Bottom Feeding - LNR.TSX, MAB.LSE, and FOUR.LSE
Linamar Corporation (LNR.TSX)
LNR is a diversified advanced manufacturing company, serving a range of industries including automotive, agriculture, construction, and medical technology. Sales are pretty concentrated in automotive, but at the profit level the segmental split is more evenly balanced.
In the year ended 31 Dec 2024, the company generated total revenue of CA$10,582.0m (FY23: CA$9,733.5m), gross profit of CA$1,504.0m (FY23: CA$1,322.8m), operating profit of CA$611.3m (FY23: CA$774.8m), and net profit of CA$258.3m (FY23: CA$503.1m). The net profit figure for FY24 was impacted by a CA$385.5m goodwill impairment charge on its European subsidiary, linked to a significant decline in European automotive production. Taking this out, the normalised net profit was CA$604.4m (FY23: CA$541.1m).
Total equity at 31 Dec 2024 was CA$5,427.9m (YE23: CA$5,322.1m), and it had net debt excluding lease liabilities of CA$982.8m (FY23: CA$875.0m), and CA$1,192.3m including lease liabilities (FY23: CA$1,078.5m).
LNR generated net cash flows from operations of CA$1,464.9m in FY24 (FY23: CA$1,002.1m), and invested CA$532.6m in PP&E (FY23: CA$762.7m), alongside CA$620.5m in business acquisitions (FY23: CA$407.1m). The company generated free cash flow in FY24 of CA$660.5m (FY23: -ve CA$13.6m), which it used to pay dividends totalling CA$61.5m (FY23: CA$54.1m), in addition to spending CA$42,025m on share repurchases (FY23: nil).
Market capitalisation: CA$3.07bn
Valuation: Using the FY24 figures, the shares currently offer an earnings yield of 8.4% (19.7% normalised), free cash flow yield of 21.5%, dividend yield of 2.0%, and trade at a price to tangible book value of 0.9.
Reason: Fears around the impact of US tariffs, and weak automotive market in Europe.
Interest level: Moderate - The valuation is compelling, but I’d like to see them returning more cash to shareholders rather than making business acquisitions.
Mitchells & Butlers (MAB.LSE)
MAB is a UK hospitality business with a portfolio of over 1,700 pubs and restaurants, operated under a wide range of brands including, amongst others: All Bar One, Harvester, Toby Carvery, O’Neills, and Vintage Inns.
In the year ended 28 Sep 2024, the company generated total revenue of £2,610m (FY23: £2,503m), operating profit of £300m (FY23: £98m), and net profit of £149m (FY23: £4m net loss).
Total equity at 28 Sep 2024 was £2,566m (YE23: £2,130m), backed almost entirely by tangible assets. Net debt was £1,008m excluding lease liabilities (YE23: £1,204m), and £1,455m including lease liabilities (YE23: £1,667m).
MAB generated net cash flows from operations of £386m (FY23: £248m), and invested £152m in PP&E (FY23: £154m). Free cash flow in FY24 was £328m (FY23: £181m), used principally to repay debt, with no dividend payment to shareholders.
Market capitalisation: £1.34bn
Valuation: Using the FY24 figures, the shares currently offer an earnings yield of 11.1%, free cash flow yield of 24.5%, and trade at a price to book value of 0.5.
Reason: The company is facing c.£100m of cost headwinds in the next year, primarily due to labour costs which will increase as a result of changes to employer national insurance contributions and the UK minimum wage.
Interest level: Moderate - Valuation looks very attractive, but it seems questionable whether this value will be returned to shareholders given the current lack of distributions.
4imprint Group (FOUR.LSE)
FOUR is a direct marketer of promotional products, with operations in North America, the UK and Ireland, but North America contributes the vast majority of the company’s revenue and profits.
In the year ended 28 Dec 2024, the company generated total revenue of $1,367.9m (FY23: $1,326.5m), gross profit of $435.4m (FY23: $401.9m), operating profit of $154.4m (FY23: $140.7m), and net profit of $117.2m (FY23: $106.2m).
Total equity at 28 Dec 2024 was $185.1m (FY23: $134.5m), and the company had a net cash position of $142.3m (FY23: $92.2m).
FOUR generated net cash flows from operations of $132.6m (FY23: $137.0m), and invested $19.6m in PP&E (FY23: $10.0m). Free cash flow in FY24 was $108.6m (FY23: $128.5m), which was used to pay $65.5m in dividends to shareholders (FY23: $110.8m).
Note: the FY23 total dividend includes a special dividend of $58.1m. The regular dividend increased in FY24 from $52.7m the prior year.
Market capitalisation: £1.07bn ($1.38bn)
Valuation: Using the FY24 figures, the shares currently offer an earnings yield of 8.5%, free cash flow yield of 7.9%, and dividend yield of 4.7%.
Reason: Fears around impact of US tariffs.
Interest level: Moderate to high - Valuation looks appealing given historic growth rates, and management has established a good precedent of returning capital to shareholders.
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