Quality at a Reasonable Price

[simoan]

On ROCE you may be interested in this:

https://knowledge.sharescope.co.uk/2024 ... rformance/

Hi doug,

I was thinking about using adjustments to ROCE a bit more. I don’t think there’s much wrong with the standard calculation tbh but there are always going to be cases where the figure is distorted by one-off or temporary events. If I were to adjust the calculation for anything, I would make a case for companies with positive reasons for having an enlarged capital base, in particular a large cash holding maybe as a result of a large disposal.

I’m sure you’re probably aware of such a case in point with Oxford Metrics (OMG) which disposed of its Yotta division a couple of years ago and has excess cash on the balance sheet with the stated intention of using it for acquisitions. I think you can make a valid case that this makes the balance sheet inefficient and that the management should be making earnings enhancing acquisitions and it is right that the ROCE should be lower as a result. However, in the meantime the cash is hiding the profitability of the underlying business and the cash free ROCE is far higher i.e. the standard ROCE is 5.6% and if you remove the cash from the capital employed, it is 24.6%. A big difference.

All the best, Si

All the best, Si

[WickedLester]

I’m sure you’re probably aware of such a case in point with Oxford Metrics (OMG) which disposed of its Yotta division a couple of years ago and has excess cash on the balance sheet with the stated intention of using it for acquisitions. I think you can make a valid case that this makes the balance sheet inefficient and that the management should be making earnings enhancing acquisitions and it is right that the ROCE should be lower as a result. However, in the meantime the cash is hiding the profitability of the underlying business and the cash free ROCE is far higher i.e. the standard ROCE is 5.6% and if you remove the cash from the capital employed, it is 24.6%. A big difference.

All the best, Si

On the subject of OMG as an investment, the management also seem to have done an excellent job of buying and selling businesses over the years. I think I can recall two successes and no failures and they have grown quite substantially from around £40m mkt cap to over £100m now. They could be worth backing for a third success. If not Vicon is probably worth as much as £80m to someone.

[simoan]

I’m sure you’re probably aware of such a case in point with Oxford Metrics (OMG) which disposed of its Yotta division a couple of years ago and has excess cash on the balance sheet with the stated intention of using it for acquisitions. I think you can make a valid case that this makes the balance sheet inefficient and that the management should be making earnings enhancing acquisitions and it is right that the ROCE should be lower as a result. However, in the meantime the cash is hiding the profitability of the underlying business and the cash free ROCE is far higher i.e. the standard ROCE is 5.6% and if you remove the cash from the capital employed, it is 24.6%. A big difference.

All the best, Si

On the subject of OMG as an investment, the management also seem to have done an excellent job of buying and selling businesses over the years. I think I can recall two successes and no failures and they have grown quite substantially from around £40m mkt cap to over £100m now. They could be worth backing for a third success. If not Vicon is probably worth as much as £80m to someone.

I hold OMG in my SIPP. Tbh it's quite a frustrating company to hold. The sale price achieved for the Yotta division was extraordinary compared to its profitability. So, everything seemed to be heading in the right direction and then the CEO leaves to join the OS and sells a huge chunk of shares. The new CEO was previously head of the Vicon division so has great product knowledge, and has been with the company a long time, but the jury is still out on her as a CEO, I guess.

With regard to the cash, they have already spent £8.1m on the acquisition of IVS in November which takes them into AI based industrial inspection systems. Only adds £3-4m of revenue but EBIT margin looks useful at 25%. Supposedly will be earnings enhancing immediately. We shall see...

[simoan]

Intertek reported excellent FY23 results today and I bought some more first thing as a result: https://www.londonstockexchange.com/new ... s/16361312

It is almost certain to still meet the QARP screen rules with FY23 ROCE = 21.5% and EBIT Margin = 16.6%. The following is music to my ears!

Based on our positive momentum, we expect the Group will deliver a robust performance in 2024 with mid-single digit LFL revenue growth at constant currency, margin progression and a strong cash flow performance. We are on track to get back to our peak margin of 17.5% and beyond in the medium-term, capitalising on the revenue growth acceleration we are seeing for our ATIC solutions, our disciplined performance management and our investments in high growth and high margin segments.

We believe in the value of accretive disciplined capital allocation. In recognition of our highly cash generative earnings model, our strong financial position, the Board's confidence in the attractive long-term growth prospects for the Group and its ability to fund continued growth investments, we are increasing our targeted dividend payout ratio to circa 65% of earnings from 2024.

All the best, Si