Caffyns - A good AGM and a new valuation

PUBLISHED: Jul 27 2018 @ 10:04 | Comments (0) |

Yesterday I attended Caffyns AGM (LSE:CFYN) in Eastbourne, and, I have to say, I was impressed by the managers and the direction they are taking the company. I bought into Caffyns a year ago, but this was the first time I had the opportunity to chat with the directors. They were very generous with their time and thoughts, talking with me at length both before and after the formal meeting. Also very interesting was the set of question asked by the new large shareholder, Andrew Perloff, the well-known property developer, and acquirer of Beales department stores in 2015.

I bought Caffyns for my Modified price earnings ratio portfolio last August because it had a low cyclically adjusted price earnings ratio, CAPE, and freehold property worth three times its market capitalisation from which it makes regular development profits.

I paid £5.01 per share (market capitalisation £13.8m). Since then the share has drifted to £4.00 – £4.50. Market capitalisation is now £11m – £12.1m.

The company has been selling cars for around a hundred years and is now run by the fourth generation of Caffyns – CEO, Simon Caffyn, told me he started in the business when he was ten year-old working at the petrol station now converted to the meeting room where we convened yesterday.

The family have almost all power through their ownership of voting preference shares as well ordinary shares. So, yesterday I was looking for reassurance that the principal family members are not the types to greedily act in a prejudicial way regarding private investors. I was looking for indications of honour and decency; two qualities that investors ignore at their peril, even though they are fiendishly difficult to conclusively observe.

In very broad terms Caffyns makes around £1m – £1.5m from selling new cars (about 5,000 p.a.), selling second hand cars (about 5,000 p.a.) and servicing and selling parts (aftersales turnover is around £22m) from 13 showrooms in the far south east of England.

It also regularly makes money by selling property and businesses. But the value generated from this, while usually positive, is variable. And it has £54m of property assets. Dividend yield is a stable 5%.

(Previous newsletters on Caffyns: 10^th – 16^th August 2017, 14^th – 16^th Dec 2017).

I’ll start the analysis with an update of the earnings numbers and valuations.

Three alternative estimates of the cyclically adjusted earnings per share.

Method 1. Reported “basic” earnings

This includes all operating profits as well as the property profits. The company regularly classifies items such as redundancy payments as “non-underlying” – such debatable accounting is to be ignored. All non-underlying are included – so this a warts an’ all approach.

Year end (in March)	Reported profit after tax (after including the “non-underlying” negatives and positives) £‘000	Number of shares (millions)	Earnings
2018	1,030	2.69	38.2p
2017	5,123	2.75	186.3p
2016	2,487	2.76	90.1p
2015	9,255	2.76	335.5p
2014	1,411	2.77	51p
2013	1,289	2.77	46.6p
2012	1,416	2.77	51p
2011	218	2.79	7.7p
2010	1,107	2.82	38.6p
2009	-3,969	2.88	-137.8p
2008	2,128	2.88	73.9p
Average earnings per share			71p

The cyclically adjusted price earnings ratio from this approach is 450p/71p = 6.3.

The 2015 result deserves a special mention: most of that £9.255m profit was a result of pension rules changing (so that future pensions could rise by only the RPI rather than the CPI) – it is a true one-off.

I’ll correct this distortion in the next earnings calculations, where I also remove the profits on property to try and get at the numbers coming solely from the operating business.

Method 2. Stripping out the one-off elements and separating the operating income from the property development income.

£’000s	2018	2017	2016	2015	2014
Reported profit after tax	1,030	5,123	2,487	9,255	1,411
Adjustments	None	Deduct profit on Land Rover business sale: 3,839	Deduct profit on sale of property: 254	Deduct profit on sale of property: 566	None
			Add cost of redeeming preference shares: 292	Deduct gain on pension scheme (after tax) due to switch to RPI: 7089
Profit after tax and adjustments	1,030	1,284	2,525	1,600	1,411
Earnings per share for the operating business	38.2p	46.7p	91.5p	58.0p	51p

£’000s	2013	2012	2011	2010
Reported profit after tax	1,289	1,416	218	1,107
Adjustments	Deduct profit

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