Byng syndrome

One such activist is the Crystal Amber Fund (CRS), which has made a decent living playing executioner, and two companies currently in its sights crop up as candidates for the Bearbull Income Portfolio.

These two are Northgate (NTG) and De La Rue (DLAR), the Guernsey-based fund’s third- and fourth-largest holdings, which together account for about 26 per cent of its £215m of net assets. Crystal Amber has made a peace of sorts with Northgate following the resignation of the van-hire operator’s chairman, Andrew Page, in March. It has yet to set out an agenda with De La Rue, although the banknote printer’s prestige has clearly been wounded by the loss of its 10-year contract to print UK passports, which ends in July.

Wounded prestige, however, is hardly terminal, so the question – about both companies, actually – is whether performance can be raised sufficiently to make the shares a high-yield recovery play?

The backdrop isn’t that encouraging, as shown by the five-year growth rates in the table. In both cases, neither revenues nor operating profits have gone anywhere in that period. The cash-flow data might have been more useful, but for these two – as for so many companies – cash flow has been volatile. So Northgate, whose free cash flow was trending downwards anyway, plunged into a £91m outflow in 2017-18 after net spending on new vehicles rose by 77 per cent to £300m and probably peaked. At least that’s likely to mean much improved cash flow for the year just ended. Meanwhile, starting from an outflow back in 2012-13, De La Rue has seen its free cash rise smoothly through to £44m for 2017-18. That was comfortably enough to cover a reduced dividend (cut by 40 per cent in 2014-15), although free cash generation for the year to end March, whose figures we will see next week, is less likely to cover the cost of 2018-19’s dividend, which – if maintained – would be £25m.

It’s not as though the companies face imminent decline, yet the difficulty is imagining the factors that could see them prosper. If an existential threat faces either, it would surely be De La Rue since it is feasible that technology will eventually do for banknotes. True, De La Rue is diversifying as fast as it can into related IT services that revolve around using electronic means to identify and keep track of goods and people. That might be spooky or liberating, depending on your view. More prosaically for De La Rue, it is still only of moderate scale, accounting for less than 30 per cent of operating profits in 2017-18.

As a van-hire operator, Northgate’s fortunes are tied closer to the business cycle than De La Rue’s, which is an obvious cause for concern. However, arguably it was not doing so much wrong as to attract Crystal Amber’s attention in the first place.

Sure, its profitability in the UK had been declining for some years and remains dull compared with its Spanish operation. In round terms, the UK absorbed £613m-worth of assets in 2017-18 for £31m of operating profits, while Spain’s £442m of assets generated £39m of profit. The proportion of its 50,000 UK van fleet on hire – the utilisation rate – is lower than in Spain and dipped a percentage point to 87 per cent in 2017-18. But for the year just ended – results due at the end of June – on average 11 per cent more vehicles have been on hire in the UK than in 2017-18; that said, the pace of growth has been drifting down through the year. That pace of growth was slightly smarter than the Spanish operation’s, which usually manages a higher utilisation rate (91 per cent in 2017-18).

In the valuation spreadsheets, De La Rue comes nearer the mark, especially as its gross profit per employee – always an important indicator – has risen smartly over the past five years; whereas, for Northgate, it has gone the other way. Even if neither of these inspires, there is no doubting that, following the takeover of Manx Telecom, the Bearbull portfolio does need a new holding. So one of them could just sneak in. Happily, however, there are other options to explore. Meanwhile, readers can click on the link below for Bearbull’s starting point – a spreadsheet of the FTSE All-Share’s components ranked by dividend yield, plus other data.