Investment research into UK Stocks by Walbrock Research

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Old Mar 6, 2017, 1:10pm   #1
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Investment research into UK Stocks by Walbrock Research

A look in the life of individual stocks of UK-Listed companies. So, stay tune.
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Old Mar 7, 2017, 10:11am   #2
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Can RIGHTMOVE PLC (LSE: RMV) gives us clues in looking for great businesses?

Walbrock Research started this thread Rightmove's business model is successful as long as they see rising house prices in the UK. And that has been the case in the past eight years. Since then, RIGHTMOVE was able to:

1. Raise advertising fees from £117pcm in 2004 to £830pcm today, an annual compound rate of 17.7%. Meanwhile, UK House prices compounded at 3.9%/annum, or a total of 58% in that same period.

2. Cash operating margins increase to 60% from 30%, a decade ago.

3. It accounts for 70% of the UK property internet portal driving 11.7bn visits with visitors spending 1bn minutes per month on their website.

The Economics of RIGHTMOVE (and ZOOPLA)

A typical fee one estate agent makes is between 1% and 3% of the property value sold. So, typically a property value of £250,000 gives the estate agent’s £2,500 to £7,500 in fees. I can hear the thoughts on your mind telling me this:
£842/month multiply by 12 = £10,104 of fees to RIGHTMOVE.
Remember, property transaction is a volume business. The UK does over 100,000 property transaction per month, or over 1.2m transactions per year, also there are 157,000 estate agents. So, one estate agent (on average) sells 7 or 8 properties per year. In total, an estate agent makes around £17,500 to £52,500 in properties transaction.

If you want to know more, please go to my website.
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Old Mar 9, 2017, 5:02pm   #3
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Carpetright PLC to target £4/share soon

Walbrock Research started this thread Management attitude of conserving cash and refreshing stores’ format is the right strategy for the turnaround of its business. Also, I get the sense Carpetright wants to emulate WH Smith by focusing on margins improvement while stemming the decline in sales.

However, the share price of Carpetright PLC seemed less enthusiastic, despite the return to profits (making £14m per annum) and reduction of debt (£7m in borrowings from £105m, six years ago).

The interesting thing is the current market valuation of £140m is 85% below peak valuation of £1bn. And, profits are growing from the refreshing their stores' format.

Recently, Carpetright plc shares gone up by 25% in two weeks with the monthly chart telling me a £4/target is next.

P.S. I researched this a few weeks ago and written an article on my blog.
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Old Mar 12, 2017, 12:44pm   #4
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Dialight valuation ahead of fundamentals?

Walbrock Research started this thread Dialight (DIA) saw market valuation reached £350m or 440% higher in 15 years.
But, what about its fundamentals?

The business saw no growth in sales (+4%) with declining earnings of 78%. One positive spot is free cash flow increasing by 55%.

However, fundamentals have not catch-up market valuation. The only explanation is the stock market is overheating sending any shares to the moon.

P.S.: The dot-com bubble didn't end well for the shareholders back in 2000.
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Old Mar 13, 2017, 1:54pm   #5
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Jd sports given shareholders 1,500% gains

Walbrock Research started this thread JD Sports is one of the most successful companies in the last decade with share price gains of 1,584%!

These factors contribute to the following gains:
1. RISING PROFITS AND INCREASING MARGINS; - Profits grew from £8m to £133m in 12 years, whereas margins rose from 1.5% to 7%.
2. Revenue growth grew at a compound rate of 12.2% per year.
3. The value placed on JD Sports is close to 40X earnings and EV/EBIT of 25X (a record).
4. For every BRITISH POUND spent, JD manages to produce an extra £2.45 in sales within one year of implementing capex.
5. JD Sports has a net cash position of over £112m.

The funny thing is the previous decade (1996 to 2006) saw shareholders lose 8% on the stock.
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Old Mar 16, 2017, 2:19pm   #6
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Is Molins a value play?

Walbrock Research started this thread Maturing business Molins is struggling to grow.

Revenue is 33% smaller today, then 2004. Market valuation decline by 80% since 2003. Are Molins shares still value for money?

Molins management made a recent trading update suggesting the poor results is for last year. Because customers were delaying orders till 2017.

The second good news is their pension situation. With the UK Bond Rates (known as the 10-year Gilts) rising. Their assets pay more in cash flow to Molins retirees.

The downside to Molins is capital expenditure. Because they haven’t spent big for a long time. Molins asset age in 14 years (is a record), and 60% of their assets meet that age.
Their last big spend was in 2003 at £13.6m. Since 2009, Molins average £4m in CAPEX. Don’t be surprised if they spend £10m.

On share price, Molins could average 80 pence per share in 18 months. But, don’t be surprised if it falls back to 40 pence because of the markets at all-time highs.
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Old Apr 3, 2017, 11:28am   #7
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St. Ives plc

Walbrock Research started this thread Here are some facts about this company you need to know (not in any particular order):
-Net book value of freehold drops from £55.3m to £13.3m in 16 years.
-It has 160 clients on their books compared with 130 last year.
-Revenue in the early 2000s is higher than today.
-Profits are very volatile.
-The business disposed of assets worth £500m since 2002.
-Today, property, plants and equipment drop from £200m to £30m in 15 years.
-The weekly technical chart shows a strong buy signal.
-The capital turnover ratio is an early indicator for investors to sell if valuation got too frothy.
- The depreciation and amortisation charge since 2002 is £341m.
-Since 2002, total gross capex spending came to £477m with net capex amounts to £136m.
-As well as doing a lot of disposing (£500m worth in 14 years), they did a lot of acquisitions causing goodwill to go from £41m to £189m (2016).

- In the last 14 years, there have been 15 occasions where the share price movement were greater than 20% in either direction.
-If 2017 is another loss-making year, it will be the second time in a row.
-The last time it made a net loss (in 2009), market valuation (such as P/B and P/S) is 70% cheaper than today, despite share price collapsing. You can argue we are in a bull market which helps St. Ives to keep a hefty valuation.

Last edited by Trader333; Apr 3, 2017 at 2:09pm.
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Old Apr 7, 2017, 10:36am   #8
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Tasty PLC, a value restaurant chain?

Walbrock Research started this thread I like this business because management has a record of past success in the industry.
Below are some key findings:
1. Annual lease per restaurant is £88k, down from £110k seven years ago.
2. The leasing duration for each chain is roughly 16.7 years. It worked out as annual lease/total operating lease = 6%. So, (1/6% = 16.7)
3. Asset turnover minus cash is stable.
4. External funding since IPO’s admission totals £32m or £3.2m per year.
5. Market valuation is at a three-year low.
6. As management revise that new store openings to seven, it helps reduce capex down to around £6m. Previous guidance of 15 new stores would result in £13m to £14m capex.

Industry Outlook

The Guardian posted a piece stating an accountancy firm cite 5,570 restaurants has a 30% probability of going bust in the next three years.
These contributing reasons are: -
-The UK imports 48% of its food, this leads to higher operating costs;
-The cost of labour is rising from £6.70 to £7.20 in April, with a further rise to £7.50 to take place next April;
-More consumers are in debt; - 48% of borrowers have a credit card which is not cleared in full each month, compared with 39% a year ago.
Although they were valid points, we don’t know how many of them are restaurant goers?
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Old Apr 19, 2017, 12:11pm   #9
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For those interested in Tullow Oil

Walbrock Research started this thread Here are my findings.

(P.S. All data got converted back to British Pounds.)

The company has been through a rough three-year patch that saw long-term shareholders lost all capital appreciation dating back to 2006!
Recently, Tullow Oil asked its shareholders to fork out $750m in a Rights Issue at a discount of £1.30/share.
Is this the turning point for Tullow and a change in fortune for its shareholders?
First, Tullow’s shares didn’t initially fall because of collapsing oil price. It fell because operating profits collapsed to £245m in 2013 from £700m, along with large capex spending in the future.
But declining oil price did exacerbate the shares lower by another 60% from £6-£7 per share.

To explain my answers in a concise and clear answer I want to dissect Tullow Oil into two sections:
1. Operational;
2. External.


(Period discussed is from 2006): -

A. Tullow Oil spends £9.6bn in finding the replacement of oil sold and building up its reserves.
That resulted in oil reserves & resources increasing by 686m to 1,193m. Given that Tullow sold 243m over this period, then the capital spend per barrel is £9.6bn ($14bn) divided by 929m = $15 per barrel.
The $15 per barrel capex doesn’t include the operational costs of extracting the oil on an annual basis. Add in operational costs per barrel, the cost of oil totals $71.9 per barrel in 2016.

B. Despite the big spend, sales volume of oil increased by 2,600 bopd, a 5% growth.
C. Despite years of producing oil, Tullow Oil has rarely generated positive free cash flow. In fact, it lost a total of £4.4bn. (Data from Tullow Oil annual report)
D. Last year, oil production came to 71,700 bopd in 2016. A year ago, it gave a production for 2016 of between 78,000 to 87,000 bopd, a 10%-24% miss.
One big reason is down to its Jubilee field in Ghana. That oil field contributes around 26,000 bopd to Tullow Oil (or, around 35% of total oil production).
E. With this year oil production guidance of 88,000 bopd, it already downgraded this by 5,000 bopd.
F. As mentioned earlier, the level of total debt grew from £214m to £4bn, while sales doubled.

External Factors
Now, for the external factor, mainly the role of WTI/Brent Oil.

(Unless stated this period is from 2011)

The collapse in oil price has affected Tullow Oil business in the following ways:
A. Tullow generated sales of 25 pence for every pound it holds in assets. Now, it does 10 pence.
B. With capital turnover, Tullow is returning less than half of its investment.
C. Net cash earnings fell to £417m from a peak of £1.1bn.
D. Tullow, also written-off impairment charges totalling £5bn.
E. In 2016, half the oil was hedge at $75 per barrel, this enables the firm not to experience the full impact of adverse oil prices. Today, it can only get $60 per barrel for 45% of oil production.

For 2017

Reasons to be optimistic are: -

A. Capex spending cut to $500m this year, down from $900m last year.
B. Hopefully, it could achieve higher oil production of at least 80,000 bopd.
C. OPEC oil production cut to maintain oil prices.

Reasons to be pessimistic are: -

A. This year oil hedge is 20% lower than 2016, it puts pressure on margins.
B. U.S. oil production dampening price increase.

C. Further operational production disruption possible.
D. The North Korean crisis looking likely as both sides won’t back down. That would dampen trade and economic activities.
E. New share outstanding of 1.38m values Tullow at £3bn. It would limit any gains in the share price.
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Old May 16, 2017, 5:58am   #10
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1Spatial, a business for employees

Walbrock Research started this thread 1Spatial is a phoenix rising from the ashes with its extraordinary sales growth. But the problem is it never made a penny in profit for shareholders.
One obvious reason with most “techies” is the cost of hiring to find talent proves expensive. Although I regard the firm ability to find new businesses, it’s an employee-base business.
Think of Premier League Football where the players get all the dough, but leaves the club (vis-à-vis Billionaires owners) with the losses.
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Old May 19, 2017, 11:45pm   #11
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Kainos Group a software firm you can trust?

Walbrock Research started this thread Kainos Group has been listed on the market for two years at £1.35 per share. Now trading around £2.60 per share. The listing has made 9 millionaires for the owners and senior managers.

Looking towards their next report (end of May), they haven't given much detail away (apart from saying they are trading in-line with expectations), but might have let something in their latest trading update. That is Kainos has recruited 216 new staff since April 2016, which is a 25% increase. From my research, I have evaluated the revenue per staff growing from £81k to £104k in three years. Similarly, profit per staff rose from £10k to £19k.
So, using conservative estimates of £105,000 sales per staff and £20k profit per staff, then my forecast for Kainos Group’s 2017 is:
A. An approximate revenue of £102m from £76.6m;
B. And operating profit close to £20m from £14.2m.
These are impressive estimates and we will see by the end of this month.
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Old May 20, 2017, 2:51am   #12
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Thanks for sharing. I even didn't heard about this firm before.
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Old May 24, 2017, 4:32pm   #13
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What you need to know about PayPoint ahead of tomorrow results

Walbrock Research started this thread PayPoint PLC results coming out tomorrow and here are a few things I have learned from the company: -

1. Apart from last year, PayPoint has made ROCE of 40% plus in the last decade;

2. It consistently generates more cash profits than accounting profits. Over a 10-year period, this averages 26% higher;

3. Since 2005, its dividends payments totalled £182m is fully covered by free cash flow generation £255m;

4. The disposal of its online and mobile payment services raised £40m. At the same time, it is upgrading their Epos platform for the first time in 12 years.
It means PayPoint would need to invest substantial amounts of money for manufacturing because there are no upfront payment costs if retail agents were to upgrade their PayPoint system. Instead, there would be a milestone payment of £20 per week for the next two years.


Analysts are expecting 63 pence per share earnings, this gives a forward-PE of 15 times.
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Old Jun 1, 2017, 7:16pm   #14
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The Good, The Bad and The Ugly of WH Smiths

Walbrock Research started this thread The post is originally from and I have full authority to re-post as I am the author. All images links are charts I've created and helps to interpret the text.

Sometimes if you want to pick the right stock for your portfolio, then you need to study successful companies that deliver to shareholders. One company that has delivered is WH Smiths. Now, we need to dissect the key drivers that drove WH Smiths share price to record highs.

N.B.: This post isn’t recommending WH Smiths shares, but it is an education.

How did WH Smiths defy the odds

WH Smiths is one of the oldest businesses in the UK (Founded in the 18th Century). Having survived the financial crisis, it makes hay and grew from strength to strength.

Click the image to open in full size.

Trading profits from both divisions grew by £87m in eleven years. One huge factor is due to winding down its high-street division (or, so we believed).

WH Smiths has drastically cut down their high-street division as sales collapsed from £1,112m to £639m, a near 50% drop.

Lesson: - When you see declining revenue, don’t assume the business is bad.

Always look at their gross and operating margins.
Their travel division has doubled in sales, with profits more than tripling. This is because more people are travelling via rails and planes.

The rebirth of British Rail

Click the image to open in full size.

The growth of air travel

Click the image to open in full size.

Okay, we know the basics on how WH Smiths have turned around their business. Now, we turn our attention to the details of their financials and operations.

WH Smiths Good Points

Increasing Profitability

One key attribute behind WH Smiths increasing operating margins have been their ability to reduce external costs. Increasing Gross Margins has helped Smiths to improve operating margins by 3-fold. That’s despite rising rental expenses and staff costs.

Click the image to open in full size.

Able to pay higher wages

Talking about staff costs, you would think the National Living Wage would pose a threat by increasing their operational expenses. So far, Smiths was able to raise average wages from £10,600 to £14,700. You might think this is still low for annual pay, but, you have to take into account the part-timers, under 21s, etc. Those working part-time could be earning £7k per annum (I’m guessing here). Meanwhile, you have store managers and high ranking staff members who are paid higher salaries, which helped to lift the average cost per employee.

One helpful factor is Smiths was able to keep up with the times and cut staff numbers.

Since 2005, Smiths has cut their workforce by 28% and that has given the company an ability to meet minimum pay increases. Also, it manages to help boost revenue productivity per worker.

Click the image to open in full size.

That saw an increase from £75.5k in 2005 to £88.4k in 2016.

How was WH Smiths able to achieve these efficiencies gains?

The obvious reason was to assume closure from loss-making stores in their high-street division (refer to the big falls in revenue). The other reason is the increased use of self-service checkouts. You can also point to factors like low inflation and closure of several competitors like Woolworths. Then there is the sales boost from their “busier” travel division.

A Stagnating Business requires less Capital Spending

A look at free cash flow would tell you if a business is spending “crazy” amounts of money or spending enough to maintain their assets.

In WH Smiths case, free cash flow is producing high cash inflows numbers. On average, it accounts for 70% of operating cash flow. And this shows in the capex/depreciation ratio (%). Since 2005, maintenance (depreciation) amounted to £439m vs. capex’s £422m, that’s 96% maintenance coverage!

Click the image to open in full size.

This gel well when you compare it to the change in sales from £1.423bn to £1.212bn in the same period, a shrinkage of 13%.

Knowing How to Reward its Shareholders

Whatever you think of WH Smiths, the retailer knows how to reward their shareholders. The dividend yield is 2.2%. Add in the share buybacks it is yielding “something” like 4.5%.

I say “something like” because shareholders need to sell their shares in return for cash. Every time, Smiths does a buyback, the shareholders hold fewer WH Smiths shares. Unlike, the dividends where you receive a straight-up cash payment without any strings attached.

Here is the change in Smiths share buybacks and dividends.

Click the image to open in full size.

How would you fair in ten years, as a WH Smiths Shareholder?

Imagine you purchase 100,000 Smiths shares in 2006 and you pay an average £3.12 per share. That amounts to an initial investment of £312,000 (ignoring transaction fees). After ten years, you would want to ask the following questions:

A. How much would you receive in dividends?
B. How has the share buybacks added to your returns?
C. The number of Smiths shares you will end up by 2016.
D. What is the total return from both the dividends and share buybacks? (In % and absolutes)
E. How much will your WH Smiths shares be worth?
F. What are the total returns after ten years from realised and unrealised gains?

Corresponding Answers

A. After ten years, you would receive a total of £198,908 in dividends.
B. Smith’s share buyback would have contributed a further £189,400 to your coffers.
C. By 2016, the amounts of WH Smiths shares in your portfolio has fallen to 61,749.
D. In ten years, you would have gotten back 63.75% of your original investment via dividends, and 60.7% via share buybacks. So, the total return comes to £388,300.
E. We know that the initial value of WH Smiths shares were £312,000 in 2006. By the end of 2016, your unrealised WH Smiths shares are valued at £1,004,965, a 222% appreciation.
F. Combining these returns (realised or unrealised), your total return is 346%.
The details of your £100,000 investment “year after year” is shown below:

Click the image to open in full size.

WH Smiths share price without the Buybacks

What would WH Smiths share price look like without the buybacks?
It would look like this:

Click the image to open in full size.

If we were to assume WH Smiths didn’t do any buybacks, but instead, pay it all in dividends, the number of share outstanding would remain the same.

And using the average market capitalisation in 2016 of £1,839m, then Smiths shares would be worth £10.04 each, instead of £16.27.

That’s enough praise for WH Smiths. Now we search for any possible red flags or weakness in Smiths business model.

WH Smiths Bad Points

When you see growing profits and increasing shareholders return, you can be forgiven for overlooking any weaknesses in the WH Smiths business model.

But, one thing I noticed or doesn’t gel well with the company increasing profitability is their collapsing inventory turnover. That is a concern if you consider that the majority of its business relies on selling goods, rather than services.

Click the image to open in full size.

One reason is Smiths numerator “Costs of goods sold” has collapsed, but still, they should manage to reduce their inventory levels along with declining sales.

The negative of Smiths inventory turnover will lead to increasing days in holding inventory. This would incur extra storage costs and other holding costs.

Prolonging creditors’ days

Below is the cash cycle chart:

Click the image to open in full size.

Apart from the increasing inventory days, WH Smiths creditors are having to wait longer for payment. However, this pattern is rather volatile and doesn’t appear to put investors off investing in Smiths.

Question: Is there any particular reasons why creditors’ days are longer?

The other dirty secret is WH Smiths assets.

A look at the depreciation of WH Smiths

WH Smiths rate of depreciation has slowed from 8.9% to 7%. A lower rate of depreciation indicates smaller depreciation charge. It helps to lower expenses and boost profits!

Another angle could be Smiths revaluing assets higher, as their original costs of assets rose from £460m to £539m, despite falling sales. In that case, you can ignore the depreciation charge.

Click the image to open in full size.

The average age of WH Smiths assets has gotten older by 3.2 years.

Lesson: - The older the asset gets over time, the greater the chance a company will spend big to refresh and maintain the condition of its assets.

For WH Smiths, this may not necessarily apply because they are focused on increasing its operating profits. However, the “bricks and mortar” coverage between their high-street branches and travel branches suggest otherwise (more on that later).

If you think WH Smiths is deliberately “lowering” depreciation charges, then there is an argument against that. One is to use the Worn-Out ratio, a measure of how much value has been written off.

Click the image to open in full size.

That ratio shows WH Smiths assets represent less than two-thirds of original value from half their original value, a decade ago.
However, it is evident the assets are getting older!

The Ugly Truth about WH Smiths

If you visit a WH Smiths store you may see this:

Click the image to open in full size.

Or, that

Click the image to open in full size.

I'm kidding!!!!!!! Now, the real ugly truth, which I’m ONLY hinting at, but shouldn’t be taken as gospel is the retail coverage.
We saw the big drop in sales of their high-street division from £1.1bn to £600m. When you compare that with “SQ. FT.” coverage, it tells a different story.

Click the image to open in full size.

The high-street division cover 2,827 (Sq. ft.’000s) today, not far from the 3,000 (Sq. ft.’000s) ten years ago, so how is it possible that sales declined so dramatically in that division?

Hmm… That’s a legit question.

We assumed from the start that Smiths been closing down its stores. In fact, the opposite has happened. There are now more stores on the high-street, as it jumped from 543 to 612. Or, it could mean that bigger branches are closing down, while it opens more little ones.

Based on the above assessment. Do you think there is foul play or a misunderstanding between crashing high-street sales and increasing stores?

WH Smiths Valuation

Smiths’ valuations are looking fairly high. Normally, it trades on single-digit of 6s and 7s for EV/EBIT. Now, it trades at 13 times operating earnings, which is doubled the average.

A similar comparison can be made for EV/OCF ratio, but the one difference is it normally trades at 5s and 6s multiples.

Click the image to open in full size.

So, is this valuation too high?

Well, analysts are forecasting £1.05 per share in earnings for 2017 and £1.09 per share for 2018. We can’t determine the absolute profits because of the company’s share buyback policies.

But, if “per share” increases are that small, despite further buybacks, then profits could be stagnating.

WH Smiths Briefing

Let’s remind us of the objectives in this post, that’s about identifying factors which support a retail stock price.

These are:
A. The growth in Smiths trading profits is a key factor, but it must translate to giving your shareholders a decent return.
B. Don’t sell a retail stock because of a declining revenue trend. Earnings should be your focus. Also, a mature business can attribute falling sales from over expansion, so it is natural for the company to implement economies of scale.
However, a growth retailer with falling sales would be bad.
C. Generating high levels of free cash flow is a positive sign and means the retailer didn’t have to borrow money to pay dividends. It is why WH Smiths debt levels are low.
D. And earning positive amounts of free cash flow gives management the options to increase dividends.

These are a few things you need to watch out for but is not everything. One big factor is the valuation. In the case of WH Smiths, it was a great buy when the company was trading on 6 times EV/EBIT. Now, at 13 times, the market got ahead of fundamentals.

A second factor is future earnings growth and for Smiths this it at a low single-digit (See WH Smiths Valuation). Add that to the high valuation and further share buyback, then fundamentals suggest it is running out of steam.

A third factor is the company’s business cycle. WH Smiths has been delivering for a long time, especially earnings growth. Now, it might be the time when consumers are cautious or picky in their spending.

As for forecasting WH Smith’s share price, I will leave that to the securities firms. If I was going a pick where the shares are going then there is a 60% chance it will trade £15 or under, but an 80% chance it will stay above £12.

Thanks for reading if you made it to the end!

Let’s me pick your brain some more and ask a few questions:
1. Do these factors support a mature retailer’s share price?
2. Do you think WH Smiths valuation looks too high? Therefore, may emulate NEXT PLC.


The opinions expressed by the writer is for entertainment and research purposes. It does not constitute professional investment advice. Data is correct on available information at the time.

Finally, the writer does not own the company’s stock, unless stated otherwise.
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Old Jun 8, 2017, 11:41am   #15
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Walbrock Research started this thread Didn’t expect Molins to pull off this disposal, but what did we expect when the shares have been undervalued for so long!

The last time I posted, I said the company needed to invest in their ageing assets. Now, they won’t need to invest as much. Instead, they have a lot more cash at hand.

Before the disposal, Molin's enterprise value was £18m, now it is 25% higher!
Let’s say they invest £8m, that would leave them with £28m-£30m in the bank.

Regarding, their pension schemes, shouldn’t the deficit come down if interest rate or UK Gilts and US Bonds start to rise? Well, that depends on what’s in the composition of Molin's pension assets.

Oh, BTW, with this disposal, I expect the shares to trade around £1.20 per share or higher, giving a market value of £25m. Think about it, if their Tobacco division has similar fundamentals to their packaging division, shouldn’t that be worth at least £20m in a liquidation!
But, I need to do further research, before coming to a full conclusion.
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