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Obviously we can't consider PizzaExpress for sale, so let's look at Lloyds TSB (LSE: LLOY) the most recent purchase the Qualiport has made, and hence most unlikely to be sold. As a Scottish Widows carpetbagger, (although I hate the sleazy association with American quacks of the Wild West) I stand to make a small amount of money from its takeover by Lloyds. Unfortunately, my interest is a tiny fraction of the guy who has paid £100 month into a with-profits pension scheme since 1970. He, if he exists, stands to make £116,000 over and above the value of his pension.
Quite how the deal will affect Lloyds is beyond my analytical ability as I am no bank analyst and my comprehension of mutual company accounts is limited.
But I can tell you that in 1998 Widows recorded gross premiums written of £2,327m and transferred £361m to the fund for future appropriations, the nearest thing a mutual has to net profits. However, that figure was substantially down on the previous year when it stood at £906m on gross premiums of £1,996m. That suggests that cashflow is quite lumpy and could make future profits from Lloyds more volatile. At the price tag of £6,100m it means the bank is paying a multiple of 16.9 for 1998 earnings, which doesn't sound very expensive. If the business is growing at anything like the rate of its peers then its profits in 1999 ought to be at least 10% higher. That drops the price to earnings ratio to 15, making it look very cheap against the market and positively outrageous compared with the historic P/E of the life insurance sector of 26.
Now these sorts of businesses should be valued on assets rather than earnings. But as Widows is a mutual company it does not have any shareholders' funds. The nearest it gets to that is a line in the balance sheet liabilities called "Fund for Future Appropriations". At the end of 1998 it stood at £4,738m and that essentially represents all the retained profits since 1814. Comparing these numbers with Lloyds TSB, it is clear that the acquisition will make a major difference to it. Net interest income for the bank in 1998 was £4,416m, net income was £2,120m and shareholders' funds were £7,475m. Adding Scottish Widows will make the company about one third bigger and, on the terms proposed, a lot more profitable. Very good news for Lloyds shareholders and the Qualiport but, as a carpetbagger, I have to say I am not impressed.
Anyway, Lloyds TSB still looks like a great business and there is certainly no reason to sell it.
However, I don't get the same feeling looking at Rentokil Initial (LSE: RTO). Bruce has already pointed out the slowdown in the revenue growth rate and the market has come to a similar conclusion. I have four problems with Rentokil. The business areas it is in are not fast growing, in the past growth has been sacrificed for margin, it has a low dividend yield and a long history of acquisitions, and consequent goodwill write-offs have destroyed shareholders' equity.
Individually, none of these features are real killers, but in total they add up to a picture of a company that seems to be floundering. The low dividend yield of 1.7% and the low book value of 6.6p means it cannot be classed as a value share. The cash flow is not generous either. In the first half of the year it generated operating cash flow of £259m which, for a company with an enterprise value (EV) of £6,600m, puts it on an EV/EBITDA (Earnings Before Interest Tax, Depreciation and Amortisation) of 12.5. That is demanding.
On the other hand, historic revenue growth of 2.3% in 1998, and 1.9% in the first half, does not indicate that this is a growth stock. That view is reinforced by its business sectors: Cleaning Services, Plant & Distribution, Security, Personnel, Property and Pest Control. None of these businesses are likely to deliver stunning growth in the future, and the fact that it employs 130,000 employees is further evidence that this company has little value to add.
Bulls can argue that the stock is only trading on a P/E of 15 and that therefore it is cheap. However, I would rebut that by saying the market is cautious because the company has yet to start to its disposal programme, and may find that prices for its disposals will be lower than hoped for. Most people would feel that Rentokil runs its businesses pretty hard and that there would be little scope for a new owner to extract much more from them. For that reason they might be hard to sell, and/or get lower prices. If the disposal programme creates further exceptional charges, instead of exceptional gains, then the market may become even more disenchanted with the stock.
So I think the Qualiport should sell Rentokil, before Sir Clive Thompson starts selling it.
Tell us which Qualiport shares you thinnk should be sold on the Qualiport message board.
Company Change Bid DELL(US)+1.70 44.80 EMA +0.11 13.30 IIG -0.05 2.58 MSY -0.16 7.99 PIZ -0.10 7.00 RTO +0.11 2.26 ULVR +0.16 4.25 LLOY 0.00 7.24 Qualiport Stocks Last Rec'd Total # Company Buy Current Change 22/04/99 542 Misys 5.57 7.99 43.3% 17/04/98 301 Emap 10.20 13.30 30.4% 27/01/99 74 Dell (US) 44.63 44.80 0.4% 27/10/98 1133 Indep Ins 2.60 2.58 (0.8%) 29/09/99 356 Lloyds TSB 7.56 7.24 (4.2%) 19/12/97 783 Rentokil 2.55 2.26 (11.4%) 04/11/98 245 Pizza Exp 7.93 7.00 (11.7%) 17/07/98 266 Unilever 7.53 4.25 (43.5%) Last Rec'd Total # Company In At Value Change 22/04/99 542 Misys 3065.85 4330.30 1264.74 17/04/98 301 Emap 3139.85 4003.30 863.46 27/01/99 74 Dell (US) 2007.42 2009.21 1.79 27/10/98 1133 Indep Ins 2990.63 2923.14 (67.41) 29/09/99 356 Lloyds TSB 2723.20 2577.44 (145.76) 04/11/98 245 Pizza Exp 1966.34 1715.00 (251.34) 19/12/97 783 Rentokil 2046.53 1769.58 (276.95) 17/07/98 266 Unilever 2052.00 1130.50 (921.50) Cash: £ 28.46 Current Total : £20,487.21 Total Invested: £20,184.62 Profit/(Loss) : £ 302.59 Value Per Share Day Month Year Qualiport 0.34% 2.87% -2.99% FTSE 100 0.79% 1.93% 14.31% FTSE All Share 0.81% 2.05% 17.81%