Investors’ Chronicle: Fuller Smith & Turner, J Sainsbury, Purplebricks

HOLD: Fuller Smith & Turner (FSTA)

The pub group has managed to keep debt in check ahead of the lifting of restrictions on July 19, writes Arthur Sants.

Fuller Smith & Turner must be happy to see the new health secretary Sajid Javid’s “learn to live” with Covid-19 stance. After a tumultuous year it looks set to bounce back well once the restrictions are fully lifted on July 19 and England’s run to the final of Euro 2020 should help reinstate the public’s pub visiting habits.

Fuller’s like-for-like sales were already running at 76 per cent of 2019 level for the 12 weeks to July 3, even without the ability of customers to walk into a pub without a booking. The group has also brought net debt levels below where they were pre-pandemic, despite burning through up to £5m during every month of the lockdown. This prudent financial management plus its recent £52m equity raise will leave it with headroom to continue to invest.

The benefit of cancelling its dividend and taking out a £100m Covid Corporate Financing Facility loan is that it has been able to continue with the “10 transformational refurbishment schemes” for its predominantly freehold estates. This will enable trading to pick up quickly and there is a strong possibility that demand for its hotels will stay above pre-pandemic levels as staycations remain popular. Private equity firms have been backing this trend with recent acquisitions of holiday and caravan parks.

The main concern is that new Covid-19 variants will generate continued restrictions, but the recent messaging by Javid has lowered this risk. Trading conditions are about to improve, but caution remains the watchword.

HOLD: J Sainsbury (SBRY)

Sainsbury’s, tipped as one of private equity’s top targets, is focused on its own restructuring, writes Oliver Telling.

Private equity is hungry for new deals and UK grocers currently look like some of the tastiest on the menu.

With Asda snapped up and a suitor now circling Wm Morrison, attention is naturally turning to larger rival Sainsbury’s, which has similarly been suffering years of underperformance. A share price festering near multi-decade lows, combined with its vast footprint and historic brand must be tempting many buyout firms.

But following a trading update this week, chief executive Simon Roberts was quick to shoot down speculation. “If we had anything to update on, we’d be updating on it,” he curtly told reporters. 

Instead, the company wanted to direct attention towards its internal restructuring effort. It said the plan to put food back at the heart of Sainsbury’s had since helped it pick up market share: sales excluding fuel grew 1.6 per cent year on year in the quarter ending in June, exceeding expectations. The supermarket lifted its guidance for full-year underlying profit before tax from £620m to £660m.

Sainsbury’s is funnelling some of its surplus cash into a £50m price war with Aldi, the German budget supermarket that helped send its shares tumbling when it first stormed on to the UK market about a decade ago. The British grocer’s aggressive strategy explicitly aims to match Aldi on price, while delivering “Sainsbury’s quality”. If it can also find a buyer for its struggling bank, it could be a winning recipe.

Sainsbury’s shares have picked up since November and current investors should be keen to see if the new leadership can continue to deliver on the restructuring effort, rather than cash out at a deflated price in a private equity buyout.

Others may be inspired to reconsider the business, which has long been dismissed as one of the rotten vegetables in the UK stock basket. Analysis by Investors’ Chronicle shows short sellers have taken more positions against Sainsbury’s than any other UK stock over the past decade, although the takeover speculation has prompted some to pull back. Low margins and vulnerability to competitors mean supermarkets will never lead the UK market.

HOLD: Purplebricks (PURP)

The online-only estate agent hopes a two-tier price model and money-back guarantee will offset any dip in market volumes, writes Alex Newman.

Pre-pandemic, the charge sheet against estate agent Purplebricks included a deficient core product and an overzealous expansion strategy. Missteps take a long time to correct. Despite high expectations after its 2015 float, the shares still trade 12 per cent below their listing price, compared with a 50 per cent total return from the FTSE All-Share.

Now, with its focus pared back to the UK, the world has arguably swung toward the company’s self-service homebuying proposition. No longer are online property walk-throughs the outlandish proposition they might once have seemed, a change which feels likely to continue even if concerns about close-quarters virus transmission fade.

Unfortunately for investors, the febrile nature of the housing market has made it hard to test this supposition.

A 14 per cent increase in instructions in the year to April looks like one source of hope, though this should be seen against Purplebricks’ market share of properties sold by volume, which fell from 5.1 to 4.6 per cent. A rising tide has not lifted all boats with the same force.

Decreasing volumes therefore pose a challenge. Along with most in the housing market, management thinks supply and demand will return “to more of a balance post-summer” as the stamp duty tax holiday rolls off.

Chief executive Vic Darvey’s answer to a tougher outlook is a revamp of Purplebricks’ pricing strategy after a successful trial in the Northwest. This includes a money-back guarantee if a property fails to attract an offer within 10 months, and a two-tier price model which the business hopes can push up revenues by 20 per cent a year.

Investors will hope an equal rise in cost inflation won’t follow, as margins remain tight.

Though statutory results suggested the business can fund itself through cash generation, more than half of last year’s operating profits came from non-trading sources: a reclassification of a stake in German peer Homeday, and a £2.3m credit from the lapsed share options of departing directors. Another £2.3m gain from the sale of the Canadian arm, and £900,000 in positive forex movements, account for the mark up in net profit from £3.9m to £7.7m.

Management says it is too early to quantify the benefit of the pricing overhaul for the current financial year. The City — which expects earnings of 1.3p per share in the 12 months to April 2022 and 1.8p the year after — will probably wait for evidence of operational gearing. We remain circumspect, too.

Mary McDougall: Follow investment trust shareholder activists

There’s an interesting tussle going on at Third Point Investors, where manager and activist investor Daniel Loeb faces a taste of his own medicine. 

Third Point Investors is an investment trust with assets worth £736m, which listed on the London Stock Exchange in 2007. It invests directly into Third Point’s largest hedge fund, which is managed by Loeb in New York and, according to its website, has generated 15 per cent net annualised returns for investors since its inception in 1996. 

An enduring frustration for the trust’s shareholders has been its persistently wide discount to net asset value (NAV) over the past three years, more often than not in excess of 20 per cent. As a result, activist investor Asset Value Investors has bought a stake and tried to persuade its board to take steps to narrow the discount. 

Asset Value Investors has had some success. Third Point Investors’ board has introduced a discount control mechanism, setting a long-term discount target of no wider than 7.5 per cent and has been buying back shares to move the discount towards the target.

However, James Carthew, head of investment company research at QuotedData, points out that a concession in June which allowed investors to exchange into the master fund at a 7.5 per cent discount was only possible for transactions worth over £10m, so irrelevant to most. The board has also agreed to two tender offers for 25 per cent of net assets at a 2 per cent discount to NAV if the discount is wider than 10 per cent in the six months to March 31 2024.

This has not been enough for Asset Value Investors which owns 10 per cent of Third Point Investors’ shares. On July 5, alongside three other shareholders, Asset Value Investors wrote to Third Point Investors’ board, asking for an extraordinary general meeting in which the option of quarterly redemptions at NAV less transaction costs could be put to a shareholder vote. This would be financed by selling shares in the master fund. 

This is quite a punchy demand. The board hasn’t responded yet, but it might argue that introducing an exit mechanism would compromise how they run money. And it may reduce the size of the trust over time, thereby increasing fixed costs relative to market capitalisation. But Mick Gilligan, head of managed portfolio services at Killik, thinks that the recent share price movements suggest the market is expecting a successful outcome for shareholders and a tighter discount going forward.

Why should we care about this? It shows the influence that activist investors can have. On July 6, Third Point Investors was trading at a discount to NAV of 9 per cent — much tighter than for years. So you might benefit from keeping an eye on the activity of activist investors. While their negotiations with boards tend to happen without a public spat, they can make significant governance changes which should ultimately benefit the share prices of the trusts in question. 

It can be difficult to identify who activist investors are, but well known discount-driven investors include Asset Value Investors and 1607 Capital Management, and City of London Investment Management. Shareholders with declarable stakes may be listed in a trust’s annual report and big changes are detailed in stock exchange announcements.  

A final point to remember as a shareholder is to vote on any resolutions at a trust’s annual general meeting and as any special resolutions occur. It can come down to the wire, and voting is necessary for shareholder democracy to thrive. 

Mary McDougall is an investment writer for Investors’ Chronicle