Scales of justice

Why I’ve sold Murgitroyd Group plc

 

Disclosure: Roland does not own shares of Murgitroyd Group.

Murgitroyd Group plc (LON:MUR) was a recent addition to my value portfolio. It appears to be a cash generative and conservatively-run business, but a comment on Twitter from @maynardpaton has made me look again at this firm’s accounts and reconsider my view on the firm’s appeal:

For at least the last eight years, MUR has credited increasingly large and very material credits to operating profit as a result of exchange rate gains. These appear to relate to EUR and USD versus GBP.

You can find details of these credits in the footnotes to the firm’s annual reports. To gain a picture of what might be happening, I’ve collated the exchange rate gains versus operating profits since 2009. Something interesting appears to have happened to the firm’s margins:

Year 2009 2010 2011 2012 2013 2014 2015 2016
Revenue (£’000) 28904 29429 33218 35699 35969 38353 39819 42231
Operating profit (£’000) 3494 4008 4184 4538 4679 4133 4182 4294
Op. margin including FX benefit 12.1% 13.6% 12.6% 12.7% 13.0% 10.8% 10.5% 10.2%
Foreign exchange credit (£’000) 348 418 555 734 1237 1355 1656 2394
Operating profit ex. FX (£’000) 3146 3590 3629 3804 3442 2778 2526 1900
Op. margin excluding FX benefit 10.9% 12.2% 10.9% 10.7% 9.6% 7.2% 6.3% 4.5%

Source: Annual reports 2010, 2012, 2014 & 2016

It’s hard to understand* quite why the FX credits have increased so rapidly, but the underlying trend seems fairly alarming to me.

These figures seem to show that excluding favourable exchange rate movments, operating margin has fallen from 10.9% to 4.5% over the last eight years.

Is the mix of business changing?

I wonder if this decline relates to the rapid growth of the group’s US revenues and the stagnation of the UK business during this period?

  • 2009: UK revenue: £18.3m / US revenue: £3.9m
  • 2016: UK revenue: £16.7m / US revenue £18.8,

In 2009, US revenues represented 13.5% of the total. This figure has increased steadily and US revenue now accounts for 44.5% of all revenue, more than the UK (39.5%).

Oddly, the company doesn’t provide a segmental breakdown of operating profit, citing IFRS 8 and saying:

The Group does not manage its business by reference to separate geographical locations. Consequently, an analysis of net assets and operating profit by location is not monitored and is therefore not provided.

Really? Personally, I’m a bit surprised that a listed company with £40m+ of revenue doesn’t know how much profit it’s making it its two largest operating geographies.

I often feel sceptical about companies which refuse to breakdown profitability by segment. There’s sometimes a good reason why they don’t want to shout about this information.

Having missed this potential risk in my original review of the company, I’m not ashamed to change my mind and admit I may have been wrong. Although these FX gains may continue to support profits for years to come, they may not. I’m no longer sure that Murgitroyd is worth the risk, and have now sold my position.

*A somewhat opaque description of the group’s currency management policy is given:

Foreign currencies

Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the rate of exchange ruling at the balance sheet date and the gains or losses on translation are included in the income statement. The assets and liabilities of overseas operations are translated at the rate of exchange ruling at the balance sheet date. The revenues and expenses of foreign operations are translated at an average rate for the period. Exchange differences arising from this translation of foreign operations are taken directly to reserves.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

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