The AIM – Alternative Investment Market – is littered with a lot of bad businesses. Case in point my investment in Accrol. This is due to the rules and regulations being less stringent on the AIM than on the main market thus allowing directors and other insiders to get up to financial mischief. But that doesn’t mean all AIM shares are bad. In fact, there are some really high quality names on the AIM. Fevrtree, Accesso Technologies, Burford Financial and RWS are just a few. Another such company is Nichols Plc.
Nichols Plc is the company that owns the Vimto, Sunkist and Feel Good drinks brands. The company is in the beverage sector which I highly favour due to the high returns on capital enjoyed by the incumbents. I already own shares in UK Listed AG Barr and Britvic and both these drinks companies have done wonderfully well for me compounding at over 12% pa. I also own shares in Coca Cola and PepsiCo further illustrating how much I like this sector. I used to own Dr Pepper Snapple in my Pension before it got taken over for a juicy premium. I currently have my eye on Fever-Tree but will let the share price drift towards more reasonable valuation levels before I initiate a purchase.
All this is to say that industry matters when it comes to investing. There are some industries that compound wealth year after year whilst others are a serial destroyer of wealth. I will be doing a post on good industries VS bad industries so keep an eye out for this soon.
Within the beverage sector, they are two differentiators as well. Companies that manufacture their own drinks. And companies which outsource the manufacturing process. History has shown that companies that outsource their manufacturing process have done better due to having low capital requirements thus boosting their returns on invested capital.
Fevertree has been a big beneficiary of this outsourced model. They simply want to own and market the brand and want others to take care of the manufacturing process. Coca Cola too is moving towards outsourcing as they want to simply own the brand.
Nichols, just like Fevertree and Coca Cola, is a capital light business. This means it doesn’t need much capital expenditures to grow. All profits it makes simply flows to the bottom line. Most companies with high CAPEX have to constantly reinvest in the business. This reinvestment expenditure does not show up in the profit and loss account and thus earnings are illusionary. That is why I constantly show the importance of free cash flow as this is what is available at the end of the day to pay out dividends.
Nichols, just like Fevertree, is a low capital business. Most of the profits flow to the bottom line. That is why you will see profits are very similar to cash flow in these companies. This is a very attractive trait for an investor.
Looking at the return on capital employed, Nichols Plc sports a very health figure of 29%. The returns on equity and assets are equally as impressive at 25% and 19% respectively. These figures indicate the signs of a high quality business.
The top and bottom lines of the business are healthy as well. The company has grown revenues from £110 million in 2013 to £133 million last year. Operating income has also followed an upward trend shooting from £20 million to £29 million over the stated time period. And as the profits move higher, so does the dividend moving from £0.18 to £0.30 between 2013 and 2017.
Looking at the balance sheet, it seems bullet proof with net cash on its books. It’s very rare to find a company with no debt in this low interest world so management of Nichols needs to be commended for being astute with their capital allocation policy and not chasing after growth by overpaying.
Furthermore, the company has high levels of insider ownership. When insiders own a massive chunk of a company, they have ample reason to plan for the long haul and create value for their investors. That’s obviously good for every shareholder, big and small.
My Purchase Of Nichols Plc
The past two weeks have seen chaos in the AIM markets. Many high flyers and those on high valuations have taken a hammering. This has brought valuations down but are still too high from my perspective for many companies. Nichols is the one quality company that appears to the the exception.
At my purchase price of £12.67, Nichols is trading at a P/E of just under 20. This is a fair price to pay for a wonderful company.
I bought 75 shares of Nichols at the above stated price. With each share paying out £0.347 in dividend income, I am expected to receive £26 in annual dividends from Nichols. And Nichols has been increasing this amount at a double digit rate so I would expect this number to substantially increase over the coming years. Investing in great companies is a wonderful thing.