A SPOTLIGHT ON THREE OF THE KEY COMPANIES WE’VE MET DURING THE PAST QUARTER
52 WEEK HIGH-LOW: £11.59 – £9.46
NET YIELD: 2.6%
HIST/PROS PER: 22.6 – 19.5
EQUITY MARKET CAP: £1,993m
Kevin Quinn, CFO
Berendsen is engaged in the laundering and maintenance of textiles and provides service solutions for sourcing, cleaning and maintenance. These textiles range from high-visibility workwear, to floor mats, to hospital linen. Customers are primarily based in the UK, Germany and Scandinavia.
The main story for Berendsen of late has been the implementation of its so-called ‘best practices’, originating in the Nordics, into their laundry businesses across Germany and the UK. The new processes, given the catchy name of the ‘CL2000 system’, essentially involves moving from the traditional model where each staff member is wedded to a specific task, to small groups of teams responsible for delivering on an order from start to finish. This encompasses everything from deciding when garments are beyond repair and replacing such items from either stock or ordering, to folding the sheets whilst still warm to avoid creases. This change has given the employees more independence, variety and sense of completion than their previously repetitive roles, driving an uplift in morale and subsequently productivity.
As well as productivity gains, there has been consistent improvement in the quality of textiles delivered to customers and volume capacity. Circa 40% of the Company’s EBIT comes from the Workwear division, where the CL2000 roll-out is taking place, and therefore these margin improvements have a marked effect on the overall profitability of Berendsen.
The company is seeking to take market share from independents, which make up 45% of their £6.8bn addressable market. In addition, they are looking under-geared at 1.1x Net Debt/EBITDA, which leaves room for potentially accretive acquisitions and/or share buybacks in the short-term.
52 WEEK HIGH-LOW: £3.76 – £2.40
NET YIELD: 3.1%
HIST/PROS PER: 20.4 – 15.2
EQUITY MARKET CAP: £1,108m
The previous edition of Prospects featured PZ Cussons as the Stock in Focus. Since publication, Alex Kanellis (CEO) and Brandon Leigh (CFO) were kind enough to sacrifice a morning and walk myself and a colleague around their innovation centre in Manchester.
The first topic of conversation was the ongoing currency pressures in Nigeria. Roughly 95% of the US Dollar supply in Nigeria comes from oil and, crudely speaking, the drop in the oil price has shrunk this supply by 90%. The official rate has remained at circa 200 NGN throughout, whilst the parallel rate (what you would expect to pay on the street) has moved up to nearer 300 NGN. It is this dichotomy that is putting increasing pressure on the government to devalue the currency. PZ Cusson’s willingness to inventory hedge at the parallel rate and worse has been the main driver behind their outperformance of late, relative to peers importing into Nigeria.
PZ Cusson’s inability to outspend the likes of Unilever has meant they have looked to product innovation and turnover to gain market share. The dangers with this strategy include product cannibalisation, inventory management, efficient distribution; all of which must be managed carefully. It became clear throughout the morning how they are able to be so nimble.
The state-of-the-art innovation centre contains every stage of the manufacturing process; from an in-house perfumery to all but fully automated production lines. The constant flow of new products created on the back of incipient market trends, when coupled with a production facility working off four hour inventory and minimal downtime, makes for a flexible and efficient supply chain.
52 WEEK HIGH-LOW: £12.43 – £8.58
NET YIELD: 4.2%
HIST/PROS PER: 15.6 – 12.9
EQUITY MARKET CAP: £3,842m
Smiths Group is a holding company that owns a selection of industrial businesses each operating with reasonable autonomy. The largest business is John Crane, which supplies products and services to the energy sector. Smiths Medical sells specialist devices into the healthcare sector and Smiths Detection, Interconnect and Flex-Tek make up the remaining c.30% of Group earnings.
John Crane, is suffering from the downturn in oil and gas expenditure. However, the business is focussed primarily on the downstream aftermarket which positions the Group towards the healthier end of the troubled sector. A potential silver lining for John Crane is that the end demand for gasoline and distillates is still growing implying the refineries cannot hold back on maintenance and repair spend for any prolonged period.
The Medical business is largely stable at present. A forced product withdrawal from a competitor bolstered sales last year but it is expected that the division will revert to more normal levels of moderate underlying growth in 2016. There have been two failed efforts in recent times to dispose of this asset in a consolidating sector. Whether a third attempt is made or not, the new management will have to dedicate significant time to stabilise returns and cut costs.
Elsewhere in the Group, Detection remains troublesome as the four global players vie for market share and Interconnect was impacted by a large order deferral by Apple. However, Flex-Tek, the lead supplier of specialist hosing, has remained resilient and boasts a solid order book. Smiths Group remains a true conglomerate and the new management will have to evaluate whether it is worth more than the sum of its parts.
We met the companies below and you can learn more on any of these by contacting the person at JM Finn & Co with whom you usually deal.
Diageo, PZ Cussons, Victoria Plc
Compass, J Sainsbury
Big Yellow Group, Lloyds Banking Group, LondonMetric Property, Market Tech Holdings, NewRiver Retail
Genus, Smith & Nephew
Alumasc, Avon Rubber, Berendsen, Porvair, Ricardo, Smiths Group, WS Atkins
OIL & GAS