Following on from my thoughts in the last post I’ve added Luminar to the portfolio. Luminar run popular venues where people can meet, eat, drink and dance. This is the first new holding in almost five months and it feels good to have a change at last. Instead of funding this purchase with the dividend from Waterman as originally intended, I sold my holdings of Electronic Data Processing (EDP) and used the proceeds plus some cash. The affect on the portfolio is to add about £20k to its book value since Luminar is so much cheaper, although as I said before I’d be surprised if that didn’t come down again.
Sale review of EDP
Electronic Data Processing is the largest IT solution provider to the UK independent builders and timber merchants market place. I bought shares in EDP on the 28th of August 2009. At that time I thought the book value was about £14 million, which put the price/book ratio at under 0.5 and well within my target range. The rest of the structure of the balance sheet was good, current and quick ratios were fine and the company had net cash. However, I failed to spot that a recent share buy-back had been used to return some £6 million of excess cash back to shareholders. So in fact the price/book ratio was about 0.8, far above what I’m after and only with a 25% expected upside.
The sale of EDP had been on my mind for a while and really I was just waiting for something better to come along. Recently the share price had climbed back in to profit so that was enough to make me back Luminar instead. In terms of results, I made 6.6% after fees for an annual rate of about 12%.
Purchase review of Luminar
Luminar is very different to EDP. The price to book is worryingly less than 0.2, although the price to tangible book is still cheap but more reasonable 0.4. These will change soon though as one of Luminar’s holdings has gone bust which is expected to wipe about £17 million from the book value. Even with that factored in the valuations are good. Less good is the tangible gearing which is right around my limit of 100%, but given that the margin of safety is so wide I think I can accept somewhat more gearing than I’d like.
I’ve limited the amount invested in Luminar so that the target sale value isn’t too large. In other words, if I put 10% (~£6,000) into Luminar and the price went up to give a price/book of 1, then the holding would be valued at about £35,000, which would be about 40% of the total portfolio. Far more than I’d like in a single company… especially one as highly geared as Luminar.
Mallett Final Results
Mallett, one of the largest and most exclusive antique dealers in the world and one of my holdings since 2008, have produced their final results for the year. While they still made a loss the general mood is more upbeat as the cash position has improved, turnover is up and the loss is smaller than last year. As the chairman says, “we are only part of the way through the task of re-engineering Mallett’s business model and cost base in order to align them with the demands of a rapidly evolving marketplace“, which is becoming a familiar phrase around here.
Value Investor – we'd be interested in syndicating occasional articles from your blog on Stockopedia (http://www.stockopedia.co.uk). I can't find any direct contact details for you on the site – could you email me on ed [at] stockopedia.co.uk.Thanks!
Richard Beddard also covered Luminar for the Naked PE in February. They had average earnings of 35.2p per year from 1997-2009. However they have big problems and I would like more evidence that the long-term down-trend has finished.
Stockopedia, I've sent an email.
Anonymous – I agree, Luminar is not a happy place to be so I can understand why you'd want to see some better news. However, most of the companies I buy are struggling which is precisely why the're cheap (relative to book value). In effect I'm paid to hold companies while they restructure, companies that others won't touch (including Richard). Sometimes it pays off, sometimes it doesn't, but on average and over time I'm betting that it's worth it.