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OPINION

Keep investment simple

Keep investment simple
March 31, 2021
Keep investment simple

The great thing about Henry Boot (BOOT) is that there is so little to say about it. That makes the Sheffield-based property developer a neat example of an unwritten rule of investment – that the quality of a company exists in inverse proportion to the amount written about it. Let’s explore that proposition, starting with Boot.

Given the nature of what it does, there will always be a struggle to conjure up exciting things to say about Boot. There are no whizzy technologies or innovative products to shout about. Buying land, taking it through the planning process, selling it on or sometimes developing it – either in house or via its housebuilding joint venture – is both low tech and cyclical. But it won’t go away and has served the Boot family well for approaching 150 years, and outside shareholders for almost 50 (Boot went public in 1974).

That is reflected in Boot’s ability to produce acceptable results even in lousy periods, as 2020’s figures illustrate well enough. Sure, revenue and operating profit were hacked to pieces, down on the year 41 per cent and 65 per cent respectively. But cash flow from operating activities rose from £11.7m to £13.8m, due chiefly to managing working capital. As a result, the group’s net cash barely changed between the start and end of the year at £27m.

Longer term, the relevant words are ‘consistency’ and ‘stability’. For example, according to the FactSet database, in the 10 years 2010-19 (2020 is excluded for obvious reasons), operating-profit margins were never lower than 12 per cent or higher than 18 per cent. Over the same period, return-on-capital metrics were mostly rising. Return on equity (RoE) rose six years running before peaking at 17 per cent in 2107, a year when accounting profits also peaked. RoE was still 12.2 per cent in 2019, comfortably higher than even the most demanding cost of equity. This fed through to earnings per share, which grew at over 13 per cent a year between 2010 and 2019. Dividends followed suit, compounding at over 11 per cent.

Bearbull had sampled Boot’s growth from an earlier and even better period. Between 1998 and 2007 the Bearbull Income Fund made a 580 per cent gain on a holding in Boot. This was a period during which the company’s light was prised from beneath its corporate bushel by City analysts who got little help from the company’s bosses.

Such corporate modesty appealed then, and still does. True, Boot is no longer the epitome of corporate reticence. But, as listed companies go, it remains self-effacing, which was partly why I was happy once more to put its shares in the Bearbull fund in mid-2019. And it still justifies a place among that band of companies for whom a low profile matches high achievement.

The table shows six that fall into this category, all of which I have followed off and on for many years. To categorise them, we could say all are run along the ‘owner-manager’ model. As such, they hark back to days when in a real sense the owner was also the boss; a time when the boss got his hands dirty, knew the business inside out – every trick his suppliers pulled and every dodge his workers tried – and shunned unnecessary risks because the firm was where the family’s wealth was concentrated and not just for the present but for generations to come.

 

The numbers do the talking
  Price change on 10 years (%)Share ratingFinancial performance
CompanyShare price (p)AbsoluteRelativePE ratioPrice/salesDiv yield (%)Profit margin (%)*Return/assets (%)*Earnings persistence†
Henry Boot 2651278128.31.62.012.18.493.5
Associated British Foods2,3771378933.71.30.08.24.878.9
Castings364421312.81.54.110.07.986.0
Caledonia Investments2,6305423nana2.3na5.683.3
JD Wetherspoon1,339205143na2.10.07.23.374.6
Renishaw6,25030722494.38.90.016.66.581.3
FTSE All-Share3,842250na1.42.8na1.4na
Source: FactSet;  * 1 year ago  † see text        

 

Maybe this sounds too much like a caricature of Arnold Bennett’s Clayhanger novels. But there is some truth in the observation that the best owner-manager businesses are run as much for the satisfaction of doing things properly as for making money, and that money-making is the consequence of applying the processes conscientiously. Thus what the six have in common is either family control – sometimes stretching over several generations – or control by long-standing managers who also have much wealth tied up in the company.

At one extreme of this spectrum – both by size and by sprawl – is Associated British Foods (ABF), the Jordans cereals to Primark fast-fashion consumer conglomerate. ABF has been controlled by the Anglo-Canadian Weston family since it was pulled together in the 1950s and for decades has been too diverse for an owner-manager to know inside out. But that hasn’t diminished the Weston family’s grip and the present boss is George Weston, a great grandson of George Weston, the Toronto baker who founded the family business in the 1880s.

However, at another FTSE 100 company among the six everything is set to change. Specialist instruments maker Renishaw (RSW) was set up in 1973 by David McMurtry and John Deer, colleagues at Rolls-Royce, to exploit a measuring probe that McMurtry (since 2001, Sir David) had invented while working on the project for Concorde’s engine. For decades, Renishaw has been a great British success story in engineering – although McMurtry himself is Irish – but the other factor helping power the share price was the assumption that the founders would eventually sell out, thus crystallising a takeover premium for shareholders. That day hoved into view early in March when McMurtry and Deer, now both in their 80s, announced they wanted to sell their holding in the company (53 per cent combined) thus prompting Renishaw’s board to begin a formal sale process. Whoever buys Renishaw won’t get it cheaply, as the table indicates. And the only reason to buy the shares now would be as short-term insurance against a violent stock market crash.

Meanwhile, investors in Castings (CGS), a West Midlands foundry operator, remain hopeful that a diluted version of the Renishaw story will apply to their company. Castings was not founded by its chairman, Brian Cooke, nevertheless he has worked there man and boy. He joined in 1960 and was the boss for 45 years until 2015 since when he has been the non-executive chairman. For much of that period, Castings defied the downward pull of the metal-bashing industry. It consistently produced a high return on capital and fat profit margins and generated lots of cash. That said, the trend has been clearly downward for several years, a fact reflected by the comparatively poor performance of the shares.

When Cooke finally calls it a day, his exit will hardly have the impact of Messrs McMurtry and Deer at Renishaw – he owns less than 5 per cent of the equity. Even so, predators might take notice. Castings’ niche has attractions, assuming the UK manages to keep a material auto industry post Brexit, and its £159m stock market value includes £35m of net cash at the last count. There may be a pay-day of sorts.

Which might be more than shareholders can expect at Caledonia Investments (CLDN), where the Cayzer family own upwards of 38 per cent of the equity. True, Caledonia is a bit of an oddball in this list. In effect, it is the trust fund for the Cayzer family, who made their fortune in shipping in the 19th century. Its idiosyncratic roster of investments and takeover-proof status mean the gap between its net asset value (£34.26 per share) and share price (£26.40) has widened steadily in the past 10 years and now stands at 24 per cent. That scale of discount usually gets shareholders restless; partly, though, they are placated by Caledonia’s outstanding record on dividends. The per-share payout has risen every year since 1967. History tells us even the best record for dividend growth breaks eventually. It also tells us that sooner or later the market will correct a gaping void between price and value. Which comes first for Caledonia is anyone’s guess, but unappreciated value always has attractions.

Perhaps pubs operator JD Wetherspoon (JDW) is another oddball because its boss, Tim Martin, hardly has the low profile of the archetypal owner-manager, although he does have the archetype’s obsession with the business. That helps explain why Wetherspoon, founded by Martin in 1979, has exploited the so-called ‘beer orders’, which diluted the dominance of brewers in the pubs’ industry, better than any other operator. As the table shows, it has also brought great returns for shareholders. Only time will tell if Martin, 66 later this month, will want to run the show as long as Cooke at Castings or McMurtry at Renishaw. Without him, intuition says Wetherspoon may become just another pubs operator, which would hardly justify the shares’ premium rating.

Which brings us back to Henry Boot. It is encouraging that, of the six, Boot has the best ‘earnings persistence’, a measure indicating the extent to which a company’s earnings are repeatable since they rely less on accelerating revenues, deferring costs and including one-off gains (see table). Nowadays the family don’t run the business day to day, although its influence is strong. Jamie Boot, on the board since 1985, remains the non-executive chairman and insiders control over 30 per cent of the equity. The newish chief executive, Tim Roberts, is an outsider who says the politically correct things. Maybe that’s obligatory, but it might be ominous. Better that it should be a struggle to find things to say about Boot – just as it was in the past.