QUALIPORT
Quality Shares For A Long-Term Portfolio

By Maynard Paton (TMFMayn)
September 6, 2001

Carburton Street, London -- The four steps to successful long-term investing are:

1. Identify superior companies;
2. Determine an attractive valuation for those companies;
3. Wait for Mr Market to offer you the attractive valuations, and;
4. Buy the shares.

Back in June, I officially revived the Qualiport's watch list.  Essentially, it's a list of companies I'd be happy to see in this long-term portfolio. As before, I'm limiting myself to just twenty companies to keep an eye on. All I'm doing now is just waiting for the stock market to offer the right prices!

I intend to publish an updated watch list in the first week of every calendar quarter. Furthermore, I'm now including "buy prices" which I consider to represent attractive valuations for each company. Generally, these entry prices are based on each company's prospective free cash flow being capitalised at around 7-8%. However, certain companies did require further adjustments.

Of course, as time passes and things change, the buy prices will inevitably alter. However, they do give a rough guide as to how far the shares currently have to fall before a purchase will be considered.

So, in order of market values, here's the present watch list. The latest company review can be found by clicking on the company's name within the table.

Company             Market     Current    Buy     Price Fall     
                    Value       Price    Price     Required 
                     (£m)        (p)      (p)         (%)

Lloyds TSB           39,729       715      618        -15

Allied Domecq         4,313       404      360        -11

Imperial Tobacco      4,490       862      720        -16

Emap                  1,814       710      677         -5

SSL International     1,101       583      320        -45

London Stock Exchange 1,063       358      230        -36

PizzaExpress            638       893      650        -27

Johnston Press          613       305      285         -7

Halma                   563       156      135        -14

Carpetright             449       591      584         -1

Renishaw                397       545      458        -16

Ultraframe              226       233      180        -23

Ulster Television       142       271      239        -12

Games Workshop          133       424      332        -22

Metal Bulletin          108       200      140        -30

Latchways                37       343      246        -28

There are two points to note from the above table:

1) The inclusion of Renishaw (LSE: RSW). While I've not formally reviewed this company for the Qualiport, a behind-the-scenes inspection of their business and financial characteristics suggests the company is portfolio material.

The five key points concerning Renishaw are:

• It's an engineer with global market-leading products;
• It has a long-standing and proven management team;
• It has a consistent track record of sales and profit growth;
• It exhibits chunky 20%-plus operating margins, and;
• It possesses a relatively large pile of cash.

A review of Renishaw will be published in the near future.

2) Following a profit warning earlier in the year, conservatory roofing firm Ultraframe (LSE: UTF) issued yet another warning last week. Using the company's own revised full-year profit forecast, I've pencilled in a buy price of 180p. That price equates to a prospective price to earnings (P/E) ratio of 10 and dividend yield of 5%. However, I'm inclined to wait for the company's annual results (due early December) before making a firm investment decision.

Other candidates

Looking back at June's review, I presented five other possible Qualiport candidates -- Enterprise Oil (LSE: ETP), Wyevale Garden Centres (LSE: WGC), Provident Financial (LSE: PFG), Renishaw and Manchester United (LSE: MNU).

I've given Renishaw the thumbs up, while I dismissed Enterprise Oil here and Provident Financial here.

Of the other two, I still fancy Manchester United, although the company's present rating (77 times expected 2003 earnings) suggests a fair dollop of patience is required. I'll continue to keep a very cursory eye on Man Utd. But they won't go on the formal watch list just yet.

And nor will Wyevale, as I've yet to look at the business in any great depth. However, while Wyevale are a retail market leader, I know they're far from being a Carpetright (LSE: CPR) in terms of industry dominance and financial characteristics.

And two more suggestions...

Guardian iT

Guardian iT (LSE: GRD) specialises in the disaster recovery of IT operations. This lends itself very well to long-term contracts that provide relatively steady earnings and good cash flow. Its operating profit margin, at around the 20% level, are another good indication of a strong business. Guardian is the number two in Europe, behind US giant IBM (NYSE: IBM).

However, recent results highlighted tough trading conditions at Guardian. Guardian now trades on a P/E of about 20, which is its lowest ever rating since the group's 1998 flotation.

Lavendon

Like Guardian iT, Lavendon (LSE: LVD) is another possible glitch investment. The group is the European market leader in the hire of industrial powered access systems. But half-year results out yesterday highlighted a slump in profits as an aggressive expansion into Germany coincided with a sharp fall in demand.

Nevertheless, the market for Lavendon's systems is said to offer substantial growth (the US market is seven times more developed than Europe) and any sector recovery should see Lavendon come out stronger than its smaller rivals. Although the forward P/E is about 10, given the current circumstances, I'd prefer to see Lavendon reduce its substantial capital expenditure programme before investing.

And finally...

MMT Computing

As announced last Thursday, the Qualiport (notionally) sold 1,093 shares in MMT Computing (LSE: MMT) on the following day. At a disposal price of 120p and dealing costs of £15, the transaction raised £1,296.60.

Disclosure: The author owns shares in Carpetright, Games Workshop, Latchways and MMT Computing.