VALUE INVESTING
Value In UK Coal

By Stephen Bland (TMFPyad)
November 2, 2001

It is perhaps a paradox that with the fall in the market over the last couple of years, more value shares have not been thrown up. I am referring to the kind of very deep value shares in which I personally like to invest, those exhibiting the four key pyad fundamentals. There has been a sharp market rise in recent months but even at the low point when the FTSE100 index was around 4,400 my regular trawls were not locating many, or any, likely candidates.

Now this is interesting. What it implies is that potentially deep value shares in general that were hovering on the edge of being attractive to me a while back (for example with Price/Tangible Book marginally over 1 plus all the other features I like to see) did not fall along with the FTSE100 to drive them into my area.

The reasons for this probably arise from the whole concept of value becoming more popular. It is well known that in bear markets there is a flight to value. That's value in the general sense meaning businesses making profits and paying dividends and standing on attractive fundamentals - the sort of shares that are unfashionable in bull markets and markets driven by fads. When such fad stocks failed their investors then those who still wished to be in equities looked for more reliable shares. Institutional investors running equity funds have to be in equities and so the switch to general value took place and took with it deep value shares as well.

I recall reading somewhere that so desperate were some fund managers in the US to be perceived as value investors for fashion reasons, that many changed their fund names to suggest a value flavour, even if they were nothing of the sort.

Now the reasons why deep value shares did not become more prevalent in a falling market are not really important, it is all a macro argument which I would normally condemn as irrelevant. I simply go on doing what I have always done, which is continually searching my usual sources for likely candidates. I don't care about what the market is doing, only individual shares matter to me and if I find one I like then I'm going in.

But it is mildly annoying to find what many considered before to be a strange cult of which I was proud to be a member, peopled by shabbily dressed fiscal winos that walked around muttering to themselves, rummaging around the rubbish bins of the stock market, is now seen as a mainstream investment style. I guess it will pass. I am not contrarian enough to condemn value because it has become too popular so I am not becoming attracted to growth shares, principally for the same reasons I have not been for several decades. They are just too risky.

There is not much around in the deep value area right now, particularly in the larger caps over £100m where I concentrate my search. UK Coal (LSE: UKC) has some attractions and is a share that has often been discussed on the value board. At 85p it trades at a massive discount to book and with a very high yield of around 11%. I should stress that it has additional risk over other shares in that it depends to some extent on government subsidies. The few forecasts are all over the place so the analysts cannot agree on the likely profits but the lowest and also the most recent indicates 2002 eps of 9.2p for a P/E of about 9. Don't put too much faith in that because clearly they have trouble predicting here. The current year to 31 December 2001 will probably show a loss but the directorspeak at the interim results published in September was expecting an improvement. I'm in at about 87p.

The author holds shares in UK Coal.