Volvere PLC: Easy as Pie

Hello dear lovely reader. I appreciate if you are still following along despite a lack of new ideas from my end. For those who haven’t been following, a few weeks ago I won Australian Survivor, and the $500k prize that goes with it. I will have a post discussing the win, my plans and general portfolio construction coming soon, however in the short term I have finally had a bit of time to start looking at new investment ideas as I look for new ideas to put this large sum of money to work. My main focus has been in British, Singaporean and Japanese small caps as these are the areas I perceive as the most attractive hunting grounds. Specifically, it was amongst the dregs of UK microcaps I found the subject of today’s writeup: Volvere.

Backstory

Volvere is a UK based company started by two brothers Nicholas and Jonathan Lander in 2002, both with long track records in a variety of financial and operational business roles. The company is an investment holding company with a focus on turning around distressed businesses and has a strong track record, sporting a 1700% return since inception and a 500% return over the past decade. Jonathan and Nicholas have a fantastic track record of taking over and turning around failing businesses from a broad variety of industries such as marketing, auto and food services. Unfortunately, Jonathan passed away from illness in 2023, leaving Nicholas to assume full control, as opposed to the classic CEO and CFO/COO relationship that they had previously, with Jonathan handling the strategic direction while Nicholas handled the operational turnarounds.

Current Situation

Currently, Volvere only has one operating business, along with a very significant cash pile. At a current market cap of £42m the company has £23m net cash. While I would usually discount the value of significant excess cash in these sorts of situations, I think that this situation is unique. Not only has the company been very active at buying back shares, but they are actively looking to make acquisitions and with their strong track record of capital allocation I would be very confident that the cash gets utilised effectively. In fact the only reason for the balance sheet being overcapitalised for so long is how selective they are with acquisitions. If the business environment is as rough in the UK as forecasts suggest it might be then Volvere may actually benefit from a more target rich environment.

More interesting is Volvere’s only remaining operating business, an 80% position in the UK’s leading pie manufacturer Shire Foods. Shire Foods is a profitable, growing business, having grown from £.8m PBT off £12m revenue in 2015 to around £3.6m (my estimate based on the trading update) PBT off £26m revenue in the most recent half. There are certainly short term headwinds affecting the company, with the increase in minimum wage and employers insurance being flagged in the company’s most recent trading update. However longer term the company is investing in increasing capacity, anticipating growth over the next few years. While this isn’t some fast growing software business, Shire foods seems to be a consistently profitable, dominant player with a strong competitive position in a classic British pastime that isn’t going to go away: pies.

So what we’ve got here is a large (half the market cap) cash pile in the hands of gifted capital allocators, along with a decent operating business that is currently spitting out cash. What makes this so interesting here is the valuation. Backing the cash out gives a valuation of £19m for Volvere’s 80% stake in Shire foods. Based on my estimated £3.6m PBT for the most recent trading update, assuming a 25% tax rate that would be around £2.2m NPAT, leaving us at an implied valuation of around 4x earnings. This valuation feels frankly ridiculous, and it’s hard to imagine this being reasonable without a major misstep from management. While I couldn’t find any pure play comparables, other UK food manufacturing companies such as Nomad Foods, Bakkavor Group, Cranswick PLC and Associated British Foods all trade at valuations between 10-20x earnings with significantly weaker growth. If we were to apply a reasonable 10x earnings multiple to Shire Foods, adding the £23m of cash we are looking at a £67m valuation, 60% above the current valuation. This value doesn’t even factor in outperformance from management through smart capital allocation, which would obviously provide further potential upside.

I think the core of this idea that makes it so compelling is management. I see ideas like this that screen stupid cheap all the time, but management either mismanages the business, lets cash build up on the balance sheet or blows it all on a poor acquisition. What makes this a potential fat pitch for me is that you are investing alongside an exceptional management team led by a proven operator in Nicholas Lander, who has a reasonably sized holding with 6% of the company (along with 11% with family in Jonathan’s estate). Not only does the company have a significant margin of safety with half the market cap in cash, but that cash has the potential to be invested at significantly above market returns, which would just further drive outperformance. Additionally, the company has a long track record of consistent buybacks and I expect this to continue, with £1.5m of share repurchases retiring over 5% of the shares outstanding this year. At this level share repurchases are very accretive, and only limited by the low level of liquidity in the stock.

A question I always like to ask myself is why does this opportunity exist, which adds to the larger question of what the risks are. The risks are fairly simple, the UK economy has been struggling along and short term headwinds discussed earlier will likely affect profit margins in the short term. Additionally, with such a large cash position the company will underperform if it isn’t deployed effectively. I think these are both mitigated by the quality of management, who I have faith in to deal with these issues effectively. As far as why this opportunity exists I think this is simple. The company is an illiquid, $40m market cap UK stock. The UK is a barren wasteland at the moment and the small cap space is experiencing the worst of it. Additionally, even if investors were interested, like many UK microcaps Volvere isn’t available to be traded on Interactive Brokers, locking many international investors out who would potentially be interested. For me, I’ll be buying it using CMC Markets in Australia. Looking around on social media and online, I found limited discussion of Volvere. A few old substack articles, a couple of tweets and moderately active stock forums. I just don’t think anyone is really looking that closely.

I think Volvere at this valuation is an amazing opportunity. You can pick up a good business run by an exceptional management team at an absolute bargain bin valuation. One look at the stock chart tells the story, with a long track record of phenomenal performance. This is a stock to potentially buy and hold in perpetuity. Additionally, with the large cash pile the company has uniquely protected downside, creating a limited risk, very high reward setup for potential investors. The more time I spend on this idea the more I’m tempted to make it my largest position. It’s already above a 5% position for me and I’m likely to continue steadily sizing it up as my Survivor money comes in so I would love to hear people’s thoughts. Anyway, I hope you’ve enjoyed my first stock pitch in a while. I hope that I am able to get back into writing more regularly as my life settles back to normal.