Member Info for SlickMongoose

The worst mistake i've made in investing is worrying about valuation with regards to a great company.

This is the best company on the UK stock market. They're not showing any signs of slowing down here. Revenue up 15%. Operating profit up 61%. Royalty income up 50%. Fantastic moat, huge ROCE, rapid growth. Worrying about p/e ratios for such a company is focusing on the wrong thing in my opinion.

Have either of you looked at the rest of the stock market today? It's just a general sell off.

Results look solid to me, not sure what the drop is about.

I think that compared to other consumer brands companies PFD is undervalued, the main issues are getting rid of the pension funds, which we're all hoping will be sorted out soon, and the Hovis sale allowing a significant reduction in debt. Once debt is down to a sensible level they can refinance to a cheaper rate. I think once those thing have happened they can start paying a dividend, and the share price could easily be double the current price, but it might take a year or two.

And of course the longer the virus is around, the more people will be cooking at home and the better PFD will do. I'm interested to know how they did in August because the "eat out to help out" scheme will have taken some of their sales, but against that there's a lot fewer people travelling abroad this year.

No, they cancelled the shares. That's what buybacks are for - the company buys the shares then cancels them, reducing the number of shares in issue.

Probably the first pic that came up on a google image search.

There's no such thing as bad publicity.

Assets of £590bn, market cap £13bn. Tell me what % change in asset values would cover the entire market cap.

eccles, you're right that the share price will be driven by the market's view of future returns, the problem is those returns are heavily dependent on investment yields. Like I said earlier I am invested here because I like the company and its prospects. I was attempting to highlight just how vast the company's holdings of bonds and other assets are compared to their market cap.

Thronegames, you are right that as the yield drops the value of bonds goes up. The problem is that large insurance companies like LGEN can't just sell all their bonds and buy equities instead because it's too risky, they have to hold a large % of fixed income bonds. So they're constantly buying bonds and it's much more beneficial for them to have bonds be cheaper and higher yield.

LGEN is an incredibly complex business. I'm not sure anyone on the planet fully understands it.

Also worth reading https://www.ft.com/content/b2fb2326-6d13-11ea-89df-41bea055720b although it's a few months old.

https://fred.stlouisfed.org/series/DGS10

I'm not trying to put people off, i'm invested here. But people shouldn't invest without understanding the link between bond yields and the life insurance returns.

When a person goes to L&G and asks for life insurance, L&G will assess the likelyhood of a payout to this person, and how high that payout might be. Because they have huge amounts of data on mortality trends and risk factors, they can make a pretty good assessment on average across the population.

They will then work out how much they need to charge in order to make a profit. They're taking in money up front for the insurance policy, often decades before any payout is needed so they don't just stuff it under the mattress, they invest it. They will take into account an expected investment return when calculating the premium.

A large part of this investment is in government bonds, although some is in stocks, some in property, some in corporate bonds etc. The higher bond yields are, the higher the expected rate of return, and the lower bond yields are, the lower the expected return.

This logic also applies to the annuity sales and pension risk transfers. The company takes in assets up front in exchange for paying out for future liabilities.

Another thing you should understand is the leverage. The company's market cap is currently £13.3bn. Now look at the balance sheet (in part 2 of the interim report). They have assets of £590bn, and liabilities of £580bn. The company has many, many times its market cap in assets and liabilities! It only takes a small change in the value of the assets to cause a significant change in the companies stock price.

MattTheBrave, they don't sell the bonds, they hold them to maturity then buy new ones. The problem is the new ones will yield less.

You can map the LGEN share price against the US 10-y treasury rate, the graphs look very similar. Not exactly the same because there's an underlying business here as well, but they track pretty closely.

eccles, you want part 2 or the announcement, search for "3.05 Consolidated Statement of Cash Flows"

Mattthebrave, LGEN is highly sensitive to government bond yields. The lower the yields, the lower the expected return on investments made with life insurance premiums.

"Profit before tax was predominantly impacted by the formulaic change in LGI's discount rates. LGI's negative investment variance of £483m was primarily driven by falls in UK and US government bond yields which have resulted in a reduction in the discount rate used to calculate the reserves"

The problem if the company is dominated by its pension funds. Management is very sensibly trying to get rid of them to a specialist provider but until they're gone movements in bond markets will affect the company's share price in the short term as much as its trading performance.

Yep, best company on the FTSE.

Fantastic update I thought, given the circumstances.

Games Workshop actually makes money. Lots of it. Rolls Royce doesn't.

In a couple of years GAW will have a higher market cap IMO.

Yes and in every case each trade is both a buy and a sell. The idea of labelling trades as one or the other is fairly silly in a highly liquid stock like LGEN. It makes a little more sense for small illiquid companies with a large spread, where you can easily see which side of the spread a trade sits on. But even then i'm not sure there's any point trying to use the information for trading, people like come up with wacky conspiracies involving "the MMs" but it's mostly nonsense.

Honestly the update didn't seem that bad. Yes it was strangely worded and strangely timed, and they need to work on their investor relations, but within all that they did say that performance remains "on-track" despite the various challenges. It's not like we're trading at a particularly aggressive multiple.

The strategy of selling shares to fund retirement works best with funds (particularly index funds). Look up the 4% rule.

If you're holding individual shares it requires a lot more thought, and carries more risk. Of course taking dividends carries risk as well, as we're seeing at the moment.