Natural tendency for corporate bloating, page-10

@madamswer

I guess the main difference between your style of investing and mine is the fact that I put more emphasis on having a founder/family controlling shareholder in the companies that I invest in.

DLX is a truly institutionalised company with no founder/family as a major shareholder. BRG, on the other hand, although it's also professionally run, the share registry has Solomon Lew's Premier Investment as a 30% shareholder. He will make sure that the BRG board doesn't do something glamorous and yet stupid investment ala WOW's Masters experiment.

If we go back 6-7 years ago before WOW's announcement of its entry into the hardware market, considering that WOW's customer base is even more granular and much less discretionary than DLX's, most people also wouldn't be able to envisage a scenario where WOW would end up in its current predicament.


Back to DLX, although I totally agree that its paint business is first class. I'm not fully certain that future management will not do something silly that will destroy shareholder value like what WOW did a few years ago.

I also feel that BRG's growth opportunities are much wider than DLX's. With the beachheads in the US & UK markets established, if they can execute their plans well, I don't see any reasons why it can't keep growing at a double digit rate (low teens) for the foreseeable future.

DLX is also much more dependent on a single customer, namely, Bunnings, and will be even more so going forward. Although currently it's not in Bunnings' interest to rock the boat, who knows what they will do in the future? New Bunnings management with new beliefs might want to claw back some of the fat margins that DLX has.

For a long time, a lot of grocery suppliers with strong brand names enjoy mutually beneficial relationships with their main customers, namely the major supermarkets. In recent years, these customers have morphed into their competitors, promoting their own private labels.

Although unlikely to happen anytime soon, we cannot discount the possibility completely. Bunnings did try to do that with their partnership with Nippon Paint (a major player with excellent reputation in Asia). Who knows, they might try to do that again in the future.

I acknowledge that BRG is also not a perfect business, it has to keep spending money on R&D to keep it ahead of competitors. Its recent track record is comforting though.


As I said in our past conversation, there is no business that is pimple-free. I'm willing to ignore these pimples when that business is having a temporary stumble. For example, I first entered BRG back in Feb 2013 when BRG disappointed the market with its HY result and my last entry was in June 2015.

In the future, if an opportunity presents itself, I will consider buying DLX, but not now.

For the record, I have 10% of my portfolio invested in BRG, whilst REH makes up 30%.