VALUE INVESTING
Allders

By Stephen Bland (TMFPyad)
June 9, 2000

In today's Investors Chronicle, the half-year results to 31 March 2000 for the department store group Allders (LSE: ADS) are shown. Looking at the figures this is at first sight a classic pyad value share situation. These are the figures quoted by the IC:

P/E (historical) - 7
Yield - 9.1%
Assets - 205p against a price of 93p
Debt - net cash of £9m

Market cap at £72m is rather below my usual minimum of £100m but I've always said I may be willing to go below that to a certain extent for a good share. The £72m is about as low as I'm prepared to go these days, I'd much prefer to stick to shares over £100m for the reasons that I have stated many times. So a share at the low cap of Allders would have to be absolutely begging for it to interest me.

Allders is one of those shares that has cropped up regularly in value searches over recent times; not just on my criteria, but since it satisfies those, it would also be very likely to satisfy an initial trawl of much lighter value criteria investors.

The reasons are simple really. Most retailers have had an immensely tough time in the last few years and the shares have been creamed. The names are well known, classic British shopping legends. Marks & Spencer (LSE: MKS), Sainsbury (LSE: SBRY), House of Fraser (LSE: HOF), Storehouse (LSE: SHS) and so on. Household high street names, or trading under various well-known chain identities.

Some investors may believe this is due to the growth of the Internet. It has nothing to do with it, in my view. Sheer competition, physical high street or shopping mall presence, is what has hit these shares. What drives shares in the long run is earnings per share (EPS) growth, apart from special factors like bids. If EPS is falling then the shares will tend to follow. Retailer EPS, in a large number of cases, has been falling. There are some famous exceptions: Tesco (LSE: TSCO), for example.

Allders has suffered from this no less than these famed companies. The share price quoted by the IC is 93p. Back in 1996 it reached 304p. Here is the record of normalised EPS for the five years 1995 to 1999:

1995 20.0
1996 -1.42
1997 23.6
1998 17.2
1999 14.3

An erratic and generally falling series, particularly since 1997. According to the IC the forecast for 2000 is 11.7p from one broker. The same broker was forecasting 12.1p in April so they have cut back somewhat.

So we have a falling EPS figure for 2000 against 1999 actual, continuing the strong downtrend.

P/BV is an impressively low 0.5 or so, at a price of 93p. Not only that, but according to the IC, of the 205p in book value, 130p is in property. If this is accurate, the share is extremely attractive to those who put great emphasis on book value as a criterion. Asset players.

I wouldn't class myself as an asset player. Such investors will go for almost any share trading at under book provided they like the quality of the assets, the favoured quality of asset being large property holdings, almost regardless of EPS and other factors. To play this game, though, you need to have a good nose for property and bet on the likelihood that someone will want to realise that value.

My purpose in requiring P/BV under 1 is not because I think this may attract a bidder, but simply because it helps to prop up the share price. A downside minimisation factor, and downside minimisation is one of my idols. But P/BV without all my other features does not attract me.

An investment institutions for which I worked in the City aeons ago was famous for this style of playing the market. At one time we had a significant stake in just about every worthwhile asset play on the whole UK stock exchange. Any bidders – "asset strippers" as they used often to be known then – would have to obtain our stake for a bid to succeed. At a fat profit of course. In fact we would attempt to instigate bids for clients by simply contacting them and saying something like "Psst, wanna take out Bloggs Butchers Plc, you can get the whole company for way less than the value of their shops, and we hold 7% which you're gonna need." It got to the stage where the mere knowledge or even suspicion that we had a stake was enough to drive up the price of the shares anyway.

Back to Allders.

The share has attractions for many value players. But it fails my approach on the falling EPS factor. To me, this is important as I have mentioned often. I am not, unlike the asset guys, prepared to rely on seriously low P/BV alone as the value outer. For me the primary outer has to be strongly rising EPS, and if that is present then a low P/BV can't hurt any. But without rising EPS I'm not buying.

And one other negative point. The IC rates it a buy. Which to all my fellow posters on the value board has a very significant meaning.

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