Share Watch: Five shares that pass my valuation tests

Anpario (ANP): Growth hopes in the mix

Anpario’s results are a bit of a conundrum. Ever since it concluded the last of three acquisitions from which the company was created, in 2012, revenue has remained fl at. Although profi ts have grown 35 per cent since then, Anpario ought perhaps to be doing even better.

Anpario manufactures natural additives, which are mixed into animal feed by farmers to improve nutrition, enabling poultry, pigs and cattle to stay healthy and produce more meat. Often farmers have relied on cheaper antibiotics to plump up livestock, but the practice is outlawed in the EU, the US and some other places because it’s believed to be linked to the rise of antibody-resistant superbugs, which endanger human health.

Even though the regulations are difficult to police because farmers still use antibiotics to treat sick animals, demand for Anpario’s products ought to be strong. Judging by the firm’s high profit margins, it is.

Modest growth in revenues from additives has been negated by the loss of less profitable business in recent years. The disposal of an animal feed firm and the loss of a contract to manufacture feed for a European supplier impacted revenue more than profit.

Now Anpario is almost entirely focused on its own additives, revenue growth should be more apparent; meanwhile, under a new chief executive, Richard Edwards, the company is sharpening up its marketing. It has rebadged the product range with the Anpario name, and it’s taking more control of distribution. The company already has wholly owned subsidiaries in the top three meat-producing regions, China, Brazil and the US, and it’s opening subsidiaries elsewhere in the Far East. In February, Anpario acquired its Australian distributor.

A share price of 300p values the enterprise at just under £60 million or about 20 times adjusted profi t in the year to December 2016. The earnings yield is 5 per cent, which is not cheap unless growth follows.

Judges Scientific: (JDG) Judged to be a winner

Judges Scientific is another company struggling to live up to the promise of earlier years. Adjusted profit fell 23 per cent in the full year to December 2016; as three of its 13 specialist scientifi c instrument companies misfired. Revenue crept up 2 per cent despite four acquisitions.

Judges buys small scientific instrument makers, of which there are thousands in the UK alone, and does very little with them. The parent company is more of an investment company than an operating company, targeting private enterprises with strong and sustainable earnings and cash flows. Out of the glare of the stock market, it can buy them fairly cheaply, typically for less than six times adjusted profit, but once they’re part of the listed group, investors value their profits much more highly. Judges adds value, simply by finding and shining a light on these companies. Their owners are happy to sell to Judges because, it says, of its reputation for straight dealing.

The past three or four years have been difficult because the main customers for scientific instruments – universities largely funded by governments – have less money to spend. Demand from industrial customers has been erratic too, but Judges’ businesses remain highly profitable and, helped by the lower pound, orders are picking up again.

A share price of £15.20 values the enterprise at £110 million, about 19 times profit in the full year to 2016. Last year may have been an unusually bad year though, and if that’s true, Judges shares are undervalued. The company is run by founder and chief executive David Cicurel, who owns 15 per cent of the shares. He is, therefore, backing his own judgement.

Portmeirion (PMP): Selling smashing wares

The year to December 2016 was eventful at Portmeirion. Normally a paragon of stability, revenue continued to slide in South Korea, a country that had briefly threatened to usurp the UK as Portmeirion’s second biggest market. Revenue collapsed in India, where the company had experienced remarkable growth the previous year.

The tableware company’s record of consistent revenue growth since the credit crunch was rescued by the acquisition of Wax Lyrical, a manufacturer of scented candles and reed diff users based in the Lake District, which propelled the UK ahead of the US, usually Portmeirion’s biggest geographic market.

Portmeirion owes much of its popularity in the US to the Spode Christmas Tree range of tableware, but its biggest seller worldwide is Portmeirion Botanic Garden, a pattern designed 40 years ago. Hitherto a cautious acquirer, it bought Spode and Royal Worcester out of administration when the venerable brands fell on hard times, and splashed out on Wax Lyrical in 2016. Scented homewares are growing in popularity though, and since Portmeirion can sell them through its large distribution network, the acquisition may well prove valuable.

South Korea, which is experiencing a period of low economic growth and political uncertainty, is the biggest concern. Revenues had grown steadily for over a decade but have fallen by over a third in two years. The company hopes the business is stabilising.

Meanwhile, the guard is changing. Portmeirion has the benefit of an immensely experienced board of directors, but after nearly 30 years as finance director, Brett Phillips is retiring. While these are unusually turbulent times, the culture he and longstanding chief executive Lawrence Bryan have helped foster should endure, enabling the company to exploit its brands and earn impressive returns on capital over the long term. The company says its immediate outlook is positive, and with a brand new kiln it has more than enough capacity to meet any resurgent demand in South Korea and India.

A share price of 940p values the enterprise at nearly £115 million, about 17 times adjusted profi t in 2016. The earnings yield is 6 per cent.

Science (SAG): Factoring in expansion

Science employs scientists at laboratories in Cambridge and Epsom to work on projects for companies in a growing range of non-military fields: medical, commercial, food, and oil and gas.

In recent years the company has acquired a handful of smaller research and development consultancies, bringing in more scientists, broadening the scope of its activities and improving its capability to service existing customers. Now it’s expanding in its biggest market, the US, by transplanting key sales people to overseas offices in Boston and Houston and a new offi ce in San Francisco.

Results for the year to December 2016 indicate the strategy is working. Revenue and profi t both increased markedly and return on capital improved to an impressive 24 per cent, having dipped slightly in 2015 as the company bore the cost of integrating new acquisitions, one of which was loss-making.

News that Science has augmented its cash surplus by mortgaging its two laboratories at historically low rates means that it has the resources to continue acquiring and expanding, a strategy that makes a lot of sense considering Britain’s scientific reputation and its possibly lower labour costs than the US.

A share price of 175p values the enterprise at £63 million, or about 13 times adjusted profit. The earnings yield is 8 per cent.

XP Power (XPP): Resoundingly profitable

XP Power is a textbook example of a prosperous, modern manufacturer, which is surprising. It’s only been manufacturing for about 10years. XP manufactures and distributes power converters used in machinery in factories and hospitals. Although its performance in the year to 2016 was helped by the acquisition of EMCO, a US manufacturer, the weak pound was a mixed blessing. It flattered revenue, which is mostly earned in dollars, but was a drag on profit due to the disproportionate impact of dollar costs.

Overall, though, the year ended in December 2016 impressively, with revenue and profit gains, and, as has become routine, high returns on capital.

XP benefits from its heritage as a distributor, which bequeathed it strong relationships with equipment manufacturers and a network of offices in North America, Europe and Asia. The move into manufacturing enabled it to start with a clean slate, building modern facilities in China, and more recently Vietnam, where production costs are even lower; it’s intending to open a second factory.

The company specialises in extremely efficient converters that reduce waste heat, which eliminates the need for mechanical cooling fans and improve reliability. Since they’re incorporated into equipment bound for factories and hospitals where failure rates and energy costs are critical, it’s worth paying for quality.

While XP is consistently targeting direct sales at its global customers to achieve a bigger proportion of their custom, and developing product families that can easily be modified to their needs, it plans to become both broader and more specialised, expanding its range through more acquisitions and supplying more custom power converters to its best customers, while focusing on manufacturing efficiencies to keep low-cost competition from elsewhere in Asia at bay.

Although profitability may waver as investment in new machinery waxes or wanes with economic growth and contraction, XP Power has proved itself to be resoundingly profi table despite pretty anaemic global growth.

A share price of £21 values the enterprise at about £415 million, about 18 times adjusted profi t. The earnings yield is 6 per cent.

For the full, live Watchlist, visit www.iii.co.uk/ZZ3. For the live Share Sleuth portofolio, visit www.iii.co.uk/Zpq.


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