Monthly Archives: May 2017

Stocks in Focus: Tate & Lyle

This week I am looking at Tate & Lyle, the food and beverage ingredients manufacturer, which announced full year results on 25 May.  The results for the last financial year were in line with consensus.  Sales increased by 17% and the company benefitted from the weak pound.

Tate & Lyle’s business is split into two divisions.  Bulk Ingredients (BI) is involved in the production of generic sweeteners such as high fructose corn syrup, whereas the Speciality Food Ingredients (SFI) division produces more technical and often patent protected ingredients.

Over the last two years, under the guidance of CEO, Javed Ahmed, the company has focussed on the higher margin SFI division and moved away from the more commodity related BI division.  However, it was the BI division which produced the strongest results in the last year with an operating profits increase of 32% to £129m. The SFI division still showed steady growth with an operating profits increase of 5% to £181m, which is pleasing to investors convinced by the management’s strategy.

As the SFI division becomes a larger part of the group, the company will transition to a higher quality business with greater barriers to entry.  However, the new US Administration plans to reform the North American Free Trade Agreement, which could prove to be difficult for the BI division as Mexico is a key export market for the corn wet milling industry, particularly for high fructose corn syrup.

Our long term outlook remains positive for Tate & Lyle given the improving quality of the business, their focus on SFI and a confident management. However, the recent share price performance has been strong and investors should continue to be mindful of the price paid for stocks.


Stocks in Focus: Scottish Mortgage investment trust

This week I am looking at the Scottish Mortgage investment trust, which aims to achieve long-term capital growth through investing in global equities, focusing on the speed of technological advancements and how they can disrupt established business practices.

The trust recently published strong results for the 12 months to 31 March 2017, during which it returned an impressive 40.9% vs the FTSE World benchmark return of 33.1%, placing it in the top 10% for Global funds during that period. The main driver of these positive results was a strong US market and, in particular, outperformance of the technology sector.

The lead manager, James Anderson, has been in charge of the trust since 2000 and has seen his successful strategy lead it into the FTSE100 and become the largest investment trust in the UK.  Over this time Mr Anderson has created a concentrated portfolio of around 40-80 holdings, with high weightings in US tech stocks including Amazon and Tesla.  In recent years he has also looked to exploit the emergence of China by holding tech stocks such as Tencent and Alibaba.

This trust has been a consistently strong performer, gaining 219% over 5 years against the FTSE World benchmark return of 116%.  This has gained it much attention from investors and the fund’s size (now at c£5.6bn) has allowed it to lead the way in reducing fees within the investment trust sector.  The trust is clearly an attractive vehicle for investors looking to have diversified exposure to disruptive technologies. The fact that it is trading at a modest premium to the underlying value of its assets makes it less attractive from a value perspective, but reflects the returns generated by the manager.

What is a positive Company Culture and how does it grow?

When I am asked what took me to work at NW Brown I frequently reply that I knew and had done business with most of the firm and liked what I had seen. If pressed to be more specific I have a problem in defining what I liked or why – and I believe that truly what I tried and often failed to define clearly was culture.

Chambers dictionary defines culture as refinement which is the result of civilisation, but I think when we describe a company’s culture I prefer to think of Alexander Fleming’s Petri dish with Penicillin spreading across it and bringing untold benefits to the world.

What the two concepts have in common is that they are the result of cultivation – they do not just happen – they need the right medium to grow and flourish, whether it is the art, literature and science implied in Chambers definition or the nutrient rich medium in Fleming’s Petri dish.

Of the two I think that a Company culture is closer to the Petri dish because Science and literature can be taught but I am not sure a company can deliberately teach culture– it needs to put the right ingredients together, make sure that the temperature is right, the light is good and try to encourage the growth, but formal diktats are certainly not enough and often will be counter productive.

Enron’s motto was “Respect, Integrity, Communication and Excellence.” Its “Vision and Values” mission statement declared, “We treat others as we would like to be treated ourselves….We do not tolerate abusive or disrespectful treatment. Ruthlessness, callousness and arrogance don’t belong here.” Just before the actual values were aired in court the annual report said “ Every employee is educated about the company’s Vision and Values and is expected to conduct business with other employees, partners, contractors, suppliers, vendors and customers keeping in mind respect, integrity, communication and excellence. Everything we do evolves from Enron’s Vision and Values statements.” This from a board which passed a formal motion to exempt its directors from compliance with the rules on investing in partnerships in which they had an interest and where the way in which prices were artificially inflated for electricity consumers was widely publicised as a major coup for the company. Greed, sales at any cost, lie about the numbers if they look bad and if we make enough today we need not worry about tomorrow was the message which came from the behavior of the directors and a 64 page manual exhorting good behavior was irrelevant.

It is perhaps easier to say what does not work than what works and we all know, even from outside, many companies where all the words are right – there is a mission statement of the ‘save the world and be all things to all men’ type as above, but it is clear that the staff hate what they are doing – there is an ‘Equality Policy’ which could come out of ‘Das Kapital’ but the directors hide behind their PA’s and avoid all contact with anyone below heads of department. I remember well a start up insurer a few years ago where all the staff had to pose with their arms round one another and were told it was one happy family and had a strong culture of staff involvement by the boss who flew down from Scotland for the event. I think it lasted three years, but the point is not a single person there believed the words and respected management less for saying them. It is how the directors live their jobs  which  sets the climate and that can either encourage a healthy culture or destroy it.

A healthy culture comes from the top – it permeates through an organisation over the years as people with common values encourage each other, as those who ‘get it’ are promoted and those who do not are frozen out. If the environment encourages good behaviour and rewards success, if management is seen to be open and honest, then the culture flourishes. But the opposite is so easy – wat takes years to build can be destroyed far more rapidly.

The Chambers definition of refinement and civilisation is perhaps more relevant here – because civilisation itself is almost synonymous with a trusting environment – a civilised society (and no insult is intended here to our transatlantic cousins) is one where we do not feel the need to be armed, where we do not need lawyers to regulate our behaviour or police to enforce standards for most of our daily life because we trust those around us to behave towards us as we behave towards them. When a society becomes a police state or rules and regulations replace trust as the basis of everyday life, civilisation rapidly disappears. So it is in a company – and in the same way that within a few years of their coming to power the Nazi party moved from breaking windows to burning books and then gassing millions, when a company begins to lose its way the results can be a rapid deterioration and disaster.

The good new is that a strong culture replicates and thrives and excludes threats. Marks & Spencer was an example of the strength of family values for a hundred years. Many of the Quaker businessmen who flourished in the nineteenth century left behind such a strong culture that their firms survived intact for the whole of the 20th century (Barclays, Cadbury, Rowntrees, Clarks, Lloyds,  Friends Provident come to mind but there were many less well known examples). What they had in common was a climate of absolute trust, of moral integrity and of a belief that by the application of sound business principles they could change the world for the better. The link between owners and managers was close – family, religion, and politics all played a part in this – but the strong belief that capitalism was a force for good coupled with an equally strong belief in the social duty to apply the resulting wealth responsibly allowed their companies to flourish for many decades. Curiously, all this took place without a single policy on ‘Socially Responsible Investment’ or the application of ESG scores (since you ask, an international grading system which gives companies marks for various aspects of their Environmental impact, Social impact and Governance).

In a way, therefore, I would summarise by saying Culture is about substance not about form and the reason business culture today is so poor compared to any previous decade since the start of the 18th century is the triumph of form over substance. Barclays has whole departments dealing with social impact, it has equality statements, it has mission statements, but the words are not only an inadequate substitute for the beliefs of its first century and a half existence, they are corrosive of those values because those who work there know that the behaviour of those at the top is not consonant with the words. Having detailed rules and regulations will always be inconsistent with a climate of trust – it will always encourage behaviour which is calculated to obey the rules instead of those which are right under the circumstances.

So coming full circle back to NW Brown, and why I found it so attractive a decade or so ago, what was the secret? My belief is that the Nigel Brown recipe for success was very simple to say but rather harder to do, as I have learnt. It was to employ people he liked and got on with and then pretty well leave them to get on with the job. He created opportunities but did not impose solutions – encouraged success and quietly removed those who did not fit with the firm. As those he brought in emulated him the firm became a pleasant place to work and the culture became self-replicating. A recent staff survey by an external specialist came up with a score for staff satisfaction which has only been bettered once.

Of course it required luck, but often it needs good judgement and leadership to take advantage of lucky circumstances. Culture may require the leaders of the business to be committed but it is often supported and helped to grow from the bottom and as important is giving freedom to individual business leaders was, I suspect, the welcoming environment into which even the most junior recruit came – an environment where they know their talents would be valued whatever they were. There are mechanisms which perhaps can help a positive culture to grow and I do not dismiss awaydays , picnics  involving families , bonding sessions on cross country treks or cricket matches but I would regard them as symptoms of a healthy culture as often as they are causes. Similarly share ownership and profit sharing are admirable and worthwhile but at most they encourage a healthy culture and maybe reinforce it a bit, they will fail to motivate and retain staff in a company with a poor culture because no-one will believe them. Unless the Board believes that the best way of serving the owners they represent is to be honest and trustworthy in looking after the long term interests of clients and staff and acts in a manner which makes it obvious this is their core belief it will waste any efforts to encourage a positive culture because everyone else in the company will follow their lead.

And having contrasted the reality of a strong culture with the pretence so often illustrated in elaborate mission statements, I do have to admit that even before I joined I knew that Nigel Brown had summarised what the firm was about in the words ‘the client comes first, but it has to be fun’. The difference from the meaningless     “To be the leading facilities-based provider of end-to-end Telecommunications and Internet services to business customers globally”   emblazoned on the office of Worldcom before we discovered $100 billion of alleged assets were an invention is that Nigel’s saying was passed from person to person by employees – because they believed this was the best way of summing up the culture of the firm, and because culture ultimately is what those who work for the firm believe in, they were right.

Points of View: Technology stocks

This week I am writing about the technology sector following an interesting article in the Telegraph.  The article highlighted that the NASDAQ index surpassed 6,000 for the first time and drew comparisons with the dotcom bubble of the 1990’s.

The NASDAQ index has a weighting of over 50% in technology stocks and serves as an indication of the performance of the technology sector.  Since March 2009 the index has had an annualised performance of roughly 20%.

The dotcom bubble was synonymous with the overvaluation of companies and investors ability to ignore companies’ underlying profits.  Indeed, these themes can be observed in some form in the current market.  The NASDAQ performance has inflated it well above the S&P 500 – indicating investor enthusiasm for tech stocks.  There are also signs of investors ignoring profits, illustrated by Netflix recent strong performance, despite being estimated to lose $2bn this year.

Technology has, however, moved on since the turn of the century.  Most noticeable the rise of the internet, broadband and smart phones has created an environment in which disruptive technology can thrive.  In addition, the valuations of tech companies do not look as stretched as previously.  In 2000 Microsoft’s price to earnings multiple peaked at 57 times. Today it is 30 times.

Investors can take some comfort from the more modest (but still high) valuations and the greater maturity of the sector. For these reasons we are not predicting an imminent decline in the sector. However, whilst the growth expectations are attractive the ratings leave little room for disappointment. Given our value bias we find it difficult to be optimistic about highly rated sectors.

Stocks in Focus: Centrica

It has been an interesting few weeks in the utilities sector after the Conservative Party’s pledge to cap prices on standard variable tariffs as part of their manifesto for the upcoming general election. Centrica, the parent company of British Gas and the biggest energy supplier in the UK, warned that such a price cap would “lead to reduced competition and choice, and potentially higher average prices”, drawing on evidence from countries that already have a similar policy. Indeed, according to uSwitch, the average price of the cheapest deal offered by the six biggest energy providers rose faster than for the market as a whole since the plan was initially announced at the Conservative conference in October last year. However, not all of the big 6 have raised their prices – British Gas, for example, has frozen its prices until August 2017.

In a trading update earlier this week, Centrica reported a drop in its UK domestic customers since the start of the year as households switched to rivals, while unusually warm weather also led to lower than expected revenue from energy consumption. Despite this, the company is keeping its guidance to deliver on a range of targets for 2017, including reducing net debt and generating adjusted operating cash flow of more than £2bn through its cost efficiency programme.

Looking forward, market conditions are likely to remain challenging for Centrica in the short term due to the pressures of a possible price cap. Set against this, however, the company has expressed its confidence in being able to navigate this regulatory clampdown and maintain its financial targets through its competitive pricing, cost efficiency and focus on quality rather than quantity of its customer base.

Stocks in Focus: Unilever

This week I am looking at Unilever again following management’s strategic review of the business, which was prompted by the failed takeover approach by Kraft Heinz in February. Most notably, the decision has been made to reduce the number of divisions from four to three by combining the Food and Refreshment divisions – with the rational that this will enable faster margin progression. As part of the restructuring, plans have begun to dispose of the  ‘spreads’ category, where sales have been in decline for a number of years, causing a drag on profits.

Management have already engaged in a number of cost saving initiatives over the last two years and intend to increase their efforts with the aim of improving underlying operating margins to 20% by 2020. Part of these cost savings are expected to come from cutting the marketing budget, and in particular reducing the amount of TV adverts aired. This reflects the difficulties many consumer companies face with how to successfully market to customers in a predominantly online era. In addition to reinvesting back in to the business, management has announced a €5bn share buy-back for the remainder of this year and a 12% increase in the dividend.

Initially, shareholders were concerned that the business would change drastically after the review and take on too much debt in the hope of “putting off” further takeover interest. It is encouraging to see that this has not been the case, and that it has been recognised that the existing business model continues to be successful. The news has so far been taken well by investors and the shares continue to trade at all time highs.