Jones Group turn-around pays dividend

For many years the mere thought of investing in Jones Group was enough to induce spasms of anguish. Now following the asset sales programme and the well structured £18.3 million cash payback proposal, the company has the potential of turning those spasms into more contented sensations.

The proposal to repay 235p cash per share for 60 per cent of investors' holdings, has rightly been welcomed. That payout looked good against the 190p market share price before the announcement. Shareholders can, of course, apply for more than 60 per cent but can only receive more than their entitlement if other shareholders do not accept the tender offer, or if they accept less than their 60 per cent entitlement.

That tender offer should be acceptable to most shareholders. The benefits are easy to see. It is, however, much more difficult to establish the value , and prospects, of the remaining company after the payout. Jones has not helped as it has not produced a proforma balance sheet to indicate the position after the payment of the cash. Nevertheless, an estimate can be gleaned from the historic records. Jones had been a diversified group with interests in manufacturing, shipping and distribution. Following the sale of Tube Rollers, it is now left with just distribution. This has three main divisions:

Oil distribution which is said to have performed well in 1997 and there was a good recovery in the UK. It has a supply agreement with Total for part of Hard Craske's territory in East Anglia. And it has strengthened its links with Esso in the London area.

The LPG Blugas importation and distribution company returned an improved level of profit after financing costs last year. Strong cash flow enabled it to repay more than u£600,000 of group debt. However, it does not yet generate an adequate return on capital employed.

Appian Fasteners distributes industrial fasteners in Ireland through offices in Dublin and Belfast. While it recorded a good boost to sales, this was not translated proportionally into profits due to the increased cost of products sourced in sterling.

No separate figures are available for these companies but the group's last annual report showed distribution increasing sales from u£78.1 million to u£83.6 million in 1997. Operating profits went up from u£1.15 million to u£1.4 million. As Jones has generated u£21 million from the recent sales, it should have around u£3 million available after the cash payout. Therefore there should be little or no financing costs. Distribution should be is capable of generating a net profit in the region of u£1 million.

Taking a conservative multiple of eight (including the u£3 million cash), that would imply a value of around u£11 million on distribution. That would represent about 210p per share to the shareholders who are left with 40 per cent of their holdings. If it is assumed (for the sake of this exercise) that shareholders accept in respect of 60 per cent of their holding, that it represents the value of their entire holding, then the value placed on their shares by the cash offer is effectively 144p per share. That leaves them in for the remainder 40 per cent at nil cost. If this is added to what is left, then the value of the shares (cum cash) is around 350p. That indicates that despite the rise to 220p after the announcement, the share price does not fully reflect the value of the company. Also, the shares, after the cash payout, could have a net asset backing of about 250p per share. However, the company has a potential liability of u£4 million following an assessment by the Revenue Commissioners. While Jones is adamant, following profession advice, that an assessment would not be sustained, it does represent 77p per share. Taking a conservative view that prospective net asset backing could be reduced to around 200p.

The Jones board has executed a difficult job, has delivered what it promised, and is now rewarding its shareholders in a way that could not have been countenanced a number of years ago. However, it has to be asked; has a company with a market value of only some u£10 million any future?