It has been a while since I last posted. I don’t really have a regular posting schedule for the site at this point. The best way to keep up with new posts is to subscribe to the RSS feed or follow me on Twitter.
One interesting stock I recently found on the AIM market in London is Leeds Group (company website). Leeds is an investment holding company and has one subsidiary called Hemmers-Itex. Hemmers-Itex is engaged in the import, warehousing and wholesaling of fabrics. Leeds used to be involved with textile processing (fabric printing and yarn dyeing), but the ever increasing competition from Asia made them cease all manufacturing operations. Today Hemmers-Itex is only involved with the trading of fabrics.
The investment case for Leeds Group is fairly simple: on November 30th 2012, the company had current assets of £15.4m (cash: £2.0m , receivables: £7.2m , inventories: £6.2m) and total liabilities of £5.6m. Net current asset value was £9.8m. The market cap of the company is currently £6.5m. So, the company is trading right around the 2/3 of NCAV level that Graham net-net investors are looking for.
Leeds Group has been profitable in 4 of the last 5 years, only showing a small loss in 2009.
There is one more interesting thing about Leeds. Swedish activist investor Peter Gyllenhammar owns 21% of the shares. Anothere Swede, Johan Claesson, owns 25% of the shares. I don’t know what the relationship between these two is exactly, but I read an old article that shows these two have been involved with some other companies as well.
I recognized Gyllenhammar’s name from a book I read called Free Capital. The author of the book has interviewed a number of successful investors in the UK markets and has written profiles of these people. It is fun to read. I have reread the chapter about Gyllenhammar. He is mostly an activist. He often takes a stake of about 25% in a company to take “negative control” of the company. It means that with a stake like that it becomes possible to block certain management actions, especially if he can find a few other large holders that agree with his agenda. He then tries to unlock the value in the company.
Leeds appears to fit this profile. Gyllenhammar and Claesson effectively control the company. Gyllenhammar is certainly more of a Graham style investor than a Buffett style investor. He looks for companies that have seen their shares come crashing down and buys in to them heavily. Usually these are not quality businesses, but they are trading at big discounts to their book values. He does not avoid ugly situations and risk. Gyllenhammar went bust twice, earlier in his career.
Gyllenhammar has been a shareholder in Leeds since 1999. Gyllenhammar and Claesson have invested some of the cash of Leeds and unfortunately they made a bad investment when they bought a 29% stake in Dawson International PLC. That company had a big problem with its defined benefit pension scheme and eventually went into administration in August 2012, wiping out the value of that stake.
One positive thing about the capital allocation is that Leeds has been a consistent buyer of its own shares.
There is one issue that looks worrisome to me and that is the quality of the receivables. In note 16 of the latest annual report, Leeds shows £1.05m in trade receivables past due and impaired (up from £0.88m in 2011). Leeds has a further £1.0m in trade receivables past due but not impaired (down from £1.12m in 2011). The company does report about this last category that: “In many cases these debts are covered by trade insurance”. The provision for impairment that Leeds has taken is £762k.
I worry that when the industry has a further string of bad years that this situation could get much worse. Since Europe is in and out of recession for some time now, this risk should be taken into account.
Considering the receivables quality and the marginal business Leeds is involved in, this company doesn’t look like a net-net I would like to invest in. It will still be interesting to follow this company and see where Gyllenhammar and Claesson take this. Excess cash can be invested in other businesses and this could also create value for Leeds shareholders.
For those interested, here are three articles about Leeds Group by Richard Beddard from 2011: