Not very glamorous, but cheap, Creighton's at 56% of NCAV

I've heard it said that intuition is really just a fancy name for pattern recognition.  After seeing hundreds or thousands of patterns a person can recognize certain things intuitively.  It might sound funny, but when I first took a look at the Creighton's financial statements my heart skipped a beat.  I knew exactly what I was looking at, the type of net-net I like to hold in my portfolio.  Sure they aren't perfect, they have a bit of debt, and less cash than I'd like, but then again nothing's perfect is it?

Creighton's is a beauty supply company located in the UK.  They make skin cremes, moisturizers, and other personal care and beauty products. The business is not all that glamorous, and without setting foot in the UK or knowing consumer trends I'd guess they make just another bottle of shampoo, or just another bottle of lotion on store shelves.  Consumers do have preferences, and some consumers prefer to purchase Creighton's products what whatever reason.  This company doesn't have a moat or any product differentiation, they note a risk is that Asian products are in direct competition with their own.  The beauty product market is very price competitive, but that doesn't mean that it's unprofitable either.

I'll start with the negatives on the company first.  If any of these negatives are too much to get past save yourself five minutes and stop reading. My biggest complaint against the company is the low amount of cash they hold, and in turn the financing for working capital expansion.  I prefer companies with lots of cash and no debt, but I'm also flexible with what I invest in.  Creighton's has £786k worth of debt against £4,103m in equity for a debt to equity ratio of 19%.  This debt is necessary because the company only has £33k in cash on hand.  Unless the company suddenly starts to generate a lot more cash flow they will continue to be in a vicious circle where they don't have quite enough cash to pay suppliers at the time of order.

What Creighton's doesn't have in cash they have in other assets, here is my net-net worksheet:

The company is loaded with receivables and inventory.  Many investors look at these accounts with suspicion and give the values a large hair cut.  The non-discounted NCAV is 4.9 GBp, whereas a discounted NCAV is .59 GBp, a large difference, all attributable to the lack of cash.

In this company's case I think both receivables and inventory could be turned into cash fairly quickly.  The receivables could be factored and the company might receive 80-90% in cash for the receivables now.  The inventory doesn't go out of date.  If the company were in a liquidation scenario I doubt consumers would know their favorite brand of face lotion was going out of business, they would happily continue to purchase the lotion at the grocery at normal prices until suddenly the shelf is empty.  Considering that both receivables and inventory could be liquidated at values close to NCAV I am using the unadjusted NCAV as the bogie value for my thesis.

The company has a market cap of £1.58m against a NCAV of £2.951m, they're selling at almost 50% of NCAV at current prices.  The company is also fairly profitable with growing sales and earnings.

The company earned £223k last year, or .37p p/s, which is a 7.43x multiple at current prices.  The company's revenue grew 16%, and profits grew 65% over the past year.  The difference between the revenue growth and profit growth shows the operating leverage imbedded in the company's operating structure.  If revenue is able to continue to grow net income will grow at an even faster pace, with incremental pound revenue falling straight to the bottom line after the fix costs are taken care of.  Some of the revenue growth is attributed to better inventory management, and higher inventory turnover.  The company has also repositioned itself away from the end of the year Christmas market to more calendar stable products year round.  

The metrics alone for Creighton's make the company a tempting investment, but it wasn't just the numbers that pushed me into buying some shares.  It was another factor, the management contract between the company and the CEO.  The company's employment contract (renumeration if you're searching) is very straightforward, the CEO is paid a bonus based on certain profitability targets.  But there's a second incentive which provides the CEO a bonus if he's able to dispose of the toiletries business for £1.5m or more.  Unfortunately the company doesn't break out segments so it's impossible to know how much of the company's business toiletries entails, but at the most simple level they're looking to divest toiletries, not the entire business for £1.5m.  The market is selling the entire company for £1.5m, which means that either the directors are valuing a division of their business too highly, or the market has the pricing wrong.

For a simple company like Creighton's, with a simple investment thesis there isn't much else to say.  The company is cheap, small, and ignored.  I could never imagine making this a large position, but I couldn't resist picking up some shares recently.  This is the type of net-net that I'm looking for a good puff from, I would sell this at or near NCAV if the opportunity arose.

Talk to Nate about Creighton's

Disclosure: Long