Qualiport

[ November 2, 2000 ]

Yields, Questions And Management

By Maynard Paton (TMFMayn)

Carburton Street, London -- November will be a busy month for the Qualiport. Three portfolio companies will publish financial details over the next fortnight. Here are the dates for your diaries.

Company            Results Date        Reporting Period

MMT Computing      Thur  9th Nov       Year ending August 2000
Dell Computer      Thur  9th Nov       Quarter ending October 2000
Emap               Mon  13th Nov       Six months ending September 2000

Next Monday, I'll preview MMT Computing's (LSE: MMT) forthcoming numbers. After reviewing the company's interim results in May, six months have subsequently passed without MMT receiving any Qualiport management attention. Although nothing too dramatic has happened in the meantime (well, not officially!), nevertheless, it'll be a worthwhile exercise to bring everyone (and that includes me!) up to speed before MMT's big day.

So, with one half of the Qualiport about to receive extensive coverage over the next week or so, today's feature will briefly cover the portfolio's other three companies. First up, Lloyds TSB (LSE: LLOY).

Yield...

There's been a sudden spurt in Lloyd TSB's share price over the past few weeks. Since September, the shares have risen from around 580p to 716p. Indeed, there's now a real danger that the Qualiport could soon see a paper gain on its Lloyds TSB holding. Not since this time last year has Lloyds TSB breached our 744p (dividend readjusted) entry price. Apart from the obvious "what's happened?", one other question always surfaces when share prices suddenly move in either direction -- the question of valuation.

I've admitted in the past that I don't really understand Lloyds TSB to any in-depth degree. Perplexing accounts combined with the sector's ultra-sensitive nature to future interest rates, which I can't predict, only gives me a cursory understanding of the company.

I class Lloyds TSB as a "value" investment. In short, I offset my lack of banking knowledge by applying a substantial margin of safety in any prospective share purchase. As I explained in this feature, my favourite valuation tool for Lloyds TSB is the dividend yield.

When I yielded to Lloyds TSB in June, I wrote:

"With that in mind, let's use the simple valuation philosophy that an investment "bargain" is a company that:

• is large and well-established;
• has the prospect of producing a significant rise in dividend payments in years to come, and;
• has a prospective dividend yield equal to the return from risk-free government bonds (gilts)."

Lloyds TSB scores well on the first two points. But have recent broker upgrades caused the recent share price flurry? Unfortunately, no. Anticipated full-year earnings per share (EPS) for 2000 remain around the 50p level, while this year's total dividend payout is expected to come to 30.7p.

Using the above philosophy, with 5-year gilts currently yielding 5.55%, our "bargain" entry price for Lloyds TSB would be 30.7p / 5.55% or 553p.

But let's go one step further. As Lloyds TSB have already paid their first-half dividend for 2000, let's adjust the calculation to include the expected second-half dividend of 2000 (21.4p) plus the expected first half dividend of 2001 (10.4p). On this revised basis, our "bargain" entry price is adjusted to 573p. All things being equal, the Qualiport isn't about to add to its Lloyds TSB holding anywhere above the 600p mark.

Questions...

Pizza Express (LSE: PIZ) updated shareholders with an AGM trading statement a fortnight ago. Encouragingly, the positive news from the company's full-year results has been sustained. Essentially, the AGM told of like-for-like sales growth at the core pizza chain remaining at 10%, while the group's fledging operation, Cafe Pasta, was said to hold "great promise for the future". All good stuff.

Indeed, the upbeat AGM statement and the rumoured corporate activity with City Centre Restaurants (LSE: CTC) gives me plenty of question material for the Pizza Express management.

Because, on Wednesday 8th November, I'll be interviewing the company's Chairman, David Page, and Finance Director, Glen Tomlinson. Of course, should you have any burning issues for the top men at Pizza Express, then please reply to this post with your queries.

...and Management

Finally, I visited Independent Insurance Group (LSE: IIG) last month to speak to its Chief Executive, Michael Bright. Mr Bright was in fine form and talked quite frankly about the company, its future and the industry as a whole.

Although the full interview will be published next week, I'll finish today by leaving Qualiport regulars with a special sneak preview.

Michael Bright on the subject of cash flow...

"Cash flow has been the single most-focused point within the company... Positive cash flow, as far as I'm concerned, is the lifeblood of what enables us to do what we do. But we called the (insurance) market wrong..."

On Independent's use of tracker funds...

"We have taken the decision, that we have recently re-affirmed in the boardroom, not to be active investors. The risk business is bad enough without us starting to play around with shareholders' funds in the markets..."

On any possible corporate activity...

"This industry that we are in loses sight of one group of people regularly, and that's the shareholders. We have a track record of a rate of return on equity in the mid-twenties. That puts us up with the best performing finance houses in Europe. Any deal that dilutes that is a no-brainer as far as I can see. It's just not on the agenda."

On the near-term...

"The combination of very strong new business growth combined with a high retention is the engine that is driving the company...Looking forward into next year, we are into a market that will generate significantly higher levels of new business backed up by the largest of the first three years of long-term policy conversion."

On the long-term...

"My ambition is quite simple -- to keep the rate of shareholder return as the number one situation. I see us as being the largest commercial underwriter in the UK within five years... Five years down the road, I think we'll be significantly larger. I would be surprised if our premium income five years down the road did not exceed £2b. I would be very disappointed, very disappointed, if it didn't."

And on the Internet...

"There are a lot of people wasting an awful lot of money, in our view, of going business-to-customer... Because like it or not, the Internet is going to be the next personalised war zone. It is only a method of distribution. What people forget is that if you drive the price down too far, then you'll make a loss. From our point of view... we are business-to-business."

Where Next?

• Should you yield to Lloyds TSB?
• Got any questions for Pizza Express? If so, then post a reply to this message.