Friday, October 7, 2011

Diary: CPP, DNO, gold

CPP - CPP GROUP - (Financial) Support Services - 121.90p/£209m
CPP is a "life assistance" products. Basically, if your credit card missing, or something like that, CPP will sort things out for you. I had a new credit issued to me the other day, and had to phone a number to activate it. That, of course, presents an opportunity to sell you typical financial product garbage. If you listen to the spiel over the phone, you realise that that's where our good friends over at CPP come in.

CPP floated in March 2010. At the end of March 2011, the FSA decided to investigate some of the stuff (I hesitate to call them "products") that CPP was selling, and the share price duly plunged. FT Alphaville referred to them as basically just another busted IPO. So, lots of bad sentiment surrounding it. I noticed that, at that time, the company was a "magic formula" company, for those who have read the writings of Joel Greenblatt. It generates very high returns on equity, and was available at a low PE.

Anyway, I decided to pass on the company at the time, figuring that it was high risk, and I couldn't be sure if the the whole thing would be a complete bust. As the weeks passed, the share price recovered, and I figured that I had missed the boat and that was the end of that.

Then, in about July, the whole market tanked, taking CPP down with it. In August, I realised that I had a second chance to buy into it if I so wished, so I took it. It was, in part, eventdriven's interest in the company that caused me to reappraise it. The directors have a massive stake in the company (£120m against a market cap of £209m), so I could be pretty sure that it wasn't going down without a fight. The directors had announced that it had re-engineered some of their products (which I assume means something along the lines of "same pig, different wig"), so the FSA investigation might not be as damaging - and more importantly not fatal - as I had originally supposed.

Other negatives pointed out on a thread on Motley Fool: negative tangible assets, and "its business stinks, selling the kind of insurance that nobody really wants but are sold on the sly."

So, where we stand today, at a share price of 122p, we are on a PER of 6.1, yield of 7.2%. The company has a high return on equity (115%). It has net debt of 7.2m, compared with net profits of nearly 16m at the interim stage. So the company looks fine from a debt angle. It trades at an EV/EBITDA of 3.8, which looks cheap to me.

Analysts have pencilled in a 15% rise in EPS for 2012, for those that have faith in that kind of thing. The company has also announced that it sees India as a growth market for its wares.

So, in summary, CPP is on a cheap rating, has high returns on equity, has recently been dumped on scary news, which looks overblown, plus it has identified real prospects for growth. That was my reasoning behind my purchase, anyway.

DNO - Domino Printing Sciences - Electronic and Electrical Equipment - 444.7p/£493m
DNO released an RNS yesterday, saying that it has taken its holding in Kameleon Source Codes from 10% to 98%. It comments:
Domino has been developing its label generation and printer integration capability using Kameleon software since taking an initial 10% stake in the business in 2010.  The move to acquire the balance of the company gives Domino full control over the deployment and future development of its software solutions that will enhance Domino's coding automation capability and offer customers the means to achieve enhanced productivity and coding reliability.  The acquisition is expected to enhance future sales growth opportunities
 DNO trades on a PER of 12, yield of 3.8%, with net cash of £12m. It has a ROE of 21%, and analysts expect 10% EPS growth in 2012. Looks good to me.

An article in Yellow Capital, dated 02-Sep-2011, speculated on the price of gold. He is bullish on it:
Western Governments are dealing with a solvency crisis not a liquidity crisis. Money printing is the only way politicians believe they can cure the patient. Austerity measures don?t win elections, only brave and patriotic leaders would embark on political suicide. Expect further devaluation of currency and my guess is one major default before or during 2012. Till [sic] then I will hold gold in its physical form.
He observes that there has been a 20-year bear market in gold, creating an under-investment in the gold mining sector. It takes an average of 10 years to get a mine operational and produce gold. Further:
Everything, I believe happens in cycles. World stock markets crash or dip severely roughly every 4.5yrs, property tends to have longer cycles due to its illiquid nature and tends to be at least 9yrs to 15yrs if one measures peak to trough.
 Summing up:
gold experienced a twenty year bear market from 1981 to 2001 and is likely to experience a bull market of twenty years from 2001 to 2021.


Richard Beddard said...

Hi Mark, love your honest writer of CPP but not sure I could bear to invest in a company whose products I loathe, or think there is little utilty in. Can't be regarded as a long-term investment surely?

Regarding gold I like the simplicity of equity markets peaking every 4.5 years, property markets every 9 years, gold every twenty but extremely sceptical whether you can rely on it! Cycles yes, regular cycles. Weeeellll...

Mark Carter said...

Hi Richard,

CPP: the types of products that it sells put me off as well. It's not like the world "needs" it.

Gold: commodities are a bit of a puzzle, and it's very hard to determine where it's all going next. Maybe China will falter, the Eurozone will become even worse than we ever thought possible, and we'll have a worldwide Depression with a capital D, who knows. I don't know where commodities are going next, but I did think the post made for interesting reading.