Diary: tre

Gonna try to keep this one short today, as I want to do a bit of prep work for NG. and GFS.

TRE: Trading emissions - Financial Services - 49.5p/£124m
UK comedian Bruce Forsyth once quipped: "I'm not a fan of alternative comedy; either something is funny, or it isn't". And so it it is with "alternative energy": either it makes economic sense, or it doesn't. What it does:

Trading Emission PLC (TEP) is a closed-ended investment company. The Company operates in environmental markets, seeking to be involved in projects that reduce greenhouse gases, either as a purchaser of carbon credits, or as a financier or an owner of such projects. The Company also owns shares of companies that provide services, develop and / or own projects and trade in environmental markets. The Company has three segments: the carbon portfolio, private equity investments, and cash and other assets. The carbon portfolio further divided into carbon loan and commercialization.

You'll know I'm not a fan of alternative energy projects.  TRE was floated in April 2005, and since then has lost 51% of value, compared with a rise of the Footise of 13%. Mid-June 2011, TRE was trading at 108p, whereupon the share price plummeted on the following news:

Trading Emissions plc announced previously that it had instigated a formal sales process for its portfolio of private equity assets (PE Portfolio). Additionally, the Company announced that it had also received expressions of interest for its carbon portfolio. Indicative offers have now been received for both the PE Portfolio as a whole and for individual assets and, having considered these with the intention of maximising returns to shareholders, the Board will now pursue an individual asset realisation strategy with regard to the PE Portfolio. In addition the Company can confirm it has received a number of bids for its carbon portfolio. This process is entering its latter stages. The Board is determined to finalise these negotiations as soon as possible and will provide further updates to shareholders in due course. Proceeds from the sale of either private equity or carbon assets will be returned to shareholders as a matter of priority by way of the most appropriate method of capital distribution determined by the Board, subject to retaining sufficient working capital to enable realisation of the remaining portfolio. Proceeds from the sale of assets within the PE Portfolio and any other remaining assets will be distributed to shareholders at the appropriate time.

I'm not familiar with the company, but it looks like we've got a situation where the company was set up to trade carbon emissions in 2005 under a new investment theme, and it hasn't worked out.  An article in the FT seems to sum things up neatly:

The chairman and three of the remaining five directors of Trading Emissions are to step down following talks with shareholders as the clean energy and carbon emissions project investor warned it would pass on a full-year dividend amid falling prices for carbon securities.

The company added that chairman Mr Eckert, along with Malcolm Gillies, Nigel Wood and Bertrand Rassool will resign at the company’s annual meeting in December “following consultation with certain shareholders”.

This last quote is very very interesting.  Because I'm going to bet you 10 quid that I know who those "certain shareholders" are. According to an RNS dated 12-Sep-2011, Laxey Partners notified the company that it had taken its interests in the company to above 6%. The point about Laxey partners is that they are known as activist investors who try to unlock value. For FY2010, TRE announce that its NTAV was 135pps. Its current share price is 49.5pps, which is a huge discount to asset value. The market cap is £124m, and TRE is sitting on net cash of £118m. Its NCAV is 153m, and additionally it has "other non-current assets" of £131m - basically investments which should realise some resale value.

I've got the warm tinglies on this one, and feel that this could be an excellent special situation. Despite the horrid business, the company is trading at a PTBV of 0.37, the market cap is almost completely covered by cash, so any realisation of the portfolio is going to be a huge boost. You'll also have Laxey Partners making the best efforts they can to maximise shareholder value. As Monhish Pabrai would say: "heads I win, tails I don't loose very much". Alas, massive spread on this one.

Diary: net-nets, value investing, pvcs, tw., housebuilders, rcg, cwr , agk, growth, hlma, imi

So many things to talk about. So little time.

PVCS: PV Crystalox Solar - Alternative Energy - 7.55p/£31.5m
Shares in PVCS dropped 42% yesterday on news of weaker-than-expected demand in Germany, the biggest panel market. PVCS make "multicrystalline silicon ingots and wafers". which are used to make solar cells. I am a big detractor of "alternative energy", viewing it as a fad investment theme that is uneconomic in the real world and only exists because governments pump money into the idea. To me, the whole idea that you sell electricity back to the grid is going to look, in a few year's time, as harebrained as the notion of selling your excess grapefruits back to Tescos. It should be obvious that only centralised operations can produce economies of scale.

Now that my Alternative Energy rant is out of the way, it should be noted that PVCS has 25 years in solar tech development, so presumably it isn't a fly-by-night operation. It has only been quoted since 15-Jun-2007, though. The interesting thing about PVCS is that it's now a net-net. It has £36,2m in net cash, against a market cap of £31.5m. Its NCAV (current assets less all liabilities) is £74.1m. So it's well and truly a net-net. There's a monster spread on this share: bid 7.60p, ask 7.75p. I'll do a check-up on this company in 6 months time, and see how we get on.

Interestingly, I mentioned PVCS in a post that I wrote on 14-Nov-2010. I was looking in the top quintile of stocks that had a low "Graham Ratio" (market cap to NCAV). Their performance was "mixed", with some delisting for unknown reasons, possibly at substantial profits, possible at substantial losses. I said that there were 4 net-nets, 3 of which were housbuilders. Alas, I didn't identify the remaing company. Actually, the housebuilders seem to have acquitted themselves quite well YTD, having mostly risen (TW. Taylor Wimpey is up nearly 16%) whilst the market has fallen 7%. RCG (RCG Holdings) has been an ongoing unmitigated disaster, falling from 30.25p in November to 3.71p as of yesterday.

CWR: Ceres Power - Electronic & Elect Equipment - 17.5p/£15.1m
According to Google Finance, it:

is principally engaged in the development and commercial exploitation of micro generation products based on the Company’s solid oxide fuel cell technology.

... whatever that means.  The company has been listed since 03-Dec-2004. Shares have dropped 51% over the last month. The hubub reported in Bloomberg is:

 Ceres’s fuel cells won’t be commercially available until the first half of 2014. The Horsham, England-based company said in March 2010 that they would be available in the second half of this year. The cells provide heat and power for homes.

 CWR is another net-net, having cash of £26.7m, and a NCAV of £22.7m. The company has minimal revenues (less than £1m), and has never reported a profit. That will probably rule it out as a net-net possibility.

AGK: Aggreko - Support services - 1709.5p/£4.6bn
OK, now onto a company that wont make your belly twist into a knot. According to Google Finance, its trading activities are:

Aggreko plc is engaged in the rental of power generation and temperature control equipment.

Finally, something that makes sense. The numbers are very impressive:

AGK
	Current	5 yr median
PER	20.4	18.8
ROE	25%	27%
Operating Margin	26%	22%
Gearing	29%
z-score	5.64
Net cash/mkt cap	-6%
Net cash/net profit	-1.5
NCAV/MKT	-3%
Insiders	£13m
Growth over years:	5	10
-revenue	23%	18%
- operating profit	37%	23%
- EPS (adj)	42%	26%
Dated:	22/10/2011

At a PER of 20.4, it's not cheap. Looking at the balance sheet, intangibles account for 5% of total assets - which seems very low when you look at most companies. So, it hasn't gone out on any big spending sprees. At first flush, it looks like one of those companies where you think to yourself: "solid balance sheet, good solid business generally, if I could get 10 such companies at a PER of around 15 I'll probably do very well".

HLMA: Halma - Electronic and Electrical Equip - 331.30p/£1.25bn
Trading activities according to Google Finance:

The Company operates in three sectors: health and analysis, infrastructure sensors and industrial safety. The Company makes products, which detect hazards to protect assets and people in public and commercial. The Company’s sub-sectors include water, photonics, health optics, fire detection, security sensors, gas detection, bursting disks and safety interlocks.

Another solid company. Here are some stats that I currently favour when looking at growth companies:

HLMA
	Current	5 yr median
PER	14.8	14.8
ROE	21%	22%
Operating Margin	20%	19%
Gearing	10%
z-score	4.93
Net cash/mkt cap	-3%
Net cash/net profit	-0.5
NCAV/MKT	-5%
Insiders	£4m
Growth over years:	5	10
-revenue	10%	8%
- operating profit	11%	10%
- EPS (adj)	13%	10%
Dated:	22/10/2011

The numbers aren't as impressive as AGK, and there is a lot more intangibles, but overall the numbers look good. Balance sheet looks fine debt-wise, and investors have been getting double-digit growth over the last decade. The business is what I call a "sensible" one, making all those little fiddly bits and bobs that no-one seems to pay much attention to. Its price multiple doesn't look excessive, and has been trading at around 15X for the last decade. A fair price for a good business.  YTD, the share price has performed about in line with the Footsie. It reached a peak in July, and has since then underperformed the market. The share price had gotten ahead of itself, when the valuation levels were too rich. At these levels, it looks like HLMA will be a solid, if unspectacular, compounder. Not a bad one to have in a diversified portfolio, I would say.

IMI: IMI - Industrial Engineering - 778.5p/£2.5bn
Trading activities according to Google Finance:

 Its businesses consist of five platforms organized into two principal activities: Fluid Controls, consisting severe service, fluid power and indoor climate; and retail dispense, consisting of beverage dispense and merchandising. Severe service designs, manufactures, supplies and service critical control valves and associated equipment. Fluid power designs, manufactures and supplies of motion and fluid control systems for original equipment manufacturers. Indoor climate designs, manufactures and supplies of indoor climate control systems and balance valves. Beverage dispense designs, manufactures and supplies of still and carbonated beverage dispense systems. Merchandising designs, manufactures and supplies of point of purchase display systems for brand owners and retailers.

 So, another one of those bits-and-bobs companies (not to be taken prejoritively). In fact, its returns are pretty impressive. Here's some stats:

IMI
	Current	5 yr median
PER	10.3	12.7
ROE	36%	37%
Operating Margin	17%	13%
Gearing	29%
z-score	3.63
Net cash/mkt cap	-7%
Net cash/net profit	-0.8
NCAV/MKT	-8%
Insiders	£8m
Growth over years:	5	10
-revenue	6%	2%
- operating profit	12%	9%
- EPS (adj)	12%	11%
Dated:	22/10/2011

Like HLMA, the company has had a huge run-up to July, whereupon its valuation slumped. It is trading at a discount to it 6-year median PER. Intangible account for 30% of total assets, so the company isn't shy about making acquisitions. It hasn't damaged its balance sheet in the process, though. Revenue growth has been unimpressive, but its operating profits and EPS growth over the past 5 and 10 years had been pretty good. ROE is good, too, having been achieved with sensible debt. It recently acquired TH Jansen Armaturen GmbH ("THJ") for 12.3m EUR, and an EV/EBITDA of 7.6 - which looks OK. IMI currently trades at an EV/EBITDA itself of 7.37, which also looks OK. IMI is currently trading below its 5-year median PER. At a PER of 10.3, the valuation looks undemanding, and it looks like you're getting a pretty solid company for your money.

Followup
Seeings as I've mentioned many companies in this post, it will be worthwhile me doing a follow-up in 6 months time. Will the solid companies outperform the cheap-as-chips one? That's for Mr Market to decide. FTAS (all-Share index) currently stands at 2827 for comparison purposes.