23 March 2017
By Maynard Paton
Quick update on Electronic Data Processing (EDP).
Summary: Oh dear — EDP’s strategic review has not gone as well as I had hoped. The software minnow has taken ELEVEN months to finally own up to holding early-stage talks with just the one interested bidder. Other approaches have disappeared, due in part to unfavourable developments within the group’s defined-benefit pension scheme. I doubt EDP’s main shareholders can force anyone to bid and, without any sign of EDP having a Plan B, I have sold my entire holding.
Shares in issue: 12,700,976
Market capitalisation: £8.6m
Click here for my previous EDP posts
* ELEVEN months of waiting… just to be told about a single potential bidder and a significant pension error
You may recall EDP announced in April last year that it was undertaking a strategic review, and had effectively put itself up for sale.
ELEVEN months later, EDP finally graced shareholders with a follow-up.
Here’s the gist of what has occurred:
* A “number of approaches” were received;
* One interested party began detailed bid discussions;
* However, that interested party disappeared after a funding error within EDP’s defined-benefit pension scheme was unearthed;
* The pension error and other revised scheme calculations may affect EDP’s distributable reserves and the company’s near-term ability to declare a dividend, and;
* A second interested party is now in “very early stage” bid discussions.
All told, shareholders are not much further forward than they were eleven months ago.
In fact, things may actually have become worse.
For a start, the pension error reads as if EDP will soon pay an extra £75k a year into the scheme. Such payments will be significant when my earlier sums pointed to an annual operating profit of £453k.
(Previous statements from EDP had indicated the scheme was fully funded and needed no further contributions.)
What’s more, this latest update has now disclosed to the second (very early stage) interested party that there are presently no other potential bidders. A generous offer would therefore seem unlikely.
EDP’s statement also suggested little work had been performed on alternative business strategies should no bids be forthcoming. Given the group’s miserable progress of the last five years…
|Year to 30 September||2012||2013||2014||2015||2016|
|Operating profit (£k)||688||709||355||377||307|
|Finance income (£k)||78||85||46||42||51|
|Other items (£k)||(849)||-||-||(72)||(114)|
|Pre-tax profit (£k)||(83)||794||401||347||244|
|Earnings per share (p)||(0.45)||4.68||3.21||2.41||1.25|
|Dividend per share (p)||2.71||2.00||2.00||5.00||5.00|
|Special dividend per share (p)||-||5.00||3.00||-||-|
…the lack of a Plan B is very disconcerting.
In fact, EDP’s update declared:
“The board is confident in the on-going execution of its strategy.”
I can now snigger at that sentence, as I no longer own any EDP shares.
You see, the current ‘strategy’ — such as it is — has seen revenue recently hit a 30-year low and profit slump to possibly a 10-year low.
* So why did I buy EDP in the first place?
I sometimes wonder that myself (one reason I write this Blog is so I can remember why I bought all my shares).
Here is an extract from my EDP buy report:
“[T]his small-cap dullard intends to pay a 5p dividend in future years — and shareholders such as me remain in line to collect a not-so-dull 8%-plus income.
Additional excitement comes in the form of EDP’s cost-saving measures, which I reckon could support an underlying P/E of just 6.
In fact, if you mix in contracted revenues, surplus assets, upfront customer payments — plus an intriguing [activist] shareholder register — then all of a sudden this £8m software supplier to builders merchants might not be that dull after all.”
I should have known better.
Anyway, I first bought EDP during September 2012 and last bought during April 2013, paying as high as 62p and as low as 49p. My average buy price came to 55p including all costs.
I collected 20p per share as dividends along the way, which helped give me a total return of 60% over four-and-a-bit years. I sold out at 67p including all costs.
That 60% return is not a disaster by any means, and is a profit at least…
…but I do think about how other shares have performed during the same time, and believe my money could have been better served elsewhere.
* The Final Verdict
So that is the end of my stint with EDP.
It has been a somewhat frustrating holding, which I have increasingly found to be the norm with ‘deep value’ shares. As a reminder to myself, the best investment results come from better companies that simply produce decent progress year after year.
During my time as an EDP shareholder, the firm delivered no revenue progress but reported quite a few extra costs. The business as a whole just never went anywhere and it is clear the long-serving management needs to be refreshed.
Details of the pension error look quite significant to me, and I’m not surprised many interested bidders have walked away. This particular development has reinforced my view that defined-benefit pension schemes can quickly become ‘black holes’ and the companies that carry them generally ought to be avoided.
True, I could be wrong selling out here. I suppose the trio of North American funds that control 28% of the shares could now be on the warpath and agitate for a quick conclusion to this whole process.
Trouble is, these funds can’t force anybody to acquire EDP. And even if they could, they can’t ensure a generous price will be paid.
Similar to EDP itself, I am not sure if the funds have a Plan B should no bids materialise.
I have updated this Portfolio page to reflect my EDP sale, and I shall now spend my time looking to reinvest in higher-quality businesses!
Disclosure: Maynard no longer owns shares in Electronic Data Processing.