VALUE INVESTING
Kleeneze – Value on the Doorstep

By Stephen Bland (TMFPyad)
November 17, 2000

Kleeneze (LSE: KLZ) is in the mail order game, but is famous for a business which is almost a joke: even the name sounds like a cartoon from depression-era USA. Door-to-door salespeople who pester people by stuffing a catalogue through their letterbox in the hope that when he or she returns the next day, the occupant may be tempted to buy some wonder product for cleaning unmentionable stains off the carpet. I loathe this kind of thing. I don't mean unmentionable carpet stains, I mean door-to-door salespeople, party plan selling and the like.

The salespeople, who are self-employed, have to buy the catalogues from the company, which is why you will find a note with it if you get one urging you to leave it outside for them to retrieve should you not be tempted to buy any of the miracle products so invitingly laid out therein. Somehow I find it rather sad that people are reduced to trying to earn a living this way. However, apart from doorsteps, I understand that their website has now become an important area from which they conduct mail order business.

There is more to it than that, though, because the company has diversified into food processing, of cooked meats and so on, and it appears in fact that the original Kleeneze door-to-door business is now a minority part of the group compared with the food division, the latter being known as Farepak and providing 65% of group turnover and 59% of profits.

Despite my suspicions of such businesses it has a very good record. Here are the usual fundamentals:

• Share price 198p
• High/low this year 325/180
• High/low five years 335/141
• Market capitalisation 92m
• Normalised earnings per share year ended 30/04/00 18.4p
• Lowest forecast earnings per share year ending 30/04/01 20.9p; 30/04/02 26.1p
• P/E ratio historical 10.8; on 2001 EPS 9.5; on 2002 eps 7.6
• Yield on historical dividend 3.8%; on 2001 forecast 4.2%
• Price/Book 4.3
• Net cash 118%
• One year relative strength -40% (i.e. negative)
• Directors own 35.7%; other majors 15.0%

EPS has increased without setback over the five years I have examined, going from 11.4p in 1996 to 18.4 in 2000, and is forecast to continue rising. Dividends have likewise increased over that period. Also, the company has had net cash for all of that period and moreover, the balance has been rising. At 30/04/00 it had 26m against 22m of net assets, which gives the 118% to which I refer above. All pretty impressive stuff. Despite what I see as the essentially tacky nature of this company's business, I'd say that someone has being doing something right.

At the AGM in September 2000 the chairman commented that "Trading to date has been strong and the board believes that prospects for the full year are very good." Pretty encouraging directorspeak.

Another development is that in October the company announced the acquisition for 37.6m plus additional deferred payments of a business involved with display marketing, whatever that means. This is quite a large deal for Kleeneze because the whole market cap is 92m at present. There are only two brokers forecasting but both forecasts were made in November, after the deal was announced, so I am assuming here that they taken the acquisition into account.

Note that this is not a pyad value share, primarily because it trades at way over book value.

What is interesting is the way the share price has collapsed this year, from a high of 325. It fell to 180 a short while back, and has now recovered to the current 198. In fact this is not that far off the five-year low of 141 which it touched in 96. Yet there does not seem to be any fundamental reason for the fall. Everything looks very promising. The fall took place prior to the acquisition so that is not to blame. The share price of bidding companies often falls on the news.

On the face of it then this appears to be the classic value play situation. A share with rising EPS, low P/E and a decent yield, together with a load of cash. At least at the last balance sheet: I don't know if they are using all that cash for the acquisition. Unless someone knows something which we don't, always possible, then this looks a promising investment.

Where Next?

• What is a pyad share?
• Value investing discussion board