocks trading at reasonably high multiples, Total Produce is on an excededingly low level of valuation. Is there an opportunity here, or is it a simple case that there is a valid reason for this?


  2005 2006 2007 2008 2009 2010
Shares Out 348971 349951 351003 351887 351887 351887
Share Price 0.76 0.76 0.59 0.26 0.34 0.38
Mkt Cap 265218 265962.8 207091.8 91490.62 119641.6 133717.1
P/E 19.9 37.7 10.9 6.0 9.2 7.3
P/B 1.60 1.80 1.26 0.63 0.72 0.79
P/TanBV 3.09 5.16 5.16 3.59 3.15 4.78
Div Yield 0.0% 0.0% 2.7% 6.5% 5.0% 4.4%
P/S 0.196 0.169 0.096 0.041 0.055 0.057
EV/Sales 0.210 0.168 0.143 0.085 0.091 0.090
EV/EBITDA 6.6 8.0 6.0 3.9 4.5 4.2
FCF Yield 6% 3% 17% 37% 21% 23%

On all measures using the current share price versus the most recent annual data, the company looks incredibly attractively valued on trailing multiples. Tangible book value is significantly lower than stated book value due to the presence of €140m of goodwill from a total equity of almost €170m. The trailing FCF yield is an incredible 23%. I wonder how sustainable that this is?

Given the underlying returns in the business, I think that this is a stock that quiet justifiably should trade on a significantly higher multiple.

  2005 2006 2007 2008 2009 2010
Sales Growth   16.3% 36.4% 4.7% -2.9% 7.2%
Gross Profit Growth   22.2% 30.2% 3.1% 1.6% 6.2%
EBIT Growth   -32.5% 72.3% -6.2% -10.7% 17.5%
PreTax Growth   -36.2% 75.3% -10.1% -4.9% 18.4%
Gross margin 13.5% 14.2% 13.5% 13.3% 13.9% 13.8%
EBIT Margin 2.4% 1.4% 1.8% 1.6% 1.4% 1.6%
Tax Rate 31.4% 28.3% 27.1% 28.4% 32.3% 24.9%
RoE 8.1% 4.8% 11.6% 10.6% 7.9% 10.9%
RoA 1.8% 1.2% 3.0% 2.5% 1.9% 2.4%

To my mind this is a business that should trade at the very least at book value. While it is a low margin distribution business, the level of operating cashflow after tax and working capital is quiet staggering.

Cashflow and Other Issues

Since the company was spun out of Ffyfes PLC, it has generated €258m of Net Operating Cashflow, and has spend €84m on capex and €161m on various acquisitions.

Given the cashflow generated in the past two years, one could be forgiven for thinking that the company is underpaying the dividend in a most significant way. In the past four years, Total Produce has paid dividends of €22m to ordinary shareholders, but has paid dividends of €17m to non-controlling shareholders.

In the past year the company has spent just under €9m on a shrebuyback of 22m shares (6.25% of the sharecount). I have always detested sharebuybacks. It presupposes that management know how to time the trading of the shares in their own company – there is no evidence that this is the case.

My principal dislike of buybacks is that they achieve very little, other than a temporary boost in the share price. In most case the purchasing company does not cancel the shares. Alas, Total Produce has fallen into this trap. All of the shares purchased are held as treasury shares to be reissued at another date. What is the benefit to shareholders of this. In my years in the markets, it has never been satisfactorily explained to me. If a company wishes to return funds to shareholders, then a dividend or special dividend is the way to go about doing this. For a company with such cash generating characteristics there is no reason for this. Acquisitions can be funded through cash generation.

If I were to use a no-growth DCF in order to value the company, as follows:

FCF 25043 25043 25043 25043 25043 25043
g 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Ke 8% 9% 10% 12% 14% 16%
EV of FCF 313037.5 278255.6 250430 208691.7 178878.6 156518.8
Net Debt -77776 -77776 -77776 -77776 -77776 -77776
Equity Value 235261.5 200479.6 172654 130915.7 101102.6 78742.75
Value/share 0.71 0.61 0.52 0.40 0.31 0.24
Upside/Downside 87% 60% 38% 4% -19% -37%

I take the last years FCF and discount into perpetuity assuming no growth, using various cost of equities. It is not perfect, in that most DCF’s are GIGO. However it does offer some semblance of a sanity check. To put it another way, the present share price & FCF is implying almost a 12% cost of equity if one assumes no further growth. What this tells me is that from a fundamental valuation point of view, is that if cashflow is sustainable (but only that), then it is only at very high cost of equities that there is fundamental downside. Equity risk premia are high at the present, but in my opinion are likely to stay that way until the secular bear market/recession/deleveraging are behind us.

I have rarely encountered a company that is capable of generating such significant amounts of free cashflow. I am immediately suspicious. The company generates between 4% & 5% of assets as FCF, and a staggering 17%+ of equity as FCF. If I was to ever own a company, I would like to own a company that year in year out genreated those types of cash returns.

The key for such a cash generator is:

(1) How does it achieve this?

To simplify the analysis, I look at the cashflow statement from a % of revenue stance. In the past 5 years, the company has on average, produced a cashflow statement with the characteristics laid out below.

Total Produce – Average Cashflow (%of sales method)

Operating Profit 1.55%
Depreciation 0.63%
Impairment Charges 0.26%
FV Movement on Inv Prop 0.00%
Amortisation 0.21%
Other Non Cash adjustments -0.02%
Pension adjustments -0.13%
Income Tax Paid -0.48%
Net Interest Expense -0.16%
Dividend to Minority Shareholders -0.20%
Working Capital Movements 0.33%
Net Cashflow from Operations 1.98%
Capital Expenditure -0.76%
Free Cashflow 1.22%

 Working capital is not a significant cash consumer as (i) inventory days average 7.5 days which is to be expected given that the product is fresh fruit. Debtor days average apporximately 45days with creditor days coming in at approximately 55 days. Hence, since the spin off from Fyffes, the company has seen a net cash inflow due to working capital management. The key drivers of cashflow then are operating margins and capex in any one year.

(2) How sustainable is it?

 Given that this is a low margin business, there is very little room for manoeuvre if costs rise. In this regard it is worth noting that cost of goods sold has been relatively stable at just over 86% for the past 6 years. Operating expenditure has risen from 11.4% to 12.3% of revenue in the same time period. I would be interested to know why this is the case? Having taken a peak at Chiquita and Fresh Del Monte, it would seem that all business operate with very low operating margins. However in the past 5 years these been reasonably stable. My worry would be that small increases in the cost of goods sold can have a dramatic impact on underlying profitabilty. This is something I would like to get to the bottom of as it is the key determinant of cashflow sustainability.

(3) How will it use the cashflow?

Capital expenditure to sales has fallen in the past 6 years. In the last fiscal year capex came in at 50bps of revenue from 1.6% in 2006. However capex at Chiquita averages 1.9% and is approximately 2.4% at Fesh Del Monte. Why is this? How can Total Produce get away with having significantly less paex outlay than two large competitors in the fresh fruit distribution business. Again, I have no real answers for this

The industry is a consolidating one. Given the strength of cashflow and balance sheet it is to be expected that Total produce will look to play a part in consolidation. There are numerous in country players that the larger international players will seek to aquire in the future. In the past the company has made acquisitions in the UK, Scandinavia, India and South Africa.

Corporate Governance Issues

There are obvious areas where this company falls down in terms of corporate givernance. For example, the four person management team at Total Produce earned €2.7million in 2010. The leading Irish fodd company is arguably Kerry Group plc. They operate globally where they are a leader in the international flavours and ingredients business. They are many times larger than Total Produce and have sustained strong returns for decades. The four person management team there are paid €5.2m. Total Produce management remuneration accounts for 7.2% of operating profit, versus 1% at Kerry Group? Why is this?

For the past number of years, Total Produce, a fruit distribution business has taken impairment charges & fair value adjustments taken against an investment property portfolio. It seems as if these relate to investments in a company related to the chairman of Total Produce. Total Produce is also involved in some JV’s with a property company with close links to the chairman. There are reported in related party transactions. Furthermore, the company has sold some agriculatural land in South Africa to a business partner there, but has in turn increased its shareholding in that business partner. I really dont like to see this. It seems to me as ith there is a lot of corporate musical chairs going on here.

Total Procuce is presently producing a level of cashflow that is in my opinion materially undervalued by the market. It has some of the attractions that I am seeeking. The company would seem to have strong posiitions in many of the markets that it is present, and has some oportunities in India, South Africa and China.

There are hurdles to investing, chiefly:

(i) very low margins and capex that is materially lower than peers,

(ii) some corporate governance worries,

(iii) timing of acquisitions

(iv) what liklihood in a spike in cost of goods sold?

(v) The question that I would really like answered is the following. Given the low leverage and high level of seemingly recurring cashflow together with strong market positions, I would have thought that private equity would be all over this type of investment. But that does not seem the case – why is that?



16 Responses to “Fruit and nuts”

  1. 1 Wexboy November 7, 2011 at 4:43 pm

    John, I’m hoping to get a blog up and running soon (just waiting for my WordPress for Dummies to arrive from Amazon, among other things!), and Total Produce is on my list of stocks to blog about (I’m a shareholder). Meanwhile, I posted the following on a board – doesn’t cover everything you raise, but I think undervaluation is ultimately down to the actions of/poor opinion of management (woefully the case with a no of Irish cos…and not just in the exploration sector!), namely the McCann brothers (same goes for Fyffes, for the v same reason – I was sad to see the news their father Neil McCann died recently, but at 87 I guess he was retired from business life for quite a few years to the detriment of both companies):

    ‘Total Produce is cheap (P/E 5.6 & 4.7% div yield) and safe (13.9 times interest coverage) – i guess the low multiple can be ascribed to zero eps growth over past few years, but on the other hand (esp. in this market) i think such consistent/stable eps delivery at least warrants a 10 P/E multiple – btw i don’t hv a lot of respect for management (except if you compare them to Greencore management…), so i suspect we’re really talking about a business that pretty much runs itself, something i like also –

    taking another approach, i peg the true underlying operating profit margin (pre-amortization/exceptionals, and adjusted to reflect minorities) at 1.34% – this deserves a Price/Sales ratio of 0.125, but i’d tweak a little higher to reflect available debt capacity – based on latest FY EUR 2,600.5 mio revenues, i’d calculate fair value at EUR 362.4 mio –

    putting all this together, i would average out at a fair value of EUR 0.89 per share, a potential 135% upside from the current share price –

    i think value will out ultimately, it usually does in the end assuming there is no underlying value destruction – i was impressed with the 22 mio share buyback last nov (which shd improve CY eps by 6%), but otherwise management is failing on at least 2 obvious fronts: i) considering the low risk nature of the business, and available debt capacity, management shd be aggressively hoovering up small/private businesses on a regular basis (as dcc does in its energy business) and quickly doubling the acquired units’ operating margins through cost elimination/economies of scale, and ii) the elephant in the room…finally figuring out it’s time to reverse the Total Produce/Fyffes break-up – a nil-premium merger is the obvious way to achieve this and should easily yield 2-3 years of decent eps growth even if the underlying business remains unchanged’

  2. 2 Philip O'Sullivan November 7, 2011 at 5:30 pm

    Hey John – I would share a lot of what yourself and Wexboy (who I’m delighted to see is about to “enter the blogging market”!) say about Total Produce. I’m a shareholder in it myself. Just one thing that I would add is on your point about the risk of a possible spike in the cost of goods sold. My understanding from talking to analysts covering the stock is that TOT operates open book accounting with its customers, and agrees prices on a weekly basis, hence this is why margins are very stable (outside of FX fluctuations).

  3. 3 jmcelligott November 7, 2011 at 5:40 pm

    Hi guys. Appreciate the comments. Total Produce does seem like a low risk investment. It ticks a helluva a lot of boxes for me. I think that vakue will out. I would have no issue putting 5% of my own funds into the stock at the present multiple if I could get a bit more comfortable. Wexboy, the analogy with DCC is pretty apt. The successes of low risk Irish businesses in the past 30 years have been characterised by entrepreneurial management, using a balance sheet wisely (not excessively) – DCC, Kerry, CRH, IAWS. The failures have been Co’s like Greencore that sat and watched the world go buy and did nothing about it until it was terminal (Greencore, Independent News and Media etc).
    Philip – thats useful to know re the policy with suppliers. As I said the line item does appear very stable – I am just sanity checking what a lurch might do.
    A few ex colleagues whom I respect their investment discipline greatly have almost 8% of their equity fund in this. I will do a but more on it. Agree on the McCanns. Fathers build companies and legacies only for sons to come in and do very little in terms of value add.

    • 4 Wexboy November 7, 2011 at 6:12 pm

      I agree with Philip: I’m often wary of distributors as their low margins don’t present enough margin of safety IF they don’t have the power to change prices quickly or frequently, but it was always my understanding that Total Produce could pretty much just pass through their underlying Cost of Goods to customers, as is the case I believe with most fresh/perishable food distributors (seafood springs to mind), and certain types of commodity distributors.

      As an aside, distributors are a funny bunch – I remember years ago presenting an FX hedging programme to a large distributor. He politely declined and I pressed him on it, surely because of his low margins he needed to protect himself against adverse FX rate movements?! He said no, he didn’t give a fig where rates went, he just never wanted to be locked into a bad rate… What?! Turns out he knew his direct competitors never hedged, so if he ever got locked into a bad FX rate (vs. the spot FX rate they were getting) his rivals would quickly wipe out his sales and profits. Made sense! – I learned something that day, the most rational/economic answer is not necessarily always the best answer. Hmm, now I think about it, he was a commodity distributor (e.g. coal)…what a great business, just pass it on to the customer!! Like I said with Total Produce, ‘…we’re really talking about a business that pretty much runs itself…’

      • 5 Philip O'Sullivan November 9, 2011 at 6:19 pm

        Just by way of an aside, one analogy that came to mind when reading Wexboy’s last comment was ICG – despite fuel being one of its biggest costs it doesn’t hedge its fuel requirements because Stena, with whom it operates a virtual duopoly on the Irish Sea, has a policy of not hedging. FYI.

  4. 6 Graeme Kyle November 9, 2011 at 5:54 pm

    Hi John

    I am liking the blog, all good stuff and really worth reading. Just to comment on your Price/ Net Net screen. The UK house builders indeed look attractive on current assets – which is usually the case. This is something I grappled with when I worked at Setanta and it’s really due to an accounting quirk. Typically over 90% of a house builder’s assets is Land + Half built houses + Part exchanged houses. For some reason, which has never been altogether clear to me, all of these assets are classed as Inventory. It seems odd they are able to do this since often land is held for 3-5 years before being developed so it would be more accurate to class as long-term investments or similar. Another point is that these guys have a history of writing down ‘inventories’ sharply in housing recessions thus severely compromising the asset value. Some are more prolific at this than others but essentially its unavoidable due to the historic cost accounting method employed (the land must be valued at the lower of purchase cost and net realisable value). Exacerbating this issue is that management teams ain’t great at forecasting the housing cycle and tend to continue buying land even when real estate valuations are stretched. This results in the inevitable impairment charge when the cycle turns.
    Anyway, hope you’re well- maybe catch up at some point for a beer!


  5. 7 Wexboy November 11, 2011 at 12:18 am

    Hi John,

    Always enjoy your blog posts, and our discussions to date! Finally got my own blog off the ground complete with a post on Total Produce, plus a few other stocks – here’s the address:

    Hope you’ll take a look when you have a chance – if I knew what I was doing (and I’m not sure I do!) I think I pinged/trackbacked (?) you & your blog in the post. Greatly appreciate if you would give a shout-out for this debut on your blog, and if you become a reader and want to recommend/Blogroll my blog at some point, I’d also greatly appreciate it! Once I figure out how, I will be Blogrolling you and perhaps adding a few widgets. And, of course, any comments or advice on posts and blogging always welcome.

    Many thanks & cheers,


  6. 8 memyselfandi007 November 11, 2011 at 7:00 pm

    Hi John,

    as usual great post. Total Produce is also one of my core long term holdings.

    One of the reasons for the cheapness could be that Continental investors are shying away from “PIIGS” stocks.

    It is also interesting if you look at Total Produce’s WACC in Bloomberg.I think a lot of people make the mistake to require “Irish” Cost of capital for total Produce which ha most of its business operations outside Ireland.

    I think this results in some outstanding investment opportunities in the “periphery”.


    • 9 jmcelligott November 11, 2011 at 9:50 pm

      Hi. Thank you for the comment. I think that some Irish small & midcaps have effectively suffered a buyers strike, so the valuations are even more depressed than they normally would be absent the PIIG/EZ crises (plural at this stage). I agree with screening for periphery stocks, and have devoted much time to this. The way I look at WACC or any cost of capital is not to calculate it, but to run an backward DCF/Gordon Growth model. I take the average cashflow/returns and the present Enterprise Value (incl pension liabs etc) and solve for the cost of capital. Using this simple induction tells me that the present share price at the most recent FCF assuming no growth is implying a 12% cost of equity. Normally I think it should be somewhere between 8% and 9% over the cycle. That gives me 54%-80% upside using this very static model.
      I should say that I have purchased a 5% position in my own fund of Total Produce yesterday morning.
      In terms of other PIIG opertunities, I am considering doing some work on BCP (a leading Portuguese bank). They have highly profitable divisions in Africa and Poland that have loan/deposits ratios of less than 100% and are well capitalised as divisions. Their value is not being reflected in the valuation of the overall bank due to the problems of the Portuguese division. Highly speculative, but it is worth a look. I like Endesa apart from the fact that ENEL own 92% of it.

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  5. 5 Wochenrückblick – Lesenswertes | valueandopportunity Trackback on November 12, 2011 at 5:53 pm
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  7. 7 Retail – Sale on Now Big Discounts in all departments!!! « valuestockinquisition Trackback on January 13, 2012 at 4:00 pm

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John McElligott


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