Succession Plan

From Christoper Browne's presentation to Columbia Business School in 2000:

 

Four years ago, Walter Schloss walked into my office with a piece of paper on which he had typed out his then 40-year investment record of approximately 20% annually compounded. To my knowledge, this is an individual record without peer. I broke the record into decades and sent it around to the members of one of the investment boards on which I sit. I wrote that if we had found Walter ten years ago, we would not have hired him despite a 30- year record of compounding at 20% per year. He was nearly 70, he had no real succession plan, no staff, and no computers. His research library consisted of borrowing my copy of Value Line. And we would have missed another ten years of compounding at 20% per year.

Associated British Engineering (ASBE)

What Does It Do?

Associated British Engineering (ASBE) has two main subsidiaries within the PLC.  British Polar Engines (BPE) manufactures and supplies diesel engines and spare parts together with repair work for clients.  Demand for its products and services is driven by the offshore oil services industry.  The other part of its business is Akoris Trading Limited (AT) which is a relatively new part of the business.  AT's activities consist of commodity and natural resource trading and investment and BPE has a 50% interest in the firm.

How Is It Valued? 

Based on the company's latest interim report (Sep 13), and a current market cap of £2.77m (Jan 14), the company is valued at 0.77x tangible book value and 0.86x net current asset value (NCAV).

What Does It Own?

Around 63% of the firm's tangible assets are in cash and cash equivalents which seems to be a nice figure.  Inventories are 19% of assets.  Provisions are made on any obsolete or slow moving stock.  Receivables account for 10% of assets.

What Does It Owe?

The biggest liability for ASBE is its pension obligations which stands at around £930,000 at the balance sheet date.  However things have improved somewhat.  Several years ago the pension obligation was above £5m until March 2009 where ASBE came to an agreement with the Trustees of the scheme that the company would no longer be liable for a portion of the obligation which related to employees of subsidiaries that no longer belong to ASBE.  This eliminated just over £3m of the obligation.  From March 2010 a schedule was put in place to provide contributions to eliminate the remaining deficit over 13 years.  The Board believes that it has the resources to meet all outgoings and continue to operate for the foreseeable future.  The other large liability is its trade payables at around £650,000.

The company's capital structure has also been cleaned up over the past few years.  As of March 2013, all its outstanding loan notes were paid off in advance and back in 2012, there was a cancellation and redemption of two sets of outstanding preference shares. 

Does It Have A Future?

I'm trying to buy companies in a way where I don't need detailed industry knowledge and I'm not relying on trees growing to the sky.  This means I need a margin of safety built into the price of the company for my ignorance and for the fact I cannot predict the future.  Having said this, I need to try and get comfortable that the company's future will look something like the past.  I believe value itself can be a catalyst so I'm not looking for a specific event to turn ASBE (or any company) around, just a reasonable expectation that the discount I pay for the company will close in the future.  With that in mind, I like to look back at a company's history and try and make a decision whether the company or industry is in decline or if there is some sort of future for the business.

Looking back over previous annual reports, senior management has reported BPE as performing well and in line with expectations given the cyclicality of the industry it operates within.  The pension deficit has clearly dominated the efforts of management over the years and with that now in the process of being resolved, they may be able to devote more time to the business.  The equity stake in AT is part of the plans moving forwards.  I don't know whether this is a good move for the business but at the moment it is costing ASBE money.  The pre-tax loss in the 6 months to Sep 13 was due to indirect costs related to AT. 

	2013	2012	2011	2010	2009	2008	2007	2006	2005	2004
Revenue	2,488	3,342	4,102	3,366	3,597	3,282	3,861	3,278	2,700	2,690
Operating Costs	2,519	2,813	3,260	2,717	2,927	2,751	3,304	3,050	2,750	2,970
Operating P/L	-31	529	842	649	670	531	557	228	-50	-280

Bloomberg states 28% of outstanding shares are held by insiders and there has been buying in the past few months.  There is an element of comfort I get from this as it means management is somewhat in line with you as they are a shareholder too.

A Side Note

This is my first ever investment write-up after several years of reading about value investing.  I am sure there are a hundred and one things I've missed from the above.  If you have any comments on ASBE or in general, please do get in touch via the blog or the email address.  It would be great to begin building up a network of value investing friends.