GPG: Interim result 2012

Statutory profit results from investment companies aren’t particularly useful for understanding underlying value. So this review focuses on the enlightening parts of Guinness Peat Group’s half yearly result, plus other recent news.

In our review last month—see GPG: Profiting from a breakup (Long Term Buy – $0.36)—we outlined four ‘potential risks’ in a table toward the end of that review. The second risk—pension liability issues—has been the one subsequently gnawing away at this analyst.

We’d allocated £64m to cover shortfalls on the two pension schemes that have full recourse to the parent company—being the current estimated liability. While it will be many years before we know if this is too little (it's rarely too much), GPG will need to set aside more than that amount—perhaps £130m in total—as a buffer for the protection of pension recipients. That cash won’t be available in this liquidation process or in the medium term. Our valuations probably deserve some trimming, up to six Australian cents per share for those wishing to fully recognise the cash to be tied up.

But at least partly offsetting that concern has been some good news from the liquidation of the company’s listed portfolio. We valued the company’s 48.1% stake in Australian life insurance group ClearView Wealth at £74.5m in the ‘Full market valuation’ and £52.2m in the ‘Discounted market valuation’. It was recently announced that GPG intends to accept an improved takeover offer for ClearView that will inject $124.3m, or £81.5m, into the company’s bank account soon. This deal alone adds almost 3 Australian cents to our 'Discounted market valuation'.

The company’s two other most ‘strategic’ stakes—34.0% of Tower and 22.1% of Ridley Corp—are both trading at prices approximately 10% above our ‘Full market valuation’ and well above our conservative ‘Discounted market valuations’. We wouldn’t be surprised if one or both also receive opportunistic takeover offers as this liquidation progress. Such a boost would help our investment case.

Perhaps the most important numbers coming from the actual result revolve around Coats, the global threads supplier that’s likely to be the sole remaining investment after GPG’s liquidation is complete. For the six months to 30 June, Coats reported sales of US$819m, down 5% in raw terms but up 1% on a constant currency basis. Sales from the craft division grew 5% while the more substantial industrial division saw a 1% fall in sales.

Exceptional items, including the €110m European commission fine outlined in our last review, drove the headline Coats profit into the red. On an underlying basis, however, the net profit of US$25.9m for the half was, while below potential, not bad for a business being valued at a pittance (as implied by the current GPG share price).

In other news, the company announced a £10m on-market buyback to commence in September. While small beer, buybacks are a sensible way to start returning cash as long as the stock continues to trade at a cheap price. And, while we try not to get too excited about such matters, it was interesting to see that famous hedge fund pioneer George Soros’s Soros Funds Management now owns an 8.2% stake in GPG.

Balancing up our concerns over pensions with positive news on the liquidation, we’re sticking with our initial conclusion. Below $0.38, GPG is cheap enough to overcome our concerns regarding this liquidation play. At today’s slightly higher price, though, we’re downgrading to HOLD.

Note: The Growth portfolio owns shares in Guinness Peat Group.