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Author: paulypilot Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 145912  
Subject: Strong IMS from Home Retail (HOME) Date: 19/06/2012 08:24
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Good morning,

As a long-suffering Home Retail Group (HOME) shareholder, I'm pleased to see they appear to have bottomed out in terms of trading (and maybe share price, up strongly this morning).

I think it's still very cheap, and for anyone interested have done a review of this morning's IMS here on my Blog;
http://paulypilot.blogspot.co.uk/2012/06/home-retail-ims.htm...

The IMS RNS is here;
http://www.investegate.co.uk/Article.aspx?id=201206190700106...

Maybe there is read-across from this to other retailers, that maybe we are now at the bottom of the cycle for earnings. If so, then the laggards in the sector could get a big re-rating, as growth is factored in again & risk of insolvency recedes. People are obsessed with lease liabilities, which is rubbish - they are only liabilities if the shop is trading at a loss! And even then it's only the actual loss that is the liability, rather than the rent.
Plus, rents are fixed for 5 years, so inflation erodes the rent gradually, so problem shops will over time, cease to be problem shops due to inflation.

Regards, Paul.
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Author: paulypilot Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 138094 of 145912
Subject: Re: Strong IMS from Home Retail (HOME) Date: 21/06/2012 10:10
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Hi,

I've spent a couple of days on this, but have just published a detailed review on Home Retail Group (HOME) which I reckon is now very cheap.

http://paulypilot.blogspot.co.uk/2012/06/report-on-home-reta...

I hope TMF don't mind me putting links here to my Blog entries, I just wanted to keep all my more detailed stuff in one place that's easily accessible on the net, without people having to register.

Regards, Paul.

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Author: timpernel Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 138096 of 145912
Subject: Re: Strong IMS from Home Retail (HOME) Date: 21/06/2012 11:26
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Excellent review Paul - and I hope you don't mind my replying here rather than on your blog.

I won't re-hash our debate over the merits of the Argos business, but I would concede that the IMS does show that they have at least managed to stem the decline in sales and without a significant deterioration in margin. I still don't like Argos as a business (or as a shop), but let's agree to disagree on that point.

What I did want to pick up on was the point that you flagged regarding the pension scheme as a potential barrier to a takeover of HOME, particularly an opportunistic deal by a PE house looking to leverage HOME's very strong balance sheet. I have no knowledge of the funding position of the HOME scheme beyond the highlights in your analysis, but I think that you are right that it could be a significant barrier. If you look back at the KKR take-over of Boots, Boots had a large defined benefit pension scheme with a small accounting surplus at the time of the deal. However, pension schemes are not funded on the actuarial position rather the accounting position and the Boots pension trustees were successfully able to stall the deal until KKR agreed to inject north of £400m into the scheme and</> to provide £600m of security to the scheme so that it, in effect, ranked alongside the other debt providers who financed the deal.

I have no idea to what extent HOME's pension position is or is not analagous to that of Boots, but you are right to flag the scheme as a serious potential issue for an acquirer, particularly one looking at using the strength of the HOME balance sheet to fund the acquisition.


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Author: paulypilot Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 138097 of 145912
Subject: Re: Strong IMS from Home Retail (HOME) Date: 21/06/2012 11:33
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Hi Timpernel,

Thanks for that, useful comments.

I agree that it's best to have the discussion here rather than on my Blog, so from now on I'll just put links to my Blog entries, and have all the relevant discussion here afterwards. Hopefully that will not upset anyone at TMF? I don't want to seem disloyal to TMF, who after all have been magnificent hosts to us here for many years.

I'll do some more research on the pension fund issue, but your comments sound sensible to me. Although with HOME, they don't have a legacy deficit - it was in balance (well, a 0.1% deficit) in 2011, but swung into deficit of over £100m in 2012 due to the discount rate reducing sharply - as corporate bond yields fell, probably due to spillover from QE forcing down Gilt yields. The same effect is showing up in lots of companies results with pension deficits right now.

Regards, Paul.

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Author: timpernel Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 138098 of 145912
Subject: Re: Strong IMS from Home Retail (HOME) Date: 21/06/2012 11:54
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Thanks for that, useful comments

You're very welcome.

Although with HOME, they don't have a legacy deficit - it was in balance (well, a 0.1% deficit) in 2011, but swung into deficit of over £100m in 2012

Correct, but be careful. As I pointed out in relation to the Boots scheme, it showed a small (£20m) accounting surplus prior to the KKR deal, but KKR had to inject £1bn of cash/security in order to buy the Trustees' agreement to the deal. The accounting measurement of pension deficits is very different to the measurement used for funding (and by the regulator in assessing scheme solvency). I am not certain what accounting basis Boots were using at the time prior to the deal, but the HOME Annual report (note 25) shows cumulative actuarial losses recognised in the Income Statement of £214m in 2012 (2011: £93m) compared to the £115m accounting deficit - and I am not sure whether that is the whole story.

It would be very interesting to know what the actuarial valuation due at 31 March 2012 will show, but I guess that this is unlikely to be available/disclosed prior to the interims.

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Author: HamsterWheel Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 138099 of 145912
Subject: Re: Strong IMS from Home Retail (HOME) Date: 21/06/2012 13:27
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I used to do the numbers for company with a largish (£80m) pension scheme. The rules are very tweakable - we opted for our pensioners to die one year earlier than average to reduce the deficit (we didn't tell them the bad news !) and were quite bullish on future returns.
When we flogged the scheme (at that time in circa 10% surplus) we still had to pay a consolidator many millions to take it off our hands. With hindsight it was a cracking deal.

As a rule, I'd add 10-15% to the liabilities of a scheme to get a true picture of the real position from the point of view of an investor who wants to get rid of it.

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Author: timpernel Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 138100 of 145912
Subject: Re: Strong IMS from Home Retail (HOME) Date: 21/06/2012 14:25
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The rules are very tweakable - we opted for our pensioners to die one year earlier than average to reduce the deficit (we didn't tell them the bad news !) and were quite bullish on future returns.


The actuarial and investment return assumptions do make a significant difference, but I don't think that companies can unilaterally tweak the funding assumptions in order to show a more favourable outcome - though I guess they can do what they like with the accounting assumptions provided that they can persuade their auditors that they are reasonable! Like you, I was involved with a reasonable sized scheme and we negotiated with the (actuary-advised) Trustees regarding certain assumptions (as well as investment approach etc). In particular, we agreed a reduced employee longevity, but it was a fact-based argument based on socio-economic profile, regional variations and subsequent proclivity to succumb to certain diseases (most notably lung cancer) - not just a uniliateral tweak!

You did very well to sell the scheme at all - as far as I am aware that market has now largely closed down since the onset of the credit crunch, though I guess that there will always be buyers at the right price.

I'd broadly agree with your rule of thumb regarding pricing - and indeed would also use it in situations such as the landlord is referring to.

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