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Clean up with Kleeneze

February 2002 - Investors Chronicle

Apart from in the odd Benny Hill sketch, the image of door-to-door salespeople is not a terribly sexy one. But when it comes to investment don't be prejudiced against a company reliant on such techniques

You may find the idea of a salesperson coming to your house or office to sell you something annoying, but for Kleeneze it generated year-on-year profits growth for a considerable time, demonstrating that there is a market for it.

It is precisely this combination of steady growth and 'unsexiness' that attracted shrewd fund manager Michael Barnard to build a secret stake in Kleeneze for his Marlborough UK Equity Growth unit trust. He says: "With the exception of last year, earnings increased year, after year, after year."

Mr Barnard leans towards a value investment strategy in search of long-term growth from stocks that do not find favour with the market and can be picked up below their true value at the right time. This approach has proved successful.

According to the Citywire Funds Insider database of individual managers, Mr Barnard has been the shrewdest manager in the UK All Companies sector over the past year. He has produced an average monthly return of 1.15 per cent in that period, compared with the sector average of minus 1.42 per cent. Over three years he ranks fifth in his class.

He invested the Marlborough fund in Kleeneze in May last year and made his latest purchase in December. The fund's total stake is 240,000 shares or 0.51 per cent of the 56m company.

So far the investment has not turned out quite as planned - it has dropped from 170p when Mr Barnard last invested to 120p at the time of writing - but he is still confident that it will come good.

The stock is held as a long-term bet so he does not expect it to really show its potential for another 12 months, but Mr Barnard's loss could be private investors' gain.

The price has been knocked by two events to which the market appears to have overreacted.

The first was the death of the company's founder and chief executive, Bob Johnson. Mr Johnson started the company in 1969 from a King's Road butcher's shop in London and built his fortune with it. Apart from this success, Mr Johnson, who nearly became a Catholic priest, had a reputation as a philanthropist. He lent his organisational and business experience to charities and institutions such as Oxford University. When Mr Johnson died aged 60 in August last year, Kleeneze suffered as the market reacted badly to the loss of a chief executive of some vision and a missionary's zeal for achievement.

Mr Barnard says the effect of Mr Johnson's loss from the management team is hard to calculate but he is not too worried. More important is what will happen to the 54 per cent stake now held by his estate.

Simon Like, the analyst in Mr Barnard's team, visited the company recently and posed this question. He told us: "They say they've got the support of the estate and they're going to be long-term holders and won't be selling the stake."

That is good news, but Kleeneze's problem was compounded when the company said in January that full-year profits were likely to be the same as in the previous year - around 10.8m. This is hardly a disaster, but in today's stock market climate such announcements are treated almost as a profit warning.

Disappointing performance in the group's Farepack division lies behind the flat forecast.

Farepack is a mail order food business with a focus on Christmas provisions. So far this year it has lost 900,000 and taken in 3.2 per cent less than the same period last year. This was the business out of which Kleeneze grew and used to be its main driver, but this market has shrunk and the company must look elsewhere for its growth.

Fortunately it has already done so and Mr Barnard and Mr Like approve of the strategy. Hope for the company's future lies in a shift in emphasis towards the Kleeneze and Display Marketing Group (DMG) divisions, which the board says operate in growth markets, while preserving the cash-generative virtues of Farepack. It helped the group bring in net cash of 4.4m so far this year, despite paying 31.5m in cash to buy DMG.

Mr Barnard and Mr Like hoped Kleeneze might do better but are confident it can improve. Kleeneze uses a self-employed salesforce to sell homecare products and gifts. It uses direct sales and home visits to sell the products, and the internet to place orders at www.eezenet.com. In the first half of the financial year this division grew its turnover by 12 per cent to 39.3m and made an operating profit of 2.7m, up by 22.7 per cent.

DMG is another direct sales business, but the salesforce does its business in offices rather than people's houses. The product range includes books, toys, CDs, videos and household goods. This, too, has produced a profit, albeit a slim one. In the six months to the end of October turnover was 18.5m and operating profits were 100,000.

Given this underlying performance and the shift of strategy Mr Like feels the stock has been oversold. He and Mr Barnard are happy with their level of exposure so will not add to their stake, but Mr Like feels the company is looking attractive again at this level. It is valued at only 7.5 times expected earnings, significantly lower than average for the past five years. It looks like an interesting long-term bet.

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 Gavin Scott
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Promoter: Kleeneze UK Ltd, Express House, Clayton Business Park, Accrington, BB5 5JY

2003-2014 Gavin Scott - Independent Distributor of Kleeneze - Approval number 4136