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PERSONAL, UNDILUTED VIEWS FROM TOM WINNIFRITH

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Guest Post: Aubrey Brocklebank: Dignity: Another Nail in the Coffin

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- Tom Winnifrith

God I am getting old. I knew Aubrey Brocklebank’s dad about twenty years ago. And now I find myself talking to the son. It is rather like hearing the name Potts at West Ham. I think gosh Stevie must be getting on a bit and then realise it is his son Danny on the pitch. Anyhow AB is a fund manager now doing a spot of writing and being a switched on fellow I am happy to help promote his ideas. As it happens his second article as a journalist is once again on Dignity (DTY) which I wrote about the other day as well. We seem to agree. ‘Natch. Over to Aubrey…

Buy and build strategies can, in principle, be a good idea. They can, theoretically deliver shareholder value. The simple idea behind them is that the acquiring company buys a business that trades on a multiple of 5 and by being able to trade on a multiple of 10 has effectively doubled its value; albeit a paper gain only.

Dignity has recently announced the acquisition of Yew Holdings (or at least part of their estate, subject to OFT clearance). In order to fund said acquisition Dignity have raised money at 1060p. At that price Dignity trades at historic EV/Sales of 4.3 and rolling EV/Sales of 3.99 – They have paid an EV/Sales of 5.66 for Yew Holdings.

Making a few assumptions about the business (26% tax rate, depreciation at 3% of sales) we see a net profit of £4m for Yew. Factoring in the Cap Ex, and brokers fees, Dignity paid a total of £60m for this business. This is a Price Earnings of 17.15! When the rolling PE of Dignity was 13.51 (at time of acquisition) it must be questioned how much value this adds to the company? A PE of that level can only be justified when there are significant growth opportunities.

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