Shares to buy, hold or sell: Stephen Message
BUY: SSP GROUP
Message bought food and beverage retailer SSP Group during the firm's initial public offering in July this year, but he claims the purchase was an unusual move.
"Typically, I shy away from IPOs, as valuations are too high in my view, but I felt the valuation here was compelling," he says.
Message initially paid £2.10 a share for SSP, which operates cafes and restaurants in airports and railway stations around the world. The firm is now a top-20 holding, accounting for 2.6% of his portfolio. With the share now trading at around £2.35, he has already made a modest profit.
Message was principally attracted by SSP's valuation, but was also enticed by the promise he saw in the abilities of the firm's management team. This is headed by former WHSmith chief executive Kate Swann, whom he credits with turning WHSmith's fortunes around by reducing the company's costs and improving its profit margins.
"Today SSP's operating margins are mid-single digits. Swann has a track record of delivering, so I think there is real scope for meaningful margin growth in this business. That in turn is good for dividend growth," Message comments.
SSP is now set to focus more on improving costs and profitability rather than growing its top line, which leads Message to conclude that the company is "in charge of its own destiny' and has little to fear from global economic shocks. That perspective makes it "a great long-term buy and hold".
HOLD: BOOKER GROUP
Message invested in cash and carry business Booker Group for 40p a share when he took over the 5 Old Mutual UK Equity Income fund in 2009. With shares now trading at £1.39 and the company accounting for 2.5% of his portfolio, he is happy to hold his position.
He says: "[the firm] has evolved under the current management team from a fairly indebted company with a poor balance sheet into one making a much better profit, while dividend growth is really strong. So it's not a recovery play now, but it's an interesting growth situation."
Message believes Booker's acquisition of German retailer Makro in May 2012 should continue to boost its prospects in the medium to long term. "There is meaningful scope to improve profits there. It will also allow the company to build on its "delivered" platform; alongside in-store cash and carry, this part of the business – which supplies goods to the catering industry – is going to be quite strong," he says.
He admits, however, that the firm's share price has struggled this year: shares are now trading at 20% below their March peak of £176.50. He attributes this to fear of "broader deflation in food retail". But he insists the firm is continuing to gain market share, and believes that, at a price to earnings ratio of 20 times, Booker's valuation is "fairly rich', so he will not be adding to his holding in the near future.
SELL: GREENE KING
Message saw a big opportunity in the shares of pub chain Greene King in 2010, when the firm was trading on a p/e ratio of nine times and paying a healthy 5.5% dividend. At that point he bought into the company for around £4.50 a share. At its peak the holding accounted for 2.5% of his portfolio.
"We bought when the chain was growing in a shrinking market - a lot of pubs were going bust, yet there was a trend, which has continued, towards casual dining out.
"The firm was also rolling out the franchise by adding around 50 pubs a year, and consumer confidence was improving," he says. Message was proved right: Greene King shares traded at a heady £9.13 at their peak in January this year. However, as the company's share price rose so did its p/e, while its dividend decreased, so he sold out in April.
"We sold purely by virtue of the fact that the shares had done so well. It re-rated from a p/e of nine to 14 times and its dividend yield came down to 3.5%, so the value wasn't there.
It's nothing to do with the pub sector; I just don't think a dividend yield of 3.5% for that business is fair," he says.
Message says Greene King's success is typical of that enjoyed by numerous UK mid-cap firms over the past two to three years, which makes finding value in the space increasingly difficult.
This feature was written for our sister publication Money Observer
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
This is the opposite of inflation and refers to a decrease in the price of goods, services and raw materials. Economically, deflation is bad news: the only major period of deflation happened in the 1920s and 1930s in the Great Depression. Not to be confused with disinflation, which is a slowing down in the rate of price increases. When governments raise interest rates to reduce inflation this is often (wrongly) described as deflationary but is really an attempt to introduce an element of disinflation.
A property chain is a line of buyers and sellers (the “links”) who are all simultaneously involved in linked property transactions. When one transaction falls through – for instance, someone can’t get a mortgage or simply withdraws their property from sale, the entire chain breaks and all the transactions are held up or even fail entirely.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.