Guest Post: Theodor Tonca of Graham Theodor & Co. Ltd explains why he’s taken a liking to a UK-based, deep-value opportunity.
London Finance & Investment Group plc (LFI) is in the business of industrial equipment leasing, manufacturing, communications, distribution, logistics and providing corporate administration services.
Such a concern would be multi-faceted, to say the least; However, LFI’s business consists solely of identifying and allocating capital to businesses it intimately understands. That is, it is an investment holding company. While such listed concerns have traditionally been plagued by the well-known “holding company discount”, there are several reasons why this should not be the case in this particular instance.
Admittedly, the company’s shares are rather illiquid despite being listed on the main board of the London Stock Exchange (LSE). This can no doubt be attributed to the large, concentrated ownership of the Marshall family which controls the company and owns over 40% of its outstanding shares. Two other independent shareholders each own substantial interests in the company of 14.7% and 7% respectively as of the end of November 2013.
Additionally, the author’s own company owns an interest greater than 1% in the company as well, which would on the whole be greater if it were not for the lack of shares presently available.
Yet another hindrance (at least to some) is the company’s relatively small size which as of this writing does not exceed $10 Mil. These three factors combined (lack of concentrated focus, illiquidity and small size) work in conjunction with others to keep the company from reaching even a semi-rational market valuation.
However, as illustrated above I believe some of these negatives to actually be positives. The first such advantage stems from the company’s two strategic investments Finsbury Food Group plc and Western Selection P.L.C., the latter of which LFI controls through its 43.8% shareholding and Mr. D.C. Marshall’s position as Chairman.
This investment exposes the company to other substantial minority interests in a diversified collection of businesses in a fashion similar to that of a Russian doll (open one up and more emerge).
Since these primary investees, all of which are profitable sans one on a standalone basis I might add, are all small to mid-size “quoted” companies, they are not as greatly affected by overall market conditions as enterprises that are larger constituents of the LSE.
Also, the diversified nature of their operations as outlined at the outset of this article offsets at least some of the risk to LFI of one or another precipitously declining due to general market and economic conditions in Europe.
Reflecting on the illiquid nature of LFI’s shares, I think it is much preferable for management to also be substantial owners of a company rather than simply “hired hands”, this way its long-term interests can be fully aligned with that of independent shareholders.
The term “growth company” is dandled about rather loosely today to businesses whose sales increases represent little more than inflation of overall prices. LFI can be categorized as a small growth company as the record will show owing to the increase in value of the underlying businesses it partly owns:
Year – Net Asset Value Per Share – Dividends Per Share
2013 46.4p 0.8p
2012 31.6p 0.7p
2011 35.0p 0.6p
2010 27.1p 0.6p
2009 21.3p Nil
Despite, assets more than doubling in the past five years and a better-than-average chance of the trend continuing in the near future, the biggest attraction of LFI today may be its severe undervaluation by the market as a whole.
Market Capitalization: $9.83 Mil. GBP
Net Asset Value: $14.48 Mil. GBP
The majority of the company’s assets are comprised of its:
– Principal Investments ($9.72 Mil.) which are carried on the books at market.
– Portfolio Investments ($5.77 Mil.) which is valued at market.
LFI also has an insubstantial amount of cash on its books, offset by $650K owing on a bank credit facility.
This is literally the equivalent of buying a dollar for less than seventy cents. At the presently prevailing market price of less than three times trailing look-through earnings of fiscal year 2013, not only is no price being paid for the company’s future growth but nothing is being paid for its current assets alone.
Disclosure: Graham Theodor & Co. Ltd owns shares in LFI.