AUTOCLENZ (ACZ)

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These companies are all previous recommendations from the Red Hot Portfolio that I have subsequently recommended and then sold from the portfolio at a later date. By no means are these companies intended to be buy recommendations for you to go out and invest money towards their shares. For the opportunity to start making serious money from the recommendations I am making now, just start your no obligation trial!

AUTOCLENZ (ACZ): Competition Intensifies – We Sell - Feb 2007

RHPS Recommendation – SELL

Autoclenz has experienced an intensifying of pricing pressure in the final weeks of 2007. This is because car dealers are struggling to shift the metal, and consequently are putting pressure on their own suppliers. Or else, they are simply deciding not to make minor repairs unless someone is genuinely interested in buying a vehicle. To some extent Autoclenz has been able to compensate for this by cutting costs, but this is hardly an extravagant company in the first place, and it will struggle to maintain its profit margin this year. I think it inevitable that forecasts for 2007 will have to be reduced and the pre-tax profit for 2007 could turn out to be around £1.5m, for earning per share of about 10p. On this disappointing turn of events we sold on 18 January.

AUTOCLENZ (ACZ): Make 76% in the next 12 months as this “boring” little company grabs market share - Nov 2006

RHPS Recommendation - BUY

I thought I might drive away from my meeting with Grahame Rummery and Trevor Clingo – the directors of this month’s first Red Hot share pick – in a car that was spotless and gleaming. After all I had travelled up from Oxford to Swadlincote in Derbyshire to see the UK’s largest car valeting company.

But this management team is not one to spend the corporate cash on meaningless gestures. In fact they told me that they sit down monthly and go through costs with a fine-tooth comb. “We always find ways to improve performance” Grahame told me proudly. This parsimonious approach clearly extended to the head office, which was as utilitarian as any I have seen. 

Piling up cash, paying juicy dividends and stealing market share

But Autoclenz is a business which combines the penny-pinching philosophy of a nitty-gritty, manual business, with a very real opportunity for growth. This combination is helping it to pile up the cash, hand out juicy dividends, and steal share of what is anyway a growing market.

“You can always polish £100 into a used car.” That much is known in all car dealerships, whether they are Bentley dealers or Honest John. So every day a small army of workers passes from one car to the next, cleaning, polishing, and using high pressure water jets to add that extra little bit of perceived value in the eye of the car buyer.

About 1,200 of these cleaners are subcontractors working for Autoclenz. Most of them are on the forecourt of customers such as Ford, Vauxhall and Jaguar. They could be polishing up vehicles that are for sale, or cleaning those that have come in for a service. Others are cleaning the fleet of car rental firms such as Avis or National Car Rentals, or vehicles waiting to go to car auctions. British Car Auctions is a customer. 

By using mainly subcontract labour Autoclenz ensures that it only pays out when there is work to be done. And it also ensures that it has a keen and efficient workforce. This is the secret of its success in winning outsourcing contracts.

Typically cars have been cleaned by a car dealership’s own staff. But Autoclenz can offer them a 30% cost saving. Why? Because the subcontracted labour force scrub and polish harder and quicker than the car dealership’s own employees. They can do four cars per day instead of just two. And they know that if they want another job tomorrow they had better do a good one today.

Autoclenz is well placed to cash in on a growing market

So Autoclenz is gradually taking over from in-house teams, and there is plenty of business to be had. About one quarter of the total market is outsourced. And Autoclenz has about one quarter of this available market. The trend towards outsourcing continues, while Autoclenz’s share is steadily rising.

As you can imagine, this business needs very little capital investment. So the cash just comes rolling in through the door. For many years most of it just rolled straight out again, into the coffers of its owner Yule Catto. Yule Catto is a large and not especially successful chemicals company. It produced car polish, and so claimed synergies with Autoclenz. But such was its requirement for cash, to fund amongst other things its big pension fund deficit, that Yule Catto sucked as much as possible out of Autoclenz, denying it even the tiniest amount with which to pursue new ideas.

Young, free and single

Last December Autoclenz finally escaped the clutches of its greedy parent, and is starting to show just what it can do. It is keen to expand its range of services and now, for example, offers a complete service for National Car Rentals at Stansted – checking incoming cars, cleaning them, refuelling them, and if necessary delivering them to another location.

Get Smart with AC SMART

But the area which is really taking off is AC SMART. This involves a team, either based at a customer’s premises or travelling around, making small repairs to bodywork, windscreens, wheels or upholstery. Their real competitive advantage is that they do the repairs on site and save the customer from having to send the vehicle to a body repair shop. The work is done by staff directly employed by Autoclenz and the team has doubled in size over the last year. Turnover is up 63% on last year, and there is obvious potential to sell this service to existing valeting clients.

Autoclenz has two other minor businesses. The first is the supply of temporary staff to the motor trade; and the second is called REACT. This is a specialist decontamination business, called upon by the police and other public services such as the highways agency, to clean up after motor accidents or other emergencies. “We pick up body parts”, Rummery explained, ”... vehicle body parts not human body parts!’”

Won contract at multimillion new Mercedes-Benz centre

Autoclenz has competitors such as Motorclean, Direct Valeting and Interclean, but the message from the interim figures with £1m of new business won in the first half of the year, was that Autoclenz is steadily raising its market share. It has won the contract for car valeting at the multmillion new Mercedes-Benz centre at Brooklands.

Together with the additional costs of becoming a public company, these new business wins do not immediately boost profitability and explain why the pre-tax profit for 2006 is forecast to be marginally below that for 2005. This is because of something called “TUPE”, which stands for Transfer of Undertakings (Protection of Employment). Under this legislation, if Autoclenz takes over the staff of a customer which chooses to outsource, then it is obliged to do so on the same employment terms. It then takes time for Autoclenz to alter working practices to its own model. But as it does so the true profitability of the contracts are revealed.

RHPS Verdict: The nature of Autoclenz’s business may not thrill. But what excites me is the profitability of the business and the excellent prospects for growth. With little requirement for capital investment Autoclenz is generating an annual cash flow of about £1.3m even after capex, and the payment of a generous dividend. This is a very high figure in relation to Autoclenz’s market capitalisation of just £12m. Profits and earnings per share are expected to grow by 50% over the next two years.  So, just like Autoclenz, shareholders should clean up! BUY with a 12 month target of 200p.

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The figures refer to the past and past performance is not a reliable indicator of future results. The past recommendation highlighted here is a small company share.By their nature, such investments can be relatively illiquid and, as a result, hard to trade. This makes such shares more risky than other investments. Please seek independent financial advice if necessary. These figures do not include the bid-offer spread, unless otherwise stated. Since the service began on 01/12/98 running through to 31/07/07, the average overall performance of the shares recommended is up 19.91%.All gains exclude dividend payments and dealing costs, unless otherwise stated. Profits from share dealing are a form of income and subject to taxation. Levels and bases of, and reliefs from, taxation are subject to change, and depend on individual circumstances. Full portfolio available on request. Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No. 115234.

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