Fletcher King – NCAV, ROCE and pay

PUBLISHED: Jul 26 2016 @ 03:58 | Comments (0) |

I sold Fletcher King (LSE:FLK) not because it was a bad business, but because of the bad point in the commercial property cycle. The balance sheet remains exceptionally strong, its profit history is encouraging and the managers are competent and reasonably cognisant of their obligations to minority shareholders.
These positives mean that I will continue to be a shareholder with a handful of shares through the next downturn just to keep an eye on things, and will look to invest properly again when the time is right.

Net Current Asset Value

£’000s	30^th April 2016	30 October 2015
Receivables	871	838
Cash	2,846	4,070
Less Total Liabilities	(1,154)	(1,863)
Totals to Crude NCAV	2,563	3,045
To be conservative we deduct 20% of receivables as being uncollectable	(174)	(168)
The company has recently used some of its cash to invest in SHIPS. This is accounted for as a non-current asset “Available for sale investment”. Arguably, this should be included in NCAV, thus I add it.	1,274	752
Adjusted NCAV	3,663	3,629
NCAV per share (9.2m shares)	39.8p	39.4p

If the business prospects were good then I’d be interested in buying the shares at 39.8p. But, as I’ve explained, I do not trust the business prospects yet.
Return on capital employed
With net tangible assets at the start of 2014 of £3,325,000 in 2014 and operating profits of £509,000 it achieved a ROCE of 15.3%:
£509,000/£3,325,000 = 15.3%
With net tangible assets of £3,729,000 at the start of 2015 and operating profits of £444,000 it achieved a ROCE of 11.9%:
£444,000/£3,729,000 = 11.9%
With net tangible assets of £3,743,000 at the start of 2016 and operating profits of £792,000 it achieved a ROCE of 21.2%:
But, look at the transformation in ROCE if £2m is returned to shareholders (instead of earning just £13,000 in interest), so that this service business operates with only £1,743,000 of net tangible assets:
£792,000/£1,729,000 = 45.8%
Even on my recession scenario ……….To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

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