Investor's Champion Blog
Provides refreshingly forthright, independent comment on predominantly small cap companies and specialist investment funds. Informed opinion, based on first-hand research, but pulls no punches in exposing management weaknesses.

Majestic Wine - the AIM blue chip premium from a local Watford boy!

I have just reviewed a new research note on Majestic Wine (MJW) from a leading small cap broker.

This follows Majestic’s recent Christmas trading statement which appeared to show that sales growth was slowing at the wine retailer with like-for-like sales growth below the long-term average.

The note concludes with the observation that the shares are on an unsustainably high rating (current year PER of 22.0x) suggesting a target price of c325p to be appropriate, as opposed to the current price of c363p.

Now I am inclined to agree that Majestic’s rating is high relative to the FTSE All Share and that there is indeed better value in the retail sector. However, I also believe that the analyst is missing a key difference between Majestic and other retail stocks in that Majestic is an AIM stock and with reference to an earlier blog, Majestic is an AIM blue chip.

Now I have long questioned the valuation of Majestic but as someone who also manages an increasing number of large AIM portfolios for inheritance tax planning purposes the shares remain highly attractive.

The simple answer to the valuation issue is that it is hard to find many large companies on AIM with Majestic’s compelling fundamentals.

Looking at the interim results for the half year to 26th September 2006 reveals a business that generated an operating profit of £6.2m (up 13.6%), a business that had sales of £88.3m (up 9%) for the half year, with like for like UK sales up 4.3%, and an AIM business that yields c2.5% that is well covered.

Net cash inflow from operating activities was £7.3m with a cash balance of £7m at the half year end.

There are also tangible fixed assets of just under £35m and a good stock of more liquid assets in red, white and sparkling varieties!

Furthermore, this is an AIM quoted UK based business that is easy for the average UK investor to understand and where management is close at hand to respond to investor queries.

I acknowledge that the rate of new store openings was disappointing; however, one could also conclude that management is adopting a prudent approach.

The ongoing threat from the big supermarket groups remains a big threat and apparently the Tesco wine club now has a membership of c550,000-I question how active some of these members are. But in my opinion the Majestic wine warehouse format with a free tasting and knowledgeable staff at each site still has a big part to play in the growing UK wine market.

Referring to my earlier blog on AIM shares I maintain that there is an increasingly large pool of money finding its way into the shares of ‘qualifying’ AIM companies for inheritance tax planning purposes and that a lot of the big IHT planning money is essentially chasing the same shares to form the nucleus of managers’ portfolios.These AIM ‘blue chips’ including the likes of Majestic Wine, probably appear in the vast majority of IHT portfolios and the share price will be well supported as a result.

One can argue that Majestic is currently over valued by c10% but this is small premium to pay for a liquid AIM share with a real business that has substantial assets, generates cash and most importantly at the end of the day could save your estate 40% tax.

Majestic is approximately 30th largest AIM quoted company with a good institutional shareholder base that trades over c£250,000 value of shares a day. The company has also instigated a share buy back program to purchase up to 10% of its issued share capital up to a value of £20m.

Surely all those potential tax savings merit a premium rating!


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