Each month Richard Beddard trawls through annual corporate results for candidates for his Watchlist and the Share Sleuth portfolio of companies that satisfy key valuation metrics, such as earnings yield and return on capital, and profiles the most interesting businesses.
Watch: IG Design (IGR)
In the year to March 2017, IG Design sold enough gift wrap to stretch to the moon and back, and enough pens and pencils to line the Great Wall of China. Formerly known as International Greetings, the business is one of the bigger competitors in the greetings industry, bashing heads with Hallmark and American Greetings in some markets.
Now IG is cementing its recovery with a new brand; it has changed not just its name but its business model, having paid down year-end borrowings ahead of schedule and adopted a more balanced, design-centred approach to flogging gift wrap, Christmas crackers and greetings cards around the world.
In the past, the somewhat niche and frivolous business has been highly dependent on Christmas. It dominates the Christmas cracker market, for example – it has even supplied them to Buckingham Palace – which puts strain on the business in the peak autumn trading period. By targeting categories like stationery and ‘everyday’ cards, trading has become more even throughout the year, though at least 75 per cent of revenue still comes from its traditional, more seasonal business.
By targeting the US, now IG’s biggest market, it is also re-balancing geographically away from the UK, its second biggest market. The balance tipped further in the financial year just concluded when IG acquired Lang, a US supplier of products for home and garden. IG will also benefit from cost savings as Lang uses its printing facilities.
A share price of 360p values the enterprise at £285 million, or 21 times adjusted profit. The earnings yield is 5 per cent. The share price reflects strong growth in profit, and especially cash flow, since the financial crisis.
IG must maintain its financial discipline to be a good investment. In 2008 it almost went under as it wrestled with poorer trading and debt built up through acquisitions. Chief executive Paul Fineman – newly appointed at the time – brought the company back from the brink, so he should be alive to the risks.
Watch: Motorpoint (MOTR)
With consumer confidence shaky and levels of car finance ballooning, it would take some confidence to buy shares in a car dealership. Nineteen-year-old Motorpoint is building a distinctive position in the market though, focused solely on selling nearly-new cars from 12 sites, which it hopes to grow to at least 20.
In the year to March 2017, its first full year listed on the stock market, revenue increased 13 per cent as Motorpoint added two new sites. It added another in Sheffield after the year end. But adjusted operating profit fell somewhat due to the cost of starting up new car supermarkets and price cuts introduced by the company to shore-up demand temporarily, after the Brexit vote.
Nevertheless, Motorpoint earned a healthy return on capital and, with demand for new cars fading, the company expects more interest in the second-hand market.
Despite potential economic headwinds, the shares don’t look particularly cheap. A share price of 140p values the enterprise at about £242 million, 17 times adjusted profit. Motorpoint’s earnings yield is 6 per cent.
If harder times are ahead, Motorpoint has one thing going for it: its specialist business model. The company’s commitment to low prices and a ‘hassle-free’ shopping experience, where the price you see is the price you get, may be enough to endear it to customers.
It’s one of a growing number of firms using its Net-Promoter Score – a measure of customer satisfaction – not only to track its performance, but also as a modest determinant in the bonuses awarded to executives in years when the company grows profit.
Watch: MS International (MSI)
MS International is going through a lean period. Revenue in the year to 30 April 2017 was still stuck around the levels achieved during the financial crisis nearly ten years ago. Return on capital has slumped from a 2012 peak of nearly 30 per cent to just 8 per cent, barely enough to justify being in business if sustained over the long term.
MSI operates four divisions: defence, most notable for manufacturing naval gun systems, earned the most revenue and profit in 2017 despite restricted defence budgets and the delay of a delivery into 2018. The company also enjoyed a recovery at its petrol station superstructures business, which manufactures and constructs canopies and stores.
Forgings, which manufactures arms for fork-lift trucks, and petrol station branding, which supplies signage for petrol stations, lost MSI about £1 million between them in 2017,compared with a £2.8 million profit at the other two divisions.
Profit is being depressed by start-up costs. In South Carolina, MSI is building a new fork-arm plant it describes as ‘superb and substantial’.
The petrol station branding division, based on Dutch business Petrol Sign it acquired two years ago, is in its first year of operation in the UK and Germany. Should these investments turn a profit in future, the effect on overall profitability could be dramatic.
A share price of 185p values the enterprise at about £33 million, 15 times adjusted profit. The earnings yield is 7 per cent.
Growing these business divisions may not be easy: the number of petrol stations in the UK increased in 2017 for the first time in decades but the long-term trend is down. Forgings is a competitive and cyclical business. But MS International is investing heavily from a position of financial strength, and recovery seems likely.
Watch: Trifast (TRI)
Forty-four-year-old Trifast may be engineering a special position in what might be considered a less than promising industry. The company and its share price have experienced the best and worst of economic cycles, riding high as a provider of industrial fasteners used in the electronics industry, only to come crashing down when the technology boom turned to bust.
A slow recovery was punctuated by another bust during the financial crisis, but since then Trifast’s story has been one of growth and diversification.
Through organic growth and the acquisition of PSEP in 2011, VIC in 2014 and Kuhlmann in 2015, Trifast has relegated electronics to third place in the list of industries it supplies, behind domestic appliances and the automotive sector – its largest market at 31 per cent of revenue. Nearer the bottom of the list, TR Norway is supplying rivets for NASA’s Mars rover.
In the year to March 2017 Trifast achieved a 16 per cent increase in revenue and a 35 per cent increase in profit, albeit helped by the increased value of exported fasteners in terms of devalued sterling. It’s the latest in a sequence of good years that has resulted in revenue more than doubling from its low point in 2010, and profit increasing nine-fold.
Return on capital has been above 10 per cent since 2013 and reached 18 per cent in the year to March 2017, indicating that the business is not just making more profit but may be getting better at it.
Trifast revenue and profit
The company has diversified its product range as well as its customer base and focused most resolutely on its largest 25 customers, global household names and their most significant suppliers. By offering a full service, including design and technical support, it can reduce component costs and improve production processes, giving Trifast a competitive advantage.
While the company has made great strides, it is difficult to recommend at the current share price of 220p. It values the enterprise at £290 million or about 17 times adjusted profit. The earnings yield is 6 per cent.
All three of its sectors are cyclical and therefore high levels of profitability cannot be taken for granted.
Add: Vp (Vp)
Equipment rental specialist Vp achieved record levels of revenue and profit in 2017, a feat it regularly repeats.
Just one of its stable of plant hire firms performed poorly in the year; Airpac Bukom supplies compressed air and steam generation equipment to the global oil and gas industry, which is in recession.
Vp’s other businesses, which supply construction, transport, utility and industrial firms, all grew. They were aided by the acquisition of TR, which rents out electronic equipment such as satellite phones, walkie-talkies, test and measurement equipment, and audio-visual kit in Australia, New Zealand and Malaysia. Like most of Vp’s businesses, TR is a specialist.
Vp’s know-how enables it to differentiate itself from competitors by supplying unique products, and services such as training and health and safety inspections. Owning diverse specialist hire firms may explain Vp’s uncanny stability over the last 10 years. Despite the financial crisis of 2008, return on capital fluctuated between 9 and 12 per cent as the company doubled revenue and more than doubled profit.
The acquisition of TR diversifies Vp geographically too, lifting the international contribution to revenue from just under 7 per cent to more than 10 per cent.
Although Vp has invested heavily in new equipment and acquisitions to grow, it hasn’t had to borrow excessively to do it. Vp’s level of gearing – the ratio of debt and other financial liabilities to the capital used by the business – has, like profitability, remained remarkably steady.
A share price of 890p values the enterprise at £625 million, about 19 times adjusted profit. It seems like a high price to pay for a hire firm, but perhaps it’s the price of quality.