It
is precisely this combination of steady growth
and 'unsexiness' that attracted shrewd fund
manager Michael Barnard to build a secret
stake in Kleeneze
for his Marlborough UK Equity Growth unit
trust. He says: "With the exception of
last year, earnings increased year, after
year, after year."
Mr
Barnard leans towards a value investment strategy
in search of long-term growth from stocks
that do not find favour with the market and
can be picked up below their true value at
the right time. This approach has proved successful.
According
to the Citywire Funds Insider database of
individual managers, Mr Barnard has been the
shrewdest manager in the UK All Companies
sector over the past year. He has produced
an average monthly return of 1.15 per cent
in that period, compared with the sector average
of minus 1.42 per cent. Over three years he
ranks fifth in his class.
He
invested the Marlborough fund in Kleeneze
in May last year and made his latest purchase
in December. The fund's total stake is 240,000
shares or 0.51 per cent of the £56m
company.
So
far the investment has not turned out quite
as planned - it has dropped from 170p when
Mr Barnard last invested to 120p at the time
of writing - but he is still confident that
it will come good.
The
stock is held as a long-term bet so he does
not expect it to really show its potential
for another 12 months, but Mr Barnard's loss
could be private investors' gain.
The
price has been knocked by two events to which
the market appears to have overreacted.
The
first was the death of the company's founder
and chief executive, Bob Johnson. Mr Johnson
started the company in 1969 from a King's
Road butcher's shop in London and built his
fortune with it. Apart from this success,
Mr Johnson, who nearly became a Catholic priest,
had a reputation as a philanthropist. He lent
his organisational and business experience
to charities and institutions such as Oxford
University. When Mr Johnson died aged 60 in
August last year, Kleeneze suffered as the
market reacted badly to the loss of a chief
executive of some vision and a missionary's
zeal for achievement.
Mr
Barnard says the effect of Mr Johnson's loss
from the management team is hard to calculate
but he is not too worried. More important
is what will happen to the 54 per cent stake
now held by his estate.
Simon
Like, the analyst in Mr Barnard's team, visited
the company recently and posed this question.
He told us: "They say they've got the
support of the estate and they're going to
be long-term holders and won't be selling
the stake."
That
is good news, but Kleeneze's
problem was compounded when the company said
in January that full-year profits were likely
to be the same as in the previous year - around
£10.8m. This is hardly a disaster, but
in today's stock market climate such announcements
are treated almost as a profit warning.
Disappointing
performance in the group's Farepack division
lies behind the flat forecast.
Farepack
is a mail order food business with a focus
on Christmas provisions. So far this year
it has lost £900,000 and taken in 3.2
per cent less than the same period last year.
This was the business out of which Kleeneze
grew and used to be its main driver, but this
market has shrunk and the company must look
elsewhere for its growth.
Fortunately
it has already done so and Mr Barnard and
Mr Like approve of the strategy. Hope for
the company's future lies in a shift in emphasis
towards the Kleeneze and Display Marketing
Group (DMG) divisions, which the board says
operate in growth markets, while preserving
the cash-generative virtues of Farepack. It
helped the group bring in net cash of £4.4m
so far this year, despite paying £31.5m
in cash to buy DMG.
Mr
Barnard and Mr Like hoped Kleeneze
might do better but are confident it can improve.
Kleeneze uses a self-employed salesforce to
sell homecare products and gifts. It uses
direct sales and home visits to sell the products,
and the internet to place orders at www.eezenet.com.
In the first half of the financial year this
division grew its turnover by 12 per cent
to £39.3m and made an operating profit
of £2.7m, up by 22.7 per cent.
DMG
is another direct sales business, but the
salesforce does its business in offices rather
than people's houses. The product range includes
books, toys, CDs, videos and household goods.
This, too, has produced a profit, albeit a
slim one. In the six months to the end of
October turnover was £18.5m and operating
profits were £100,000.
Given
this underlying performance and the shift
of strategy Mr Like feels the stock has been
oversold. He and Mr Barnard are happy with
their level of exposure so will not add to
their stake, but Mr Like feels the company
is looking attractive again at this level.
It is valued at only 7.5 times expected earnings,
significantly lower than average for the past
five years. It looks like an interesting long-term
bet.
