3 Signs that AGA Rangemaster Could be a Bargain

AGA Rangemaster, owner of a truly iconic kitchen brand, could well turn out to be an incredible bargain.   In fact, investors can buy the company today for little more than the cash it holds in the bank. 

It may be that – for the moment at least – a price of around 75p is justified as the dividend last year was only 1.7p and is unlikely to be much better this year.  Earnings have also fallen during the recession and could stay well below 10p for the foreseeable future.

None of this is exactly surprising.  Given that AGA’s products are a big discretionary purchase for consumers, it’s entirely sensible that many of them put their dream AGA purchase into the someday / maybe folder.

A quick look at the company’s 10-year price chart shows why past investors may be less than happy.

As was the case with the review of Marks and Spencer, looking at the past share price can be very misleading.  If, instead, we look at the company in terms of its assets rather than its price chart or even its earnings, then things start to look a little different.  It turns out that AGA fits the 21st Century Net-Net criteria.

Sign #1 – Plenty of cash

At the last annual report, AGA had around £35m net cash, which just means that if they turned all their liquid assets into cash, they could pay off all their borrowings and have £35m left over.

Any company with net cash is likely to have a relatively small amount of interest-bearing debt, which means that surviving tough economic periods becomes that bit easier.

Partly as a consequence of the £50m cash pile in the bank, the quick ratio is over 1, and the current ratio is over 1.5, both of which are relatively healthy numbers.

I don’t expect excessive debt or cash flow problems to be the downfall of AGA anytime soon, so I think it has a fair chance of weathering the continuing recession.

Sign #2 – Very low price-to-book ratio

P/B is currently 0.29, which is very low by normal standards.  The price is also well below the tangible book value, giving a P/TB ratio of 0.59, which means a buyer would be getting a lot of assets for their money.

A low price-to-book ratio is one of the key valuation metrics when valuing companies where profits are uncertain.

Sign #3 – Very low price-to-sales ratio

With a market cap of about £50m and revenue last year of around £260m, AGA is priced well below its single-year sales figure.

This indicates that the assets which can be bought cheaply today (via the low price-to-book ratio) are actually being used to generate a meaningful volume of sales.

This doesn’t mean that sales will automatically turn into profits, but without sales, there is not even the chance of generating a decent profit in the future, so sales are important and could be a better indicator of future earnings potential than current earnings.

Bet the farm, or spread your bets?

Ben Graham was probably the first person to outline an investment approach based purely on balance sheets rather than income statements.  His net-net strategy has proven time and again in various back-tested studies to be capable of trouncing the market indices over long periods of time.

What is often forgotten is the extent to which he used diversification as part of the strategy.

Companies that are so far down the price-to-book scale are not great compounding machines.  They don’t generate an endless stream of profits that grow year after year as the company profitably reinvests retained earnings.

What you’ll typically find instead are companies that have:

  • Fallen on hard times recently
  • Been struggling through hard times for many years already
  • Cut the dividend to zero or never pay a dividend
  • Made a loss this year or perhaps for several of the last few years
  • A reputation among investors as a ‘no-go’ area.
  • Highly uncertain futures.  It’s not obvious how they’ll make a profit in the next few years or if they’ll survive.

To counter that level of uncertainty Ben Graham diversified extensively, holding upwards of 100 positions in his portfolio.

In the same vein, I will be adding AGA to my 21st-century net-net model portfolio, but only with a 1/60th weighting, which is about 1.7% of the total portfolio.

Using time to your advantage

Many active investors are constantly worrying about their holdings, watching the market and the talking heads on TV to look for any news that might affect their hard-earned capital.

In most cases, this is a mistake, and one way to take advantage of the short-termism of other investors is to have a fixed holding period for an investment.  Usually, the period used in academic studies is one year, which may be too short for value investors.

Studies (such as Time and the Payoff to Value Investors) have shown that holding periods beyond 12 months can generate higher returns than shorter periods.

For that reason, as well as to minimise the workload of managing 60 positions in this portfolio, my target holding period is five years, during which time each position will be effectively ignored.

In some ways, this is like private equity.  The asset is bought; an extended period of time is given for the management team to turn things around, and then it is sold, hopefully for a handsome profit.

This may be an unusual strategy, but as Ben Graham said:

“the investor cannot enter the arena of the stock market with any real hope of success unless he is armed with mental weapons that distinguish him in kind – not in a fancied superior degree – from the trading public”

Author: John Kingham

I cover both the theory and practice of investing in high-quality UK dividend stocks for long-term income and growth.

13 thoughts on “3 Signs that AGA Rangemaster Could be a Bargain”

  1. Hi UKVI. I’d love to invest in Aga, but when I looked a couple of years ago its pension fund was big enough to put me right off. Also in the back of my mind is the amount of energy they use. Maybe it’s time to challenge those worries, and see if Aga’s done anything about them.

    1. Hi Richard. I’m sure there are plenty of issues lurking in there, that’s why I’m going to give them a long time to sort things out. With a bit of luck they won’t go the way of so many other companies and fall over into the abyss. Only time will tell.

  2. I’ve been watching this one too, after dumping at much higher levels for a small loss last year. You need to have a look at the pension fund for sure — there are scenarios where it’s set to devour tens of millions in cash IIRC, which may be a big constraint on cashflow to shareholders. Indeed I suspect that’s why AGA has fallen so far recently — it’s an oven maker bolted on to a massive fund manager!

    I see this as an opportunity but Ive still got a fairly bullish outlook. It might not have the defensive qualities you’d expect in a prolonged downturn…

    Did big pension deficits even exist in Graham’s day?

    1. Hi Monevator. You’re right in that the pension scheme does increase the chances of a catastrophic failure at some point. I have no meaningful way to evaluate that risk which is why the position size is just 1.7%.

      As for Ben Graham and pensions, I certainly haven’t seen anything written by him that mentions them explicitly.

      But for this portfolio these kind of details are just ignored to replicate the mechanical nature of existing, successful back-tested strategies.

  3. I have also been looking at AGA for some time now from a value investing perspective. I have just read a book called ‘The Little Book of Value Investing’ (not a bad read), which breifly mentions staying away from companies with excessive pension liabilities. The fact that AGA has problems with its pension liabilities is probably one of the reasons it is showing up as a good value investment. Something else that concerns me are the products AGA manufactures. Why aren’t these products being made in, and imported from Asia like everything else is these days? AGA’s products are not cheap so the potential for someone to undercut them must be relevent? I remember seeing an interview with Buffett where he talks about buying a shoe manufacturing company in the US which turned out to be a bad investment due to cheaper imports.

    My biggest concern is my limited knowledge of pension issues. Do others consider AGAs pension liabilies excessive in relation to the rest of there business?

    1. Hi Alex, thanks for commenting. Regarding the pension, I think a lot of people do think it’s excessive and a risk. I’d probably say it is excessive. However, I’m not sure I could come to any meaningful conclusion about how it will affect the company and its share price.

      The way that I run my small-cap portfolio is to be quite diversified (60 positions) so that I can invest without worrying too much about any one company. So I’d probably say the bigger your position in AGA the more you should look at the pension.

      As for others undercutting them, I don’t think that’s an issue. They are a brand more than anything so if a competitor had the exact same product for half the price then a lot of people would still buy an AGA. To many people an AGA is the only option.

  4. Hows it going John?

    I’m still contemplating taking a posistion in AGA. I have done in Molins however. Thanks very much for your weekly updates. Its good to read your intelligent investment perspective instead of the rubbish posted on some of the BBs on the net.I’ve been court out chasing so called 10 baggers as well, but won’t be again in the future.

    Have you been following or taken a posistion in Telford Homes? It was a classic Ben Graham undervalued stock. Has appreciated recently though.

    1. There are a couple of problems with house builders and how they relate to deep value criteria, neither of which will probably have any bearing on the performance of Telford Home’s stock.

      The first thing is that they often show up as net-net companies, but that’s because their housing stock shows up as a current asset because it is effectively inventory. However, they’re not exactly a liquid asset which is really what the net-net criteria was looking for with its focus on current assets (typical cash, trade debtors and more liquid inventory like tins of beans).

      The second thing is that they often have quite a bit of debt which on the balance sheet is covered by the housing inventory value, but in a fire-sale probably wouldn’t be.

      Both of these factors don’t really get picked up by the net-net criteria which is why a lot of net-net investors don’t even look at house builders.

      However, none of this is to say that Telford Holmes will or won’t make an amazing profit (or loss) for anyone who invests in it. If you’d have bought in early 2009 you’d be up about 300% already, which is incredible.

      For me though I wouldn’t consider it because it isn’t net cash, i.e. it has too much debt. When I’m looking at these small-cap firms I like to avoid debt as much as possible which I think is in the spirit of the original net-net approach.

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