Stockwatch: Keep backing this 100-year-old chairman

by Edmond Jackson from interactive investor |

Three cheers for the first centenarian chairman of a public company, and our companies analyst likes the shares too. 

Here’s a refreshing rebuke to ageism and modern corporate governance rules that would have founders and their associates moving on after a set number of years.

Anglo-Frenchman Jacques “Tony” Murray was born on 8 February 1920 and enjoyed his highest profile in the 1980’s/90’s after taking control (with Michael, now Lord Ashcroft) of Nu-Swift, a troubled maker of fire-extinguishers and turning it around, later reversing it into London Security (LSC), nowadays a £270 million company on AIM. He also took charge at equipment hire group Andrews Sykes (LSE:ASY) via a proxy battle after it had been poorly managed, nowadays a £230 million company also AIM-listed.

Murray’s managerial culture could be described as the obverse to wheeler-dealer private equity, which instigates change (I balk at “improvement” in all cases) and sells businesses on.  He became a billionaire with diversified interests and long-term methods, establishing a dynasty with his two sons (in their fifties) on these two company boards, and family control of over 90% of the equity.

Frankly I’m puzzled how even AIM rules allow this, given the usual need for a mandatory offer once the 29.9% level is passed. Yet, in contrast with the typical assumption, private control doesn’t square with wider responsibilities in a public company, a benign dictatorship has here delivered sound shareholder returns. Skills appear passed down to keep cash generative service businesses nicely honed.

Recent de-rating after milder winters

I’ve originally drawn attention to Andrews Sykes at 330p in November 2015 after a price-fall in 2014, on the basis that a 7% prospective dividend yield (23.8p dividend, see table) was secure, requiring just over £10 million versus £19.7 million reserves and in context of a strong cashflow profile.

The table below shows sound financial growth and I maintained a “buy” stance until June 2017 at 478p – suggesting 500p to 550p as a medium-term target.

The stock traded at over 750p last July and I confess letting it slip off my radar, if aware now of a 28% downtrend to 540p currently. This would appear chiefly due to another mild winter after 2018/19, last September’s interim statement citing “less opportunities for our heating and boiler hire products.” The first six months of 2019 were also relatively dry which impacted pump hire. 

Source: TradingView Past performance is not a guide to future performance

Weather fluctuations are the critical determinant for a group hiring out heating and air conditioning. Ideally, there would be cold winters and hot summers, the pump hire operation benefiting not just from rainfall but construction activity and overseas sales. Around 60% of sales are within the UK, 23% Europe and 17% Middle East/Africa. Climate change is thus a mixed upshot: weather extremes would potentially be beneficial, but warmer winters a hindrance.

Currently, the stock trades on 14x 2018 earnings, which looks more likely the higher teens even 20x in respect of 2019, there being no published forecasts that I can see. The 23.8p dividend provides a 4.4% yield which is material, but possibly with scope to creep up if the narrative/figures remains uninspiring, and the stock slips further. There are higher yields out there, although this is a quality one.

Andrews Sykes Group - financial summary            
year ended 31 Dec 2013 2014 2015 2016 2017 2018
             
Turnover (£ million) 61.1 56.4 60.1 65.4 71.3 78.6
Operating margin (%) 24.0 20.1 22.0 24.2 24.7 26.3
Operating profit (£m) 14.7 11.3 13.2 15.8 17.6 20.7
Net profit (£m) 11.5 9.3 10.8 14.5 14.1 17.0
Reported earnings/share (p) 27.3 22.0 25.6 34.2 33.4 40.3
Normalised earnings/share (p) 26.3 21.5 24.7 33.3 32.4 39.2
Earnings per share growth (%) 3.1 -18.3 14.9 35.2 -2.8 20.8
Price/earnings multiple (x)           14.2
Operating cashflow/share (p) 33.6 25.1 28.7 35.8 42.3 45.2
Capex/share (p) 10.4 8.8 12.4 12.8 13.7 16.9
Free cashflow/share (p) 23.2 16.3 16.3 23.0 28.6 28.3
Dividends/share (p) 17.8 23.8 23.8 23.8 23.8 23.8
Yield (%)           4.3
Covered by earnings (x) 1.5 0.9 1.1 1.4 1.4 1.7
Net asset value/share (p) 108 100 103 114 126 140
             
Source: historic Company REFS and company accounts            

The story is quite staid for a publicly listed company

A dilemma of this kind of “family run” business is, while capably and respectfully run, that it merely ticks over on the stock market fringe. The kind of stocks that get attention – albeit higher-risk – are those which regularly refresh their narrative, rather than plod on with similar operations.

Yes, Greggs (LSE:GRG) is regular snack shops, but it has pulled off a marketing trick capitalising on demand for vegan food. Admittedly, it’s harder for Andrews Sykes to achieve this without riskier acquisitions, the example of Photo-Me International (LSE:PHTM) demonstrating enough trouble over the years as it tried to diversify from its original photo booths.

So, I harbour some concern that this stock may be undergoing a status change to a yield play, potentially involving lower price in order to attract new buyers for income.

I don’t think this is altogether a disadvantage or cause to sell unless you are chiefly capital (protection) oriented. Andrews Sykes is a well-run, cash generative operation looking able to sustain its 23.8p total dividend, with £23.8 million of balance sheet cash last June, up 11% year-on-year despite the first-half 2019 trading shortfall.

Moreover, in the fullness of time it is possible that the Murray sons consider fresh challenges for themselves which herald new ownership at Andrews Sykes, especially if the stock festered as a result of unfavourable weather.

Recalling five to six years ago, it de-rated for no adverse underlying reasons in the business before its strengths re-asserted. The operations are definitely of value, so, while I don’t currently have conviction price-wise to rate it a “buy”, it could in due course.

Softer first-half 2019 performance 

Last September’s interim results showed operating profit down 25% to £6.9 million on continuing operations’ revenue 7.5% easier at just under £35.0 million. Earnings per share fell 28% to 12.9p, although the interim dividend was held at 11.9p, the cash flow statement showing gross cash generated from operations only very slightly down to £7.5 million. The net figure eased 14% due to higher tax and interest charges.

Bank debt is similar at around £4 million, although £9.3 million has appeared as a non-current liability “under right-of-use-lease,” which follows from adoption of IFRS 16 accounting rules and changes the nature of lease expenses.

The outlook statement did say that the third quarter had started “slightly more positively,” with UK pump hire showing steady improvement and a strong performance in air conditioning hire in mainland Europe, while the Middle East performed consistently.

Since then, however, a mild winter has intervened. I’m being harsh to say there doesn’t seem any radical new agenda beyond “growing the geographic coverage organically” with new depot openings and an expanded hire fleet, such that the group can “optimise any weather driven opportunities.” But it does add up to a message of maintaining the status quo.

Jacques Murray effectively in a presidential role

Such a title is not in vogue for corporate governance nowadays, given it has historically implied an honorary role typically for founders/directors who have had most influence on corporate development. The modern sense is that 10 years max and you’re on your way (witness Tim Martin’s expletives from the chair at JD Wetherspoon (LSE:JDW)).

Jean-Jacques, the eldest son, is in a vice-chair role, but “leads the board and is responsible for setting its agenda, corporate governance and efficacy” (the usual assumption behind chairing it). Jean-Pierre Murray is a non-executive director, similarly at London Security.

I should note the finance director resigned last 13 January with no specific reasons given, making it hard to decipher if there were any shortcomings or they were simply moving on for a fresh challenge after nearly five years in the role. The company declared its regret and wished him well.

It has happened swiftly, and you might think contracts exist with notice periods to protect company/shareholder interests from disruption, with awards if the company side breaks prematurely, although, on a cynical view, directors seem free to do as they wish nowadays. His responsibilities will be divided between other members of the senior management team.

With hindsight, I should have been on the case earlier in this stock downtrend, albeit without a crystal ball for the weather. I would not sell Andrews Sykes unless you are convinced of mild winters becoming much more common. Remember, too that the recent rain should have helped pump hire. On a longer-term view, I rate Andrews Sykes as a potential event-driven “buy” according to what the Murray sons decide for the future. For now: Hold.   

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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