VALUE INVESTING
Fine & Dandy Value

By Stephen Bland (TMFPyad)
September 13, 2002

Gibbs and Dandy (LSE: GDYA) (www.gibbsanddandy.com) is a small chain of builders' merchants based in Luton, with eight branches in the surrounding counties. Yes I know, tell me about it, a retailer, and a specialist one as well.

Many readers will know that I have a deep seated antipathy to specialist retailers but that is because they are frequently a small investors' graveyard due to the propensity of the latter to buy at the wrong time. Typically a small chain, usually with some fancy new idea, might grow very rapidly and attract the attention of unsophisticated investors just when they are on a very high P/E based on past growth. Rapid small retailer growth will nearly always come to an abrupt halt often just after a load of investors have piled in. The market punishes no share as badly as a growth star gone wrong and a lot of money is then lost. So money can be made but only by those skilled enough to know when to pull out of the growth phase, before it breaks. That counts out most small guys.

These comments apply to any high P/E growth share of course, the opposite of value, but the additional draw of specialist retailers on high P/Es, as distinct from other highly rated shares, is that they are very visible to investors, who make the mistake of thinking that because they can see them in the high street or mall, this gives them a special insight. However all this applies only to very highly rated situations which Gibbs and Dandy is not.

Here is the usual data:

Share price - 192p ("A" non voting shares)
Market cap - £20m
52 week high/low 206p/125p
5 year high/low 206p/68p
Eps y/e 31/12/01 - normalised 24.9p (same as reported)
Eps forecast y/e 31/12/02 - 28.3p
Eps forecast y/e 31/12/03 - 31.2p
Historical P/E - 7.7
Forecast 02 P/E - 6.8
Historical yield - 4.7%
P/TBV - 1.0
Net cash at interim 30/06/02 - £1.2m
Directors own 12% of A shares, 34% of ords. 
Other majors own 25% of A shares, 38% of ords.

Note the old fashioned share structure, no longer allowed by the stock exchange for more recent issues. The total share capital is £831,000 nominal, split into 6.52m "A" non voting shares of 10p and 1.79m ordinary shares of 10p. Most of the trading is in the non voting "A" shares but the power is held by the voting ordinaries.

The shares have a good growth record in the five year period I have studied. Earnings per share has risen unbroken from 12.5p in 1997 to 24.9p in 2001 and growth continues with the forecasts. The same applies to dividends rising every year in this period, always well covered by eps at around three times in each year. Note though that there is only one forecasting broker, and that is the tame house firm, a common problem with small caps. It is a well known firm for what that is worth, but one whose name always make me think of salad dressing for some reason.

Directorspeak at the interim results for 30/06/02 was good. After reporting an excellent half year eps of 15.0p, rising strongly against a comparative 10.3p: "The second half has started well with sales showing some encouraging growth." and "I remain optimistic that the business will make further progress during the second half of the year.

One interesting snippet is that they took over a company in January 2002 for about £2m. This, very unusually, created negative goodwill amounting to £208,000 which is being credited to P&L over ten years. What this means is that they bought the company for less than the value put on its net assets, which sounds like a value investment itself. In the great majority of takeovers, goodwill is created, being the excess of the purchase price over net asset value. It is very rare to see negative goodwill in a takeover.

Some people might like to consider the nature of the business, building materials, and how that might be affected by any possible downturn in building activity. However that is too macro for me really, I have little real interest in what the company does. But whatever it does, it does it right judging by the fine growth record for which it is being given a pretty derisory value style rating, in theory the perfect situation for value players. The low rating may well be due to being a very small cap and thus attracting little interest from investors.

Gibbs and Dandy looks interesting. Crucially for value players, the name displays sound nomenology, possibly being the founders' names. I like that. In fact there are two Dandys on the board. If you go in and they change the name, dump it quick.

Do beware of the usual small cap problems such as the lack of forecasts and likely large spread, poor investor interest and so on.