UK Edition
Questor: buy Conviviality – its directors seem to think the shares are too cheap
When we select shares for our Inheritance Tax Portfolio – which, to recap, consists of stocks listed on the junior Aim market, which are normally exempt from death duties – we will sometimes use the approach adopted by Questor’s Follow the Money format on Wednesdays.
Our other Inheritance Tax Portfolio tips
- Questor: nine new Aim shares to buy for our Inheritance Tax Portfolio
- Questor: buy IHT-free RWS as it tightens its hold on patent services for blue-chips
- Questor: buy resurgent pub group Young's for growing profits - and to beat death duties
And although that column tends to focus on the actions of fund managers, we also take note of any purchase (or sale) of shares by the managers of the firm in question.
It is particularly interesting when executives buy shares in their company just after a poorly received announcement because it is a sign that those insiders, who know the business better than anyone, think the market has overreacted to the announcement and that the shares have become undervalued.
Something of this sort happened when Conviviality, the drinks distributor, published its interim results on Jan 29. Investors took a dim view and the shares fell by 11.2pc to 318p. They later fell further, to as low as 285.5p on Feb 15, before recovering slightly. They had been at almost 430p as recently as Nov 1.
Several directors bought shares on Feb 5. Diana Hunter, chief executive, bought 50,000 shares at 305p, spending £152,500, while David Adams, chairman, invested £48,960 to buy 16,000 shares at 306p and Mark Moran, chief financial officer, bought 60,000 shares at 299p for a total of £179,400.
Two non-executive directors spent £157,915 between them at prices of 300p and 305p respectively while an associate of the chief executive bought 15,000 shares at 297p for a total of £44,550. In all, these individuals spent £583,325 on Conviviality shares.
But they weren’t the only ones to sense a buying opportunity. Fraser Mackersie, who manages the stock portion of the Acorn investment trust, told Questor that he had bought shares at between 289p and 310p after the share price fall. He had sold shares in September last year at about 400p.
“The fall in the share price after the results felt excessive,” he said. “There was a small rise in debts, a fractional fall in margins and a delay in cost-saving measures, and the market didn’t like the combination. But we view these things as part of the company’s normal growing pains – and earnings guidance for the full year was unchanged.
“The small fall in margins reflected new long-term sales agreements with large customers, who naturally expect better prices, while cost-saving measures were delayed to avoid any disruption to service levels over the crucial Christmas period.”
Conviviality was originally a chain of bargain shops but expanded by buying distribution businesses such as Matthew Clark. It now supplies the shops, which are franchised, as well as third-party customers such as pubs, off licences and restaurants.
“The advantage of this approach is in the benefits of scale – as the business gets bigger it has more buying power and can increase efficiency,” Mackersie said. “It was a good business when we invested at the time of its flotation in 2013 at 100p but the benefits of scale have since become more obvious.”
He said the group was “clearly profitable, growing both the top and bottom line”. There is also a decent dividend – the stock currently yields 4pc, high for Aim – and he said the market expected double-digit annual growth in earnings per share and “something similar for the dividend”.
Dividend cover is currently 1.7-1.8 times and the company said it would aim for a figure of 2 by 2020.
The fund manager also praised Conviviality’s management. “The chief executive has been there since the flotation and we know and respect her. We think she is doing a great job – she is ambitious and driven and is executing the strategy well.
“We think the recent share price fall gave us a good opportunity to buy a stock we’ve known for a long time.”
Investors Champion, an Aim specialist, said the shares should qualify for IHT relief.
Questor says: buy
Ticker: CVR
Share price at close: 288p
Scapa
We covered this company, a supplier of tapes for industry and healthcare, in Follow the Money on Wednesday but, as a conventional Aim-listed company (that is, one involved in trading as opposed to investment or property), it should qualify for the IHT exemption and can therefore be included in our Inheritance Tax Portfolio.
Questor says: buy
Ticker: SCPA
Share price at close: 471.4p