“It was luxuries like air conditioning that brought down the Roman Empire. With air conditioning their windows were shut, they couldn’t hear the barbarians coming.”
Garrison Keillor

“Look to the past and remember no empire rises that sooner or later won’t fall.”
Al Stewart

British Empire Investment Trust has been added to my portfolio because it is uniquely positioned amongst funds at the crossroads of a number of themes that appeal to me.

-          Discount to NAV

-          Owner Operated Businesses

-          Strong Track Record

-          European Equities

-          No Sell-side coverage/ Institutional Sponsorship

-          Concentrated Portfolio

The British Empire Investment Trust managers believe that their edge is maintained by keeping a very small investable universe relative to most of their “Global” investing peers. They focus on conglomerates, investment holding companies, asset backed investments or investment trusts trading at a discount to their own NAV. They think that this area of the market is particularly susceptible to inefficiencies and mispricing because their universe doesn’t possess any “natural owners” in the institutional world and often the stocks are quite hard to categorize or pigeonhole into sectors.

Price – 413p

NAV – 467p

Dividend Yield – 2%

Discount to NAV

The trust currently trades on an 11.5% discount to NAV which is as wide as it has been since inception.  Because of the nature of many of the conglomerate or investment holding companies, BTEM offers what can be considered a “double discount”. For example, Jardine Strategic is an Asian family holding company of which BTEM is a long-term owner, they believe that this stock trades at a 40% discount to its own NAV; so purchasing this via BTEM allows you to get an 11.5% discount on a portfolio containing Jardine Strategic on a 40% discount. Getting a dollar for sixty cents is good but buying it for 54 cents is better.

Asset Value Investors calculate a “look-through” NAV on their portfolio which they currently estimate at around 40% which is the highest level since their calculations began and has widened from 23% in 2010 and 39% as of the Annual Report in Nov 2011. They calculate this “look-through” NAV by using either tangible NAV, peer comparison or sum of the parts analysis, it is not exact but they have proven prescient enough in their calculation of business or asset values in the past. At the widest discount in their 26 year history, I believe that we can take comfort in the level of undervaluation. To quote Strone Macpherson in the Chairman’s Statement this year “These underlying discounts have historically proved to be an excellent source of good returns for shareholders as markets stabilise and start to improve.”

Strong Track Record

The track record of the BTEM managers Asset Value Investors (AVI) is a very strong one indeed as demonstrated below. AVI was founded in 1985 to manage just £6m and the majority of the increase in funds under management up to today’s £1.2bn (of which BTEM is £800m) has been the result of internally generated compound growth rather than gathering new assets. In 2003 the company was involved in a management buyout from owners Aberdeen Asset Management meaning it is now wholly owned by the small team of investors who run BTEM ensuring their skin is well and truly in the game. I found it quite hard to get data on insider ownership but what I found amounted to £16m worth of shares across the staff and the board. This seems plausible however the transaction data I found shows lead manager John Pennink buying £1.2m of shares in January 2012. This is listed as his only holdings in the trust which I just don’t believe given how long he has been managing it for and the track record. I’m sure he owns substantially more but cannot verify it.

I believe that BTEM will prove to be an excellent steward of my capital over the course of these lean years. I will quote from John Pennink’s 2010 Annual Report.

“What concerns us is that the challenges to economic growth are in many cases structural issues that require difficult and painful reform and are not going to be solved by QE and low interest rates. Central Bank reflationary policies may turn out to have harmful side effects that outweigh their benefits. The beneficiaries of low interest rates and QE are banks and other financial institutions but the average person is hurt by low returns on savings, a stagnant job market and higher inflation. It is hard to build sustainable prosperity on this basis.

As long as reflationary policies are seen to be working, however, the equity markets may continue to rise but we foresee periodic sharp corrections as market participants realise that developed economies remain stubbornly weak.

Overall, the equity markets may not make much progress. In this sort of environment, the equities that we find appealing are those with strong balance sheets, high dividend yields and high discounts to NAV. It will pay to find those companies that have their own catalysts in terms of restructuring potential and unrecognised value. We are trying to find a mix of assets to allow us to ride out the as yet uncertain effects of this experiment with monetary easing.”

Owner Operated Businesses

Investing in owner operated businesses is a favourite tactic of mine because you are more likely to find management act in a shareholder friendly manner if they are major shareholders themselves. Family controlled holding companies like Groupe Bruxelles Lambert (GBL) or Jardine Matheson have numerous advantages for long term value investors.

-   Diversification across various industries

-  Focus is truly long term, these businesses are often dynasties with a multi-generational management.

-   Exposure to assets which are unlisted/unavailable to normal investors.

-  They are often illiquid and institutional investors seem unwilling to do the analysis on them.

These stocks are currently despised by the market, hence the massive discount to NAV but this has not always been the case. In 2006/7 these stocks were very much “in play” with hedge fund arbitrage and the discounts narrowed dramatically. There is no sector wide catalyst but eventually the discounts tend to narrow as a result of investor attention or corporate actions unlocking value. As you would expect, valuations dictate the level of exposure the portfolio has to these stocks, in 2006 after the discounts had narrowed substantially only 25% of the portfolio was in these companies as opposed to 55% today. The allocation reflects the opportunity set.

European Equities

I laid out the case for turning relatively bullish on European Equities in a previous post here…

http://kelpie-capital.com/2011/12/12/europe-be-greedy-when-others-are-fearful/

Ultimately, much of Europe is now at a level of CAPE valuation where returns are very good almost regardless of what is going on in the macro environment. The holding companies that BTEM owns are often European (Vivendi, Investor AB, Orkla, Aker, Deutsche Wohnen) and some contain relatively cheap European equities with the additional conglomerate discount layered on top.

About 41% of the portfolio is in Continental Europe and 4 of the Top 5 holdings are European (totalling 27%).

No Sell-side coverage/Institutional Sponsorship

A cynic would say that research analysts from sell side firms are only assigned to cover stocks and sectors where the investment bank or brokerage divisions can leverage their work to make good commissions or fees.

Investment Bankers must be sick of these conglomerates and family owned holding companies, they aren’t particularly acquisitive, they don’t take on much leverage because they don’t want to jeopardise their reputation or their hard-earned wealth.

Brokers can’t make much money from them either, the volume in these stocks is quite thin and the average holding period is a lot longer than your average stock so they don’t get the turn or churn in clients portfolios either. It’s difficult to justify a quick buy and sell of a stock like Jardine Matheson or Jardine Strategic, the owners of which can trace their involvement in the company back to 1832. Furthermore, the controlling Keswick family have had five generations of the family in the business – these companies are about much more than a stock price, they are a family tree, an inheritance and they are legacy.

Because of this awkward reality, a browse through most sell side research databases would have you believe that these companies do not exist or an in some way inferior, the lazy “conglomerate discount” tag being used to keep price targets unnecessarily low. This is the reason why the investment holdings companies and conglomerates are mispriced.

A second angle to this institutional disinterest lies on the “buy-side” and explains why I think Investment Trusts are attractive going forward. The Wealth Management and Asset Management industries are undergoing great change. Wealth Managers and private client stockbrokers have traditionally been the holders of investment trusts but “fashion”, size/liquidity constraints and desire to minimize benchmark risk have meant that there is a wholesale move across the industry out of “old fashioned” investment trusts and into the newer style of unit trusts or OEICs which are open ended and do not have premium/discount issues. They are also attracted to the hidden fees/remittances available through OEICs rather than investment trusts.

So I think that means we have a structural, but not particularly time pressured, non-economic seller slowly liquidating their shares in Investment Trusts. Personally, I think BTEM is particularly likely to be sold by these large firms because it is particularly hard to put in a “style box” – what is it? Global Growth? Property? Equity Income? Alternatives?  It’s nothing in particular and for some reason, these institutions seem to hate that!

Concentrated Portfolio

Description of the Top 5 Holdings

Vivendi – A French telecommunications and media conglomerate that trades on a discount of over 40% to the sum of its parts. Vivendi owns stakes in companies operating in the music, games, television, films and telecoms industries.

Orkla – A Norwegian conglomerate operating in the branded consumer goods, aluminium and energy sectors. A streamlining of the business may narrow the discount to NAV which currently stands at 35%. Orkla could be the Norwegian Unilever.

Jardine Strategic – Controlled by Jardine Matheson, an investment vehicle for the Keswick family, trades on a 38% discount to an attractive collection of Asian listed companies including Hong Kong Land, Dairy Farm and Mandarin Oriental.

Investor AB – A Swedish industrial holding company that owns significant shareholdings in major public multinational companies as well as private companies in the healthcare sector. Investor AB takes an active owners ship role in many of the companies and currently trades on a 37% discount to estimated NAV.

Aker ASA – A Norwegian conglomerate whose interests range from oil and gas exploration to seafood processing. The company currently trades on a 32% discount to estimated NAV.

Overview

SanDisk was founded in 1988 by Dr Eli Harari who remained Chairman and CEO until the end of 2010. The company is a world class, pure play, technological innovator in NAND flash memory storage which is used in a wide range of devices for which traditional spinning disk storage isn’t appropriate such as digital cameras, USB drives, tablets, smartphones and certain high end laptops. The company also receives royalty streams from various competitors such as Samsung for the use of their technology.

I first came across SanDisk when researching the industry of a previous holding Western Digital, but I didn’t dig too deeply until I saw it mentioned in the T2 Partners year end letter as one of their top 10 holdings. Of course the reason that Western Digital was so cheap was because the HDD business is in secular decline, mostly because of the increasing capacity and affordability of the products produced by SanDisk and its peers.

SanDisk stock presents an excellent buying opportunity because the current price meaningfully underestimates the future cash flow potential of a company that is intertwined as a vital facilitator in the growth industry of smartphones, tablets and increased data storage globally in enterprise and in our private lives. I view SanDisk as a high quality Growth at a Reasonable Price idea. It is also a “Magic Formula Stock” which means that it is attractive on a purely quantitative basis. I can see the stock trading well into the $60-70 range over the next year or two offering 50-70% upside.

You probably recognise the name from memory cards for your digital camera or USB stick but that was the SanDisk of 2008, the rest of the world has begun to catch up to their technology which is increasingly embedded in all high end computer devices.

Product Descriptions

Imagine 128GB of memory inhabiting something smaller than a penny. SanDisk has just made it a reality, in its relentless, market leading pursuit of better, smaller, faster flash memory storage solutions.

SanDisk specialises in NAND Memory which is a type of non-volatile storage technology that does not require power to retain data. NAND flash has found a market in devices to which large files are frequently uploaded and replaced. Mp3 players, digital cameras and USB drives use NAND flash. Flash memory is much more expensive than traditional HDD memory, but it is more compact, durable, offers faster access and uses less power, so its usage has grown dramatically with the proliferation of mobile computing and the increasing sophistication of peripheral electronic gadgets. A consensus is emerging that flash drives will be used for requirements of speed and power efficiency and older HDD’s will be used for needs of capacity. Online transactional processes and high frequency trading are two good real world examples where SSD has a functional advantage worth paying for.

To quote Whitney Tilson in T2 Partners year end letter…

“Historically, the flash memory business has been commodity-like, with chronic excess capacity and rapidly declining prices. Due to industry consolidation and explosive growth in end demand, however, we think SanDisk is on the verge of very strong secular growth, with improving margins, which should lead to explosive profit growth and a meaningful revaluation of the stock. The best stocks are ones that combine high earnings growth and an expanding multiple on those earnings, and we think SanDisk is poised for both.”

SanDisk is an industry leader and has two very important strengths that should lead it to sustained success: its distribution channels and its low cost leadership. First, it has a strong global reach with 57 percent of its sales being international and has at least a 28 percent market share in all parts of the world including a 34 percent market share in the United States and a 32 percent market share in Europe. Second, the company has a lot of relationships with consumer hardware companies including Apple, Samsung, HP, Dell, Nokia, Motorola, and HTC.

When these companies’ products are bought, they come embedded with a SanDisk storage device, so consumers become familiar with the SanDisk brand and are more likely to use the SanDisk memory devices. Third, the company’s products have a very strong retail presence. SanDisk reports that its products are available at over 250,000 stores worldwide and are available at 19 of the top 20 consumer electronics retailers in the United States.

SanDisk is able to use its high cash flow and position at the front of the market to fund research to cut costs and stay ahead of its competitors. This way, it can outprice them, maintain and expand on its market share, and increase revenues and profits.

Industry Summary

The NAND market is mature and oligopolistic with a few major players dominating supply (Samsung, SanDisk, Micron and Hynix). Furthermore Apple currently constitutes around 30% of global demand for NAND storage and has the influence to move prices based on their new product releases.

The NAND market has doubled in size in the past 5 years, going from $12bn in 2006 to $25bn in 2011. The multi-year growth story looks likely to continue due to growing demand from smartphones, tablets, notebooks etc.

To emphasize the rate of change and growth we are seeing here, we can pretty much say that tablets didn’t exist 3 years ago and now they are an integral part of many lives.

A slide below with a selection of consumer end products that SanDisk memory is embedded within.

SanDisk is probably the industry leader for innovation and technology as evidenced by their being the first to produce sub 20nm scale of miniaturization, something which was previously thought impossible. The jargon at this point begins to bamboozle me but I read that they were the first to design, patent and sell a “4 bit per cell architecture at 43nm node” and that a greater proportion of their production and sales are done at the cutting edge of technology than their peers. This is demonstrated in the use of their “X3 Technology” which has a 15-20% cost advantage over what the competitors are using and is in around 50% of SNDK production.

One of the biggest concerns to pricing power in the industry is that supply outstrips demand, due to a downturn or exuberant expansion of capacity from suppliers. Pricing is volatile in these markets and this was one of the problems faced by HDD producers leading to volatile quarterly earnings. The participants in the NAND market appear to be behaving rationally and all are talking about cautious expansion of capacity in line with demand and no-one seems willing to slash prices to take market share. On top of this, only SanDisk (35%) and Samsung (40%) have sufficient scale to materially affect the capacity growth of the total industry. SanDisk has also indicated they will use “non-captive” supply which essentially means outsourcing production as that retains flexibility, enhances cash flow and protects them from building out excess capacity in house. This is prudent although it is not profit maximising, non-captive supply has margins of around 10% relative to 40% for their own supply.

In summary, it seems that the participants are all acting rationally and although supply growth will be healthy as manufacturers expand their facilities, it will be not be sufficient (on current ramp up forecasts) to remove the tightness in the market due to the superior demand growth. This means that margins and profitability are likely to protected and the curse of excess capacity is less likely to plague the industry.

Enterprise Market

SanDisk has taken steps to move away from the retail/consumer market which it traditionally served with its USB sticks and memory cards towards servicing businesses, a market which is currently growing faster. With their May 2011 acquisition of Pliant Technology for $318m, SanDisk is ready to exploit the full range of possibilities in the market by producing high performance solid state drives (SSDs) to transform cloud and data center applications by reducing physical office space requirements, purchase cost and power usage.

Within the mass storage market there is increasing focus on “speed of access” to data rather than purely cost per gigabyte, this switch obviously favours NAND over traditional HDD. This adds just another element to the potential growth story in the flash storage market.

Toshiba JV in Japan

SanDisk does not directly produce their flash drives, they do so via a JV with Toshiba in Japan. The benefit of this is cost sharing and a reduction in the capital intensity of SanDisk’s business. These high volume manufacturing facilities allow the company to ship more than two million flash products every day, and have contributed to a 50,000-fold reduction in the cost of flash memory over the last 20 years.

This is listed as an asset on the balance sheet marked at a value of $2.2bn however in reality it produces no profits to SNDK and costs them money each year as it is essentially their factory. The properties and capacity is clearly worth a substantial sum if they were to sell their share back to Toshiba however.

Royalties

SanDisk has a portfolio of patents and is not shy about litigating to protect them. In addition to its NAND products SanDisk benefits from IP royalties it receives to the tune of around $350m per year from licensees like Samsung and Hynix for using their patented technologies. Because of the nature of these revenues they cost SanDisk nothing and come in as near pure profit.  The fact they receive these royalties is testament to their technology leadership within the industry.

Balance Sheet

SanDisk has a rock solid balance sheet with $5.5bn of cash, short term investments and marketable securities against long term debt of $1.6bn equating to a net position of $3.9bn, 39% of the market capitalization or $16 per share. SanDisk has the strongest balance sheet amongst the 20 largest semiconductor companies according to Nomura.

In October 2011 SNDK announced a buyback programme totalling $500m over the next 5 years. They have previously completed a 2 year $300m program over just 12 months in 2006 so I am hopeful they will be accelerating the purchases at current prices. In Q3 2011 they also retired $222m worth of convertible debt, further strengthening the balance sheet.

The Apple Opportunity?

Apple is the most important individual customer to the entire NAND market accounting for 30% of global demand and around 10% of SNDK revenue (does the market even know this?). Apple is popularizing the benefits of flash memory in its many consumer products however it is possible that Intel will advance the cause further by adopting them in their ultrabook for the consumer and enterprise spaces. Is this the first sign of a move away from HDD for even laptops? Once you have experienced the immediacy of flash memory it is quite evident that HDD is an inferior product.

Apple has an increasingly litigious relationship with Samsung which has the potential to put their major strategic NAND relationship in jeopardy, throwing up an opportunity to steal the market’s biggest customer.  It could be argued that only the SanDisk/Toshiba JV has the scale and expertise to step up and take Samsung’s place as supplier number one to Apple – Micron and Hynix are just too subscale. News on this could be a major catalyst.

Certain people have even suggested that it makes sense for Apple to just buy SanDisk to secure supply and use some of its massive cash pile. Certainly the SanDisk earnings would be awarded a much higher multiple under the Apple banner. Seems unlikely but something to think about.

The Cloud – Opportunity or Threat?

In 1999, the idea of a new paradigm pushed the multiple on anything related to the computer industry or the internet to dizzying highs. Since then it has been a relentless grind lower and it’s simple to explain why; the industry had no revolutionary themes for investors. Tech investors are by their very nature growth orientated innovators, they don’t like the incumbents, they like the disruptors. As Ben Rogoff of Polar Capital’s Technology Fund joked to me once regarding my value orientation “Don’t bring your sh*t to MY party!” Interestingly, he observed that historically tech investors have seldom made money after the multiple on stocks in the sector has contracted, the money is made when these growth stocks go from expensive to extremely expensive during the adoption phase. Now, the industry and investors have found a new revolutionary theme: cloud computing. The “marquee” cloud name is Salesforce.com and it trades on something like 600x earnings.

“Cloud Computing” is defined as “The practice of using a network of remote servers hosted on the Internet to store, manage, and process data, rather than a local server.” The threat is that we no longer need hundreds of gigabytes of storage in every home as we download everything we need from a central library in the cloud. If network speeds are high enough, why would anyone need local storage? This would mean the total storage required would vastly reduce and the storage market NAND and HDD would shrink dramatically. This is the reason that SanDisk trades like a stock in run-off mode.

YouTube quoted their database at 45 Terabytes in 2006 and by 2011 they were saying 9000 Terabytes. This growth seems likely to remain exponential for the foreseeable future as more leisure time is spent online. The one thing we can all probably agree on is that “content” will continue to be produced, arguably at an increasing rate due to the democratization of dissemination that home studios, webcams, YouTube, blogs etc have all brought about. Furthermore the quality and size of the content is increasing, whereas previously a movie video file was 700MB now an HD movie can consume 4 or 5 gigabytes, a six-fold increase. Content is cumulative too, books written 300 years ago are getting digitized and adding to a global library alongside blog posts and video diaries created today. Content production of any sort requires storage, and whether it is stored on the cloud, on an external hard drive, on a tablet, on a smartphone or all of the above – it WILL be stored somewhere.

We should also remember that there are major security issues involved in cloud storage. How safe really is it? Can it be relied upon 24/7, 365 days a year as most businesses will require? What you might find is that the cloud is viewed as the great big back up drive in the sky and all data is still duplicated on the ground for daily and immediate use/security – good news for SanDisk and their total addressable market. I think it will take years before we all truly trust “the cloud” to be our one and only source for data.

Remember, it was once thought that the development of the PC would lead to a “paperless office”, clearly reality has borne out something quite different! The threat of “the cloud” might be similar.

Sensitivity to Yen Weakness

For the past 5 years SanDisk has been suffering due to relentless Yen strength which has consistently surprised macro commentators. This Yen strength against the Dollar acts as a major headwind to SanDisk earnings as their wafer purchases from the JV with Toshiba which are denominated in Yen. It has been estimated by analysts, and commented on by the CFO, that roughly 1% depreciation in the Yen drives a 1% increase in EPS. SanDisks investments into the JV are also denominated in Yen and therefore their future funding exposure will cost less in a weak JPY environment. Given the overvaluation of the Yen and the arguably extreme fiscal/demographic issues the country faces I would expect material Yen weakness at some point over the next few years. To quote John Mauldin, “Japan is a bug in search of a windshield”. At some point, “speculators” and “bond vigilantes” will turn from the Euro crisis and they are far more likely to look East than to look to the US.

Liquidation Value?

SanDisk management have suggested that they believe the stock is currently trading below liquidation value – this is why they have in place an aggressive buyback programme to reduce the share count and maximise shareholder value. Their breakdown of value is below with one adjustment I made to make it more conservative; they used just Debt of $1.6bn rather than Total Liabilities which I swapped in. Management calculations result in a liquidation value of $42 per share.

JV Wafer Capacity at 50% of value   – $2.9bn

Accounts Receivable at 50% of value  – $0.119bn

Inventory at 50% of value  – $0.24bn

PPE at 50% of value  – $0.135bn

Cash  – $5.5bn

Royalty Value ($350m x 10 multiple) – $3.5bn

Total Liabilities  – ($3.2bn)

Total   = $9.194bn

Shares Outstanding = 243 million

Liquidation Value per Share = $37.83

Valuation

Given the Margin of Safety demonstrated above in the Liquidation Scenario we can approach looking at a target price with some conservatism. In general, I think if you can’t find that a company is cheap on the back of an envelope it’s not worth doing more work on it. If you do enough Gerrymandering and “assuming” you can make anything look cheap. You can also lose a lot of money.

Analyst estimates for 2013 FCF per share is $7.70 which we can reduce by 20% to account for analyst optimism taking it to $6.16.

Taking the current share price of $42.

$42/$6.16 = 6.8x 2013 FCF or a Free Cash Flow yield of 14.7% per annum.

Let’s also assume that the cash and marketable investments stays flat at $16 per share which is again, probably conservative.  If we net off this from the share price then we are looking at $26/$6.16 = 4.2x 2013 FCF or an ex-cash Free Cash Flow yield of 23.8% per annum.

If we use the analyst estimate numbers without reducing them for their optimistic bias then we are looking at an ex cash 2013FCF multiple of just 3.4x!

Based on a reasonable multiple of 9x a conservative FCF estimate plus the cash & investments gets you to a share price of $71.44 or a 70% premium to today.

There may even be upside to these numbers based on the effective deployment of buybacks at low prices, a substantial weakening in the Yen and the potential for the acceleration in the rate of change in technological adoption by enterprises and consumers.

I see a lot of similarities between SanDisk and my investment in Western Digital last year. The industry is generally seen as unattractive due to the requirements of constant innovation to keep pricing stable, cyclical demand, threats of “the cloud”, the commodity nature of the product etc. I would make two differentiating points – SNDK operates in a much faster growing industry than WDC or Seagate, they are in a sense the disruptors and furthermore, at the price WDC was offered at last year it was a good investment regardless of growth, I think SNDK is priced just as cheaply today despite a much rosier outlook.

Risks

The bear argument on SanDisk is that the company’s margins will erode as current and new competitors offer cheaper versions of similar products that SNDK provides. I would address these concerns twofold

1)        SanDisk has the scale and technological expertise to make it the low cost producer in the industry, it would be difficult for someone to maintain profitability whilst trying to steal share via price. For example, in their retail business SanDisk has a 15% price premium to competitors as customers are willing to pay for the brand.

2)        The market for flash memory cards and SSD’s will continue to grow at a fairly spectacular rate and growth can hide a multitude of sins.

SanDisk would have to lose a lot of pricing power and market share to experience large declines in their profitability.

Ownership

It is comforting to see that SanDisk is a stock where a number of high quality hedge funds have a stake. This is re-assuring because it shows that their analysts (whom I assume are of a pretty high quality given the funds historical performance records) are obviously similarly attracted to SanDisks GARP qualities. Viking Global own $160m of stock, Third Point own $35m of stock (down from $70m in 2011), Balyasny Asset Management own $10m worth and finally T2 Partners own $8m, which I believe is around a 4% position for them. Finally, Joel Greenblatt also owns the stock for his Magic Formula fund.

Insiders also own a substantial amount of the stock too, founder Dr Eli Harari owns $162m worth of stock which he added $3m to in February 2012. CEO Sanjay Mehrota owns $1.8m worth of shares. Catherine Lego, a director, owns $12m and the Chairman, Michael Marks owns $2m.

Price – $0.60

NAV – $1.15

Discount to NAV- 48%

Shareholder Equity – $1.31

Discount to Shareholder Equity – 54%

Market Cap – $51.8m

Shares Outstanding – 86.2m

Description

Aberdeen seeks to acquire equity participation in pre-IPO and early stage public resource companies with undeveloped or undervalued high-quality resources. Aberdeen focuses on companies that: (i) are in need of managerial, technical and financial resources to realize their full potential; (ii) are undervalued in foreign capital markets; and, (iii) operate in jurisdictions with low to moderate local political risk.

Aberdeen is essentially a vehicle through which director Stan Bharti and CEO George Fauth invest in publicly traded and occasionally private resource companies. Both individuals are also involved in running the privately-owned Forbes & Manhattan (“F&M”) investment banking group which was founded by Mr Bharti. They leverage the existing infrastructure and expertise within F&M as needed in helping with the investment portfolio. That infrastructure includes the expertise of 25 geologists, 25 engineers, 6 lawyers, 30 bankers and capital market professionals and finally 15 administration and accounts staff.

Because of its focus on the “seed stage” Aberdeen provides something akin to “Venture Capital for mining companies.” Like a VC, it typically takes board seats and gets involved with management, corporate finance, marketing and infrastructure. It usually holds investments for 2-3 years. Since inception 4.5 years ago they have an IRR of 67% on their investments – does that sound like it deserves a discount to NAV?

• Aberdeen now trades at just less than half of its investment portfolio NAV of $1.15 as of 10/31/2011
• This NAV is liquid, tangible and easy to calculate: it is cash and listed equities although admittedly the equities are small caps and fairly thinly traded.
• This NAV is supplemented by additional valuable assets such as their 2 gold royalties in South Africa and some “performance shares” as explained below.

Stan Bharti, the CEO describes Aberdeen International as follows…..

“Many people on The Street, so to speak, and many funds in the financial sector find a lot of the juniors that Forbes invests in—or that I invest in personally—too small. Raising $5 million to $10 million isn’t enough for big funds to come in. So we created Aberdeen International Inc. (TSX.V:AAB), and raised $100 million or so in Aberdeen. The model for Aberdeen is that any time I invest in a junior company at the seed level, Aberdeen co-invests with me. This gives investors indirect exposure to all of Forbes companies.”

Portfolio

The portfolio of equities that Aberdeen owns is reasonably well diversified. Just less than half is Gold Mining equities. Near 2/3rds are public equities.

The Top 5 holdings:

1. Sulliden Gold (TSE: SUE). This is a gold & silver exploration company developing a mine in Peru which is expected to start production in 2013H2.  The stock is covered by seven analysts, all of whom recommend it as a buy, with an average PT of $3.42 vs. a current price of $1.50 per share.

2. Temujin Mining Corp is a private company for the moment and carried at cost. World class licenses covering two of the most exciting advanced projects on Oyu Tolgoi copper-gold belt in Mongolia

3.Crocodile Gold (TSE: CRK) acquires, explores and develops gold fields in the northern territories of Australia. This stock has been subject of a Value Investors Club write up and this is linked to in the appendix. That write up suggests it is worth  $1.15 relative to a current share price $0.56.

4. Forbes & Manhattan Coal Corp. (TSE: FMC) FMC is a coal miner, with mines in South Africa. The stock is covered by five analysts, all of whom recommend it as a buy, with an average PT of $4.08 vs. current price $1.85 per share.

5. Black Iron Inc. (TSE: BKI), which is developing an iron-ore mine in Ukraine, expected to start production in 2016. The stock is covered by seven analysts: 6 buys and 1 hold, with an average PT of CAD 1.56 vs. a current price of CAD 0.70.

The Top 5 holdings are 32% of the portfolio and there are 20 other holdings of smaller sizes. The Portfolio contains other names that I have seen other value investors involved with too in Dacha Strategic Metals (itself at a huge discount to NAV of rare earth metals) and Alderon Resources.

Stan Bharti describing Avion Gold Corp (TSE: AVR) to illustrate his point around what an investment of theirs should be like:

“We acquired the assets about three years ago for $20 million. It had a fully permitted plant, all the infrastructure at the site and three to four million ounces in gold resources. Then we hired President and CEO John Begeman, who was with Goldcorp Inc and with him and with a top-notch management team, we worked the asset. Today, the mine is producing almost 100,000 ounces per year, it has a market cap of close to $400 million and we think that in the next two or three years that this stock has the potential to double.”

Dealing with the Discount

Since inception Aberdeen’s portfolio included some of the biggest home runs in resource investing over the past few years: Black Iron, Sulliden and Avion Gold. F&M under Mr Bharti’s guidance seeded Desert Sun Mining and Consolidated Thomson leading to spectacular returns.

Aberdeen International management is well aware of the discount and are being proactive about it. Combined they own 15% of the shares outstanding. Aberdeen’s President and COO, David Stein, exercised 1.6m options in 2011Q2, more than doubling his stake to 2.8m shares, 3.2% of outstanding. In 2008-10, Aberdeen bought back 7-8m shares per year, contributing to shrinkage in shares outstanding from 103m in Jan 2008 to 87m in Jan 2011 (there were some options issued, too). This has declined further to 86.2m as of 1^st February.

Quoting from Alon Bochman @ SC Fundamental Value Fund….

“In 2011, they bought back just 2.5m shares. Aberdeen’s COO told me that they are buying back as many shares as TSX rules allow. TSX restricts buybacks to a certain number of shares per day, a certain percentage of the daily volume, etc. The purpose of the rules is to prevent a company from manipulating the price of its stock. The only exception is if Aberdeen is able to find a block to buy. In 2008-10, they were able to buy plenty of blocks from the same counterparties that bought CAD60m in Aberdeen stock in 2007 (see below). However, in 2011 that supply dried up and Aberdeen has been restricted to the open market. “If you find a block, please let us know,” the COO told me. “We would love to buy it.” Unable to buy back as much stock as it wished, Aberdeen recently declared its first ever dividend in March. The current yield is 3.4%.”

Given the level of the insider ownership and the vast wealth of Mr Bharti, there really is no reason for this company to trade on the public markets if it’s going to trade at such a substantial discount to intrinsic value or even NAV.

Why is it Cheap?

No sell-side research and this won’t ever change. Sell side coverage is very self serving, they only cover something when they might get something in return. Aberdeen will never provide IB business because they will always have F&M on hand to do all their corporate finance or capital markets work.

Aberdeen International is tiny, at only $50m it is way below the radar of almost every institution that runs more than say $100m maximum.

Aberdeen’s share price may have suffered because of a longwinded legal battle: As Alon Bochman describes it….“In 2006, Aberdeen loaned USD10m in seed capital to a South African mining company called Simmer and Jack Mines. The loan came with a 1% net smelter royalty (“NSR”) for the life of the mine. Through a complicated and bizarre set of events the loan became disputed with Simmers claiming no principal was due back. Aberdeen sued for about $13m. The suit was settled in October 2011, for $9m in cash plus the 1% NSR in perpetuity. The $9m in cash is spread into five payments ending February 2012.”

Royalty

The value of the royalty is tricky. Aberdeen have attempted to value it by capitalizing it with the following assumptions:

(1) Life of mines and gold production estimates as per Simmer and First Uranium

(2) $850 gold price through fiscal 2010, and $700 long term

(3) 5% discount rate.

This comes to a total net value of $33.3 million

Now looking at today’s gold price of around $1700 we can see that the value of this royalty is potentially much higher because it will make more of the mines economic and therefore extend the life of the mine and it will obviously increase cash flow.

It has been suggested that royalty companies like Royal Gold or Franco Nevada trade at 10-20x cash flow. The company presentation from Feb 2012 states that they expect to receive $2.2m net over the next 12 months. The resources behind the royalty are very large and therefore the royalty is expected to last for many years to come. It doesn’t seem unreasonable to value that at $22m or $0.25 per share.

Management has a stated desire to sell the royalty and I would imagine this will be around the lowest figure they have in mind. When/if they receive that cash it can be used for further investments or to buyback further stock at this discount.

Performance Shares

Aberdeen has the stated goal of eventually taking its private investments public as a way of monetizing their investment. Clearly the team has historically done this very well with Avion Gold and with F&M via Desert Sun Mining. Performance Shares are shares in now listed companies that accrue to Aberdeen based upon the achievement of certain pre-determined operational or investment milestones.

In his presentation given in June 2011 at the Richmond Club, David Stein suggested that they would achieve milestones both in the near term and hopefully over the next few years where they would receive extra shares for free, which would of course increase the NAV further.

Currently all performance shares that are not vested or earned are carried on the book at zero value so any upside regarding these would be free. Tim Eriksen of Eriksen Capital Management has suggested that the performance shares for just Aquia and Forbes & Manhattan Coal could be worth around $0.10 per share or just over $10m.

He quotes that in a conference call in early 2011 they mention performance shares (non-listed) which they own. They say these could deliver “huge upside over next 2 years”.

Junior Miners – Risky Ventures?

Absolutely! For many reasons but here is Mr Bharti on how these risks can be turned into great returns for investors…

“It’s different in the sense that we actively manage our assets (at Forbes & Manhattan/Aberdeen). There’s a lot of leverage in junior companies. If you can get in early on, with what we call the seed stock—$0.10, $0.20, $0.30 cents—you see these seed stocks grow. Five key elements drive junior companies. One is a good asset. Second is management. Third is the ability to raise capital. Fourth is telling the story, promoting the stock. Fifth is good capital structure.

The difficulty with a lot of the junior companies is that they just don’t have the management depth, the ability to raise capital to take these stocks to a level where they belong. We believe that by taking a junior company with a good asset—a good asset is key—and surrounding it with a lot of depth in terms of management, access to brainpower and capital, and working the asset over four to five years, the rewards can be phenomenal for our shareholders.

We bring all the companies that we invest in into our shop. We surround them with our own lawyers, accountants, IR people, investment bankers, analysts. We have all of them in-house so that a junior company can operate like a major without the overhead of a major.”

Because of the nature of the junior mining industry is of course quite possible that some of the Aberdeen Investments will go to zero, although you would hope their expertise will minimize the chances of this. On the other side, there is the chance for extremely good, but lumpy, returns.

Raising Money?

Management has indicated that they would see their ideal size as $250-500m and therefore they would like to increase their AUM. They have been quite specific that they have no desire to do this when the stock is trading at a discount as it would damage existing shareholders.

Appendix

http://www.aberdeeninternational.ca/Theme/Aberdeen/files/AAB%20Fact%20Sheet_v003_k0g4ak.pdf

http://www.aberdeeninternational.ca/Theme/Aberdeen/files/AAB%20Corporate%20Presesentation.pdf

http://video.cnbc.com/gallery/?video=3000045289    (5min interview with Bharti)

http://www.youtube.com/watch?v=2jkmlaMy4Qg   (40min interview with Bharti)

http://www.richmondclub.com/Luncheon%20Videos/AberdeenJune1511/index.html

(presentation made by President and COO David Stein)

http://www.uranium-stocks.net/home/2010/8/13/stan-bharti-a-few-of-his-favorites.html

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/60250  (write up on Crocodile Gold)

http://www.bharticharitablefoundation.com/index.html

http://www.northernlife.ca/news/localNews/2011/11/24-LU-donation-engineering-bharti-sudbury.aspx

It’s difficult to do a post on Tesco because what can I say that hasn’t already been said? Seems unlikely I can add any insight to the cumulative wisdom of the 41 sell side and umpteen buy-side analysts who cover the stock full time? On that basis this is much more qualitative than quantitative.

I think Tesco is a “time horizon arbitrage” long at this stage. The old adage is that profit warnings come in threes and so far we’ve only had one so there may be more bad news to come. Because of this, most of the sell side has taken a big step back and will avoid the stock for a few quarters until we have “more clarity” (and the price has moved one way or the other by 20%). For the buyside, there is a decent amount of risk in being seen to have “topped up” if it falls again because the knives are out for the company right now. For investors who can look out a year or two then I think this is an interesting opportunity which on that kind of horizon, with the help of the dividend, will handily beat the return on the FTSE 100 or on cash.

Description

Tesco PLC is an international retailer. The principal activity of the Company is retailing and associated activities in the United Kingdom, China, the Czech Republic, Hungary, the Republic of Ireland, India, Japan, Malaysia, Poland, Slovakia, South Korea, Thailand, Turkey and the United States. It is the market leader in the UK, Thailand and South Korea. The Company also provides retail banking and insurance services through its subsidiary Tesco Bank. Its online businesses include online grocery and Tesco Direct.

Market Cap (£)                  £26bn

Price                                  325p

P/E                                     10x

Dividend Yield                    4.5%

Dividend Cover                   2.2

Piotroski Score                    8

Investment Case Summary

Quality

Tesco is twice the size of its UK peers. Size and scale matter in this business, look at Wal-Mart’s operational performance. Tesco has a long history of operational excellence, is a market leader and has a strong, investment grade quality balance sheet with expansionary spending mostly behind them. Tesco is one of few businesses that benefits from a negative working capital cycle, they do not have to pay suppliers for goods until after they have already sold them and received payment from customers.

Value

The shares have been significantly de-rated thanks to the company’s first ever profit warning in January. The sell side has become increasingly focused on the metric of LFL sales in the UK business which has been struggling and will be difficult to turn around quickly as operating momentum in grocery retailing is not easily won.

Management have announced they will be rebasing UK profitability by investing in the “customer offer” – in price and in better staffing. They confess they have probably “over-earned” in the UK in the last few years by running the business too lean. An example of this is that the number of employees per 1,000 sq feet of store has declined from 74 to 61 since 2004.

The value opportunity arises because this myopic focus overlooks that there are other parts of the business at FCF inflection points or showing good value.  Operationally the business is struggling but we have to remember its history of delivery – for the 2000’s Tesco grew earnings at a compound 11.5% per annum. This isn’t going to happen going forward but this is at least a GDP + inflation growth business.

Additionally, it is interesting to note that three directors and Berkshire Hathaway have purchased shares since the price decline in mid January. Warren Buffett now owns 5% of the company.

Growth

Tesco has a long list of potentially value creating options at its fingertips. It has promised that Fresh & Easy will either start performing or close in the next year or so. At the moment this division loses around £100m a year. The closure of the Japanese business shows a more ruthless approach from management regarding non-core operations – they should either deliver or be closed from now on. The businesses in Korea and Thailand have now achieved critical mass, contributing 10% and 5% of profits respectively. Asian operations are expected to produce almost £700m of profits in 2012.

Tesco Direct provides the online shopping element of TSCO, groceries and non-food. Interestingly online sales are done at an 8% margin rather than a 6% margin for the business as a whole so this businesses growth should help going forward. However, the true look through margin differential may actually be less impressive given that many of the costs of the online business are borne by the normal stores where “pickers” collect the shopping before it is sent out to customers. This will likely be addressed overtime by moving online business to centralised “dark stores” and distribution centres where there are no customers only staff focused on fulfilling online orders. The benefit of this is that the stores can be built on much less expensive real estate and do not have to be quite as aesthetic.

Although non-food Tesco Direct – which sells home, clothing and electronics etc is currently a weak part of the business because the UK economy is weak and because it takes up a lot of expensive floor space in the hypermarkets I do not believe this shall always be so. Looking 5 years out I think the UK High Street is doomed, sales are going to move online to Amazon/Tesco.com/SportsDirect.com/ASOS and the incumbents like Comet/Argos/Dixons/Matalan are going to start dropping like flies. They cannot offer the same range of products and they can’t sell it at the same margin due to their expensive square footage. Over time we might see the Tesco Direct floorspace in stores become like a shop window for the most popular deals from the 100,000+ products available online.

The services division offers a few “free options” for growth in things like Tesco Telecom which they aim to contribute £150m of profits by 2013 or Dunnhumby which owns consumer information making £80m per annum and finally the insurance business where Tesco are actually the 6^th largest motor insurance business in the UK. All of these businesses are materially valuable and robust but they are a little lost within the context of the giant conglomerate.

Business & Management

Strengths

Through “Clubcard” Tesco knows its customer’s shopping habits better than any of its peers. Historically, Tesco’s retail execution has been very strong with its multi-format flexibility allowing it to closely align store space with its target markets and target customers.

Weaknesses

Management have no credibility yet due to short track record and a failure to deliver on initiatives. It seems the new CEO may have been thrown a “hospital pass” upon taking the job. There are worries that its decades of success have left Tesco a sprawling conglomerate suffering from “mission creep” and perhaps a little complacency.

The highest P/E multiples are placed on focused specialists rather than generalists. For example, management must ask why they are in the garden centre business when it doesn’t move the needle and just provides a distraction.

The dramatic lowering of profit expectations has allowed the doubters of Tesco to jump on the bandwagon citing that the business has been run too hard for efficiency, it has become complacent, there are cultural issues and that their marketing effort has been weak.

Margins are going to be a bit weaker in the UK business due to the “over-earning” issues from the past. Tesco do however have the best margins in the sector so a move back towards its peers is now getting priced into the market.

Opportunities in Tesco Bank

Hypermarkets may be ex-growth but Tesco has many opportunities in the smaller stores like Extra or in the roll out of the Services division, particularly Tesco Bank which is just rolling out its mortgage offering in the UK. I think Tesco has a very large opportunity here to steal basic banking/savings/deposit business from the incumbent major UK banks. RBS, Lloyds and to a lesser extent Barclays have permanently impaired their reputation and their relationships with their customers. Tesco may have a reputation as a big, nasty profit sucking corporation but not to anything like the same degree as the banks. For banking, TSCO’s ubiquity and brand recognition will help. The placing of “branches” in the stores will save money because there is no incremental high street real estate required and furthermore they are guaranteed footfall from the stores.

At the moment Tesco Bank is a negligible part of the business (circa £150m of profit) but in 10 years time it’s possible that they will have considerable market share. Analysts have been quite explicit that there is no risk at this stage that the bank will jeopardise the broader Tesco balance sheet with undue financial risks.

Opportunities in Real Estate

The Tesco freehold real estate portfolio was valued as of the last annual report at roughly £32 billion. I think the sell side is almost completely ignoring this asset backing because of their focus on the income statement and the fact its inherent value is a slow burning process. The property assets provide a degree of inflation protection too.

The stated aim of selling down the real estate portfolio over time to realise imbedded profits, whilst implementing the new commitment to limiting the capex on expanded on store expansions in the UK will materially shift FCF in a positive direction. UK Capex was £2.6bn in 2008 and some analysts estimate this new rationalization could take this down to £1.3bn by 2014 which could add 5% to the FCF yield.

Tesco has been selling down real estate assets at a rate of around £1bn a year realising £200-300m of profit – this could be ramped up going forward and there are further considerations of a Thai Tesco REIT or other such OpCo/PropCo options.
Threats

Consumer sentiment towards “big business” is poor, exemplified by campaigns from high profile TV chefs amongst other things. This trend has yet to translate towards sales moving away from the Big 4 however – this seems unlikely due to their one stop, price competitive position. Depending on one’s macro view, Tesco’s non-food exposure is a threat relative to its peers. Austerity induced fiscal drags and fuel price inflation which takes significant wallet share will be a secular headwind for consumer spending going forward.

There is an unfavourable supply/demand dynamic in UK Food retail currently. Sales growth is slow and slowing but industry floor space is still expanding, this points towards some leaner years ahead for profits.

What Needs Work?

Marketing has been poor for years and there is a less clear brand message than MRW and SBRY in particular. There is also less impetus in the own brand products than the peers and it seems to be coasting on the fact it is all things to all people. There is no attempt via product or store architecture to differentiate or target particular customers. A store in a high end area will appear almost identical to a store in a poorer post code. Stores remain industrial and bland feeling with “character” being sacrificed for lean productivity.

Tesco has a very attractive final salary pension scheme relative to peers and it is a major draw or retainer for lots of Tesco staff. It seems like the profit warning will be a good opportunity for management to take steps to  “rationalise” or “right-size” this pension promise that they really no longer can afford.

Competitive Position

Supplier Power

The UK food retail market is highly consolidated, has high levels of property ownership, national pricing and relatively flexible labour laws. Tesco’s scale and buying power means it exerts considerable pressure over its suppliers.
The four big players in the UK – TSCO, MRW, SBRY and ASDA are pretty rational. In 2000 they had a combined 55% share of a £50bn market, now they have a 70% share of an almost £100bn UK food market. Tesco’s share is largest at around 30% of the market. All are listed and all have the same time horizons. It seems unlikely that a price war is anyone’s best way to take share from anyone else.

Food retail in the UK is a very competitive business and continuing operating weakness in the UK does not bode well for Tesco’s market share. As of today however they are still very dominant.

UK Food Retail has significant barriers to entry due to the enormous economies of scale in the incumbent market leaders. There is also a degree of loyalty amongst consumers who tend to change where they shop slowly due to habitual behaviour.

Customer Power

Tesco’s market dominance has allowed it to permeate many aspects of its customer’s lives but they do retain the ability to “vote with their feet”. It would seem that customer’s habits are somewhat sticky and often shop in the supermarket closest to them.

Management Incentivisation

Compensation was changed to focus on ROCE since 2006 and the target is from today’s 12.9% to 14.6% by 2014.

This focus on ROCE will only hasten the team to deliver on or close Fresh & Easy like they did in Japan. There should be some natural improvement in ROCE as the project pipeline of stores roll off and open and are not replaced with the same intensity of development.

Management will receive bonuses of between 225-300% of salary if they can achieve compound EPS growth of 12% over the three years to 2015.

Conclusion

The investment case for Tesco remains the same as it was a year ago, the major capex of rapid UK store and overseas expansion is largely behind us – critical mass has been achieved. This leaves Tesco now trades two standard deviations below its long term P/E multiple.

We expect management to start to focus on shareholder returns and customer satisfaction. There are a number of relatively easy to implement options that can be deployed to start to bring the intrinsic value of the business to the market’s attention.  Warren Buffett and the Directors of this business know it well and they have been adding to their already sizable holdings. The share price decline from 400p to 320p presents a fantastic opportunity for long term investors to pick up a consistent, market leading, asset backed franchise at a discount to the value of its bricks and mortar.

Very Rough Sum of the Parts – What Do We Get?

Freehold Property – £25-32bn

UK – £2.4bn profit @ 8x for a low margin, low growth business = £19bn

Asia – £650m profit @ 10x to reflect long term growth prospects = £6.5bn

Europe – £500m profit @ 8x for a low margin, low growth business = £4bn

Bank – £150m profit @ 7x to reflect low rating of financials = £1bn

Total = 25bn + 19bn + 6.5bn + 4bn + 1bn = £55.5bn

Minus £10bn debt and £1.5bn pension = £44bn/8bn shares outstanding = £5.50 per share

Per Share Breakdown =

+ 312p Property

+ 237p UK Business

+ 80p Asian Business

+ 50p European Businesses

+ 12p Tesco Bank

= 690p in Assets

– 140p in debt and pension

= 550p Value

Appendix

A friend of mine and their partner work at Tesco and so I sought their opinion on a number of the criticisms recently raised by analysts and their thoughts on the steps management would be taking to address the issues. I attach below their comments verbatim.

What I find interesting is that these problems were very visible on the ground but yet left unaddressed. However, one might say that at least now the top and bottom of the organisation both know where they were going wrong and are headed in the same direction.
“Alas I have seen changes in the past 2 years. I’d say particularly in the past year. Staff who leave are not replaced or replaced with someone with fewer hours or a lower wage. Particular departments run on skeleton staff or no staff at all. They rob Peter to pay Paul. All this is amounting to a growing unrest amongst staff, low morale, less energy. Personally, I don’t enjoy my job 70% of the time, mainly because I don’t have the time or resources to fulfill customer’s needs. New staff are not being offered the same Sunday rate as current staff (150%). New service desk staff are not awarded a premium, they are offered the same rate as a checkout/shelf stacker.
The Big Price Drop was introduced by closing all stores overnight in order to change prices/promo material. Customers expected massive bargains and instead received goods at the same prices they were a few weeks earlier – it’s nuts! I’m not sure how well my store relates to the mean but my outlook is pretty bleak. (Name) would love to move elsewhere but I still think he’s in one of the safest jobs he could have currently.”
“Customers believe there are many things done to deliberately trick them into buying goods at a higher price than they believe. Shelf edged promos and promo labels are often a bit misleading. Promos “From £1″ merchandising posters are next to products where only about 25% of the goods are £1.

I could go on listing the negatives but I think it’s important to mention the positives. Unfortunately, many customers are unaware of Clubcard points and their rewards. Some customers, including myself, revel in the scheme whereby Tesco reward loyalty by issuing money saving vouchers which may be used against grocery shopping or traded for 4x their value to spend elsewhere. Many customers do appreciate this but it doesn’t deal with the immediate shopping experience. I reckon change is needed whereby honesty is key. Customers want to be able to do their shopping quickly and efficiently, they want to glance at the price and know it’s what they’ll pay at the checkout.”

“In stores you have general assistants, team leaders, department managers, senior managers, deputy managers and store managers. I think team leaders are surplus to requirements, except at checkouts. Dept managers vary widely in competence. It seems to be a case of who your chums are and not what you know that sees you through to management – at least this is the only way I can explain what I have seen. Deputy Managers are like floor managers and Senior Managers, of which there are 3 or 4 in my store, are not so hands on, but its variable.
Beyond that there are directors who look after groups of stores across the country. There are also floating managers who take on roles out with their job description/special projects to be rolled out to different stores.”

“When it comes to produce items, I wouldn’t buy fresh fruit or veg from ASDA (Wal-Mart subsidiary) because I don’t believe it’s as fresh. I get all mine straight from the fruit market. Tesco is a mixed bag. I prefer Tesco overall. If Marks & Spencers was larger and less expensive it would win hands down. As for the competition, I am not a huge fan of ASDA as I just couldn’t do a full shop there, it’s too basic/low end. Sainsburys seems of a very similar quality to Tesco but is overpriced. I’ve never liked Morrisons as I believe it lacks variety.”