Share Sleuth: Dewhurst's AGM surprise is a warning

Walking along the Uxbridge Road from Feltham station to Dewhurst's headquarters I admit misgivings to myself. Though it's a bit bleak, they're not about the locale.

The lift component manufacturer has been a stalwart of the Share Sleuth portfolio since the beginning. Over the years only Dewhurst's large pension obligation and, recently, a very slowly declining trend in profitability have troubled me.

I've never visited the company, and I've corresponded with its finance director only briefly. Largely, I've assumed the company, by dint of its long and profitable history and family ownership, will go on as it has done in the past.

Nearly seven years of compliant share ownership have left me with scant knowledge of the lift industry. Not enough to decide whether any decline in profitability is temporary, or something to worry about.

COMPLACENCY

Now I'm worried, because I've just read a statement released the same morning that warns profit in the year to September 2016 will be significantly lower than profit in 2015 was.

The walk is a stretch. I'd given myself an hour, and Google said it would take just 29 minutes, but delays into London and incorrect platform selection at Vauxhall mean I only have 30 minutes to get there. Perhaps I shouldn't have stuck to my original plan. Perhaps I should have caught a taxi.

Perhaps I shouldn't be so complacent about Dewhurst.

Longstanding chairman Richard Dewhurst starts the meeting by adding colour to the statement the company had published earlier.

Demand has been dented along with confidence in the global economy, and by the prospect of a vote on our membership of the EU. The strong pound is reducing Dewhurst's competitiveness at home and abroad.

At home, cheap European imports are proving stiff competition and, while sales abroad - in Canada, the US, Australia and the Middle East - are healthy, profit margins are being squeezed because Dewhurst's foreign subsidiaries buy their pushbuttons from Dewhurst in pounds.

When dollar earnings are translated back into pounds, they're worth less in reported revenue and profit.

The company owns two smaller businesses. The more significant of the two makes keypads for ATMs. As I find out later on, it has one major customer, and demand for its ATMs can be capricious.

Prior to sanctions, it may have been selling a lot to Russia. A sudden, and unexpected, drop in keypad sales will contribute to Dewhurst's fall in profit.

Currency and customer concerns may well be temporary, but the impact on revenue and margins reveals a competitive market.

DEWHURST'S MARKET IS CHANGING

I have come to learn whether Dewhurst's position in that market is strengthening or weakening because of something I have picked up from recent annual reports: the market is changing.

There are only seven resolutions, none of them controversial and the meeting ends after little more than 15 minutes.

As I gaze at the display at the back of the room, Richard Dewhurst approaches and I comment on the large number of LCD displays and signals, and the relative paucity of pushbuttons, Dewhurst's speciality and heritage.

The company has introduced a premium touch screen lift control panel. It's also developing a Destination Dispatch system. With Destination Despatch you select which floor you want to go to from a console in the lobby and it directs you to a lift. Destination Dispatch systems use LCDs too.

Where lots of people want to use lifts at the same time, lobbies in hotels and busy office blocks for example, Destination Dispatch systems have caught on. They cost more, but it's worth it if they enable more efficient lift management and impress clients more.

In one sense, it doesn't matter, as Dewhurst is supplying LCDs, lanterns, and soon whole systems, but in another sense it does matter, because Dewhurst isn't making the LCDs, so it collects less of the profit.

This explains why Dewhurst's shifting its emphasis to systems, control panels with pushbuttons (or LCDs) embedded in them, and lanterns beckoning you to the lift that the Destination Dispatch console has allocated you.

They use Dewhurst pushbuttons, a new laser cutting machine cuts the panels, but they use components from other manufacturers too.

I'm always surprised when I walk through an ordinary looking door in an ordinary office corridor and it opens into a factory. Dewhurst still has old fashioned lathes for specific jobs, as well as modern machine tools.

Keypads and some of the routine lift components are manufactured in Dewhurst's factory in Hungary, but higher value 'just in time' components and assemblies are made in Feltham.

PUSHBUTTON NICHE

The pushbutton corner of the factory is relatively small. There's a section for manufacturing Uniblade lanterns, a paintshop and so on.

We pause to look at control panel destined for a railway station. The pushbuttons and panel are made by Dewhurst, but the telephone is bought in, and the LED display comes from a long-established partner in Singapore.

Dewhurst's niche has always been pushbuttons. They're durable, attractive and much copied in the industry, but can withstand attack by a hammer.

They're not cheap, a typical pushbutton to summon a lift might cost £15 in the UK, but if they save you calling out an engineer, they save you money.

Not only are alternatives, LCDs, making inroads into the market but BST, the Shanghai company that manufactures most of the pushbuttons for the big four elevator manufacturers, churns them out by the thousands for 'pennies'.

When customers want something different, the big four might offer Dewhurst buttons, but mostly Dewhurst is active in the modernisation market where its reputation with lift consultants and architects gets them specified in projects.

Pushbuttons are only a small part of the overall cost of a lift modernisation programme, so customers may be prepared to pay a bit more for quality, but a profit warning, and the encroachment of European competitors when the terms of trade favour them, show there are limits.

I leave Dewhurst enthused by the chairman, his easy relationship with the men and women working in the factory, his willingness to discuss the challenges facing the business, and charmed by a man who daydreams of bulldozing Britain's terraced houses and replacing them with low-rise flats, serviced no doubt by lifts controlled by pushbuttons.

But I have been complacent. I've assumed that the good results of the past will be repeated in the future, so long as Dewhurst keeps up the good work. In other words, its markets are stable. They're not, and the choices Dewhurst and its rivals are making now will determine success in the future.

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