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.
Alumasc (ALU): winter woes
After five years of profitable growth, Alumasc suffered a reversal of unexpected intensity in the year to June 2018. Revenue fell 6% and adjusted profit fell 25%. Without the contribution of Wade International, a manufacturer of drainage products acquired during the year, revenue and profit would have fallen further, by 11% and 38% respectively.
In cash terms, Alumasc made a loss as money flowed out due to an upsurge in orders at the year end, which it funded but had yet to be paid for. Alumasc had also splurged on stock earlier in the year, ahead of price rises.
The sharp reduction in profit was the result of the cold winter, which made life difficult for builders in the UK; the collapse of Carillion, which had a knock-on effect for the whole industry as finance dried up; and a big drop in overseas revenue.
Alumasc hoped to pick up enough business to make up for the completion in 2017 of a large project supplying solar shading to a power station in North America. Demand did not materialise, but the company remains expectant.
This year’s performance highlights Alumasc’s susceptibility to the cyclical nature of the construction industry and its dependence on outside finance. Its biggest obligation is to its own employees and former employees in the form of a defined-benefit pension scheme, but it also borrowed to buy Wade. Financial obligations and erratic profits are not good bedfellows, but Alumasc continued to invest in 2018, beefing up its sales operation in North America and opening a new building products factory in the UK, believing that the problems of the past winter were transitory.
Alumasc has redefined itself as a specialised building materials group with a range of highly profitable and, it says, market-leading products. It may make a good long-term investment for investors who can withstand the short-term volatility.
A share price of 128p values the enterprise at about £80 million, 14 times adjusted profit in the year to June 2018. The earnings yield is 7%.
Quartix (QTX): driving a hard bargain
Quartix spooked traders in July, when it issued a trading statement saying profit for the half-year to June 2018 was about the same level as it had been for the same period in 2017. The flat half-year followed a flat year to December 2017, and fears may have been compounded by the departure of the company’s chief operating officer – a high-profile hire – after little more than one year.
Since July, the share price has fallen about 40%, perhaps into value territory if Quartix is merely experiencing growing pains.
Quartix supplies vehicle telematics systems – trackers that tell fleet owners, typically small businesses such as builders and plumbers, where their vehicles are and how well they are being driven. This information helps businesses be more efficient, saves fuel, reduces accidents and protects firms’ reputations from bad drivers. Quartix also supplies UK insurers with the same device, to monitor young drivers – although insurers drive a hard bargain, so Quartix is rationing the device to customers willing to give it a reasonable return.
Although Quartix only floated in 2014, it was founded by Andy Walters, the current chief executive, in 2001. Since then it has grown rapidly by supplying a generic product at low cost and, after the first year’s subscription, without tying the customer into a contract. This freedom does not seem to have encouraged disloyalty, as Quartix routinely reports customer attrition rates of about 10%, well below the industry average of 15%. Slightly disconcertingly, the gap narrowed in the half-year to June, when Quartix’s attrition rate was 12%.
There are two principal explanations for the drag on profit: a slowdown in the still healthy growth rate of UK subscriptions, which Quartix says it has dealt with (without going into detail), and increased investment overseas. Quartix has a profitable French operation and a fledgling loss-making US operation. Subscriptions and revenues are growing rapidly, and the company obviously expects profit to follow once it scales up.
A share price of 235p values the enterprise at £107 million, about 20 times adjusted profit in the year to December 2017. The earnings yield is 5%.
Renishaw (RW): measurable success
Long-term followers of Renishaw will be accustomed to wild gyrations of profit, but there have been a lot more ups than downs; overall revenue has tripled and adjusted profit nearly quadrupled in a decade. The year to June 2018’s contribution was a 14% increase in revenue and a 23% increase in profit.
Ninety-four per cent of Renishaw’s revenue comes from its metrology division. It equips factories around the world with sensors, probes, gauges and related software that automate and calibrate machines. Metrology is a big growth market as manufacturers around the world seek greater efficiencies and operate at ever-finer tolerances. The metrology division also makes additive manufacturing machines, which may also become a big growth market if, as many expect, 3D printers become fast enough to mass-produce components as well as prototype them.
The other 6% of Renishaw reached a notable milestone this year. The company’s healthcare division made its maiden profit. The division uses the 3D printing and sensor technology from metrology to make dental and surgical implants and surgical robots.
Renishaw is a prodigious developer of patented intellectual property, and heavy spending on research and development amounting to 15% of revenue (£84 million in 2018) makes it a formidable competitor. It is also very self-sufficient, using its own tools in factories – experience that helps it refine products and develop new ones.
The shares are not obviously cheap, but Renishaw is a rare business. A share price of £42.15 values the enterprise at just over £3 billion, about 25 times adjusted profit in 2018. The earnings yield is 4%.
FW Thorpe (TFW): brighter than expected
Despite having warned that it probably wouldn’t, FW Thorpe registered its best-ever performance in the year to June 2018, earning 4% more revenue and 6% more profit. Excluding the contribution of Famostar, a Dutch manufacturer of emergency lighting acquired mid-way through the financial year, the performance was pretty flat, though, and the company warns 2018’s result will be “difficult to replicate” in 2019.
FW Thorpe has an exemplary record. Average return on capital over the last 11 years is 25%, a period in which it more than doubled revenue and adjusted profit, remained unencumbered by year-end debt, and invested in an entirely new product range as the lighting industry shifted from fluorescent to LED technology. In 2018, 85% of revenue was derived from LED products.
It makes all manner of lighting systems. Thorlux, FW Thorpe’s biggest brand, manufactures industrial and commercial lighting systems, but the group also makes emergency lighting systems, streetlights, tunnel lighting, store signs and lighting for retailers and clean rooms. In recent years it has expanded more aggressively overseas, and it now earns 36% of revenue outside the UK, principally in the Netherlands.
While a mooted slowdown in construction activity and trade barriers following Brexit are concerns, perhaps the biggest risk to profitability is a reduction in demand following the rapid adoption of LED lighting in recent years. Heightened demand shielded FW Thorpe from the weak economy, but the company believes the LED boost has peaked.
Long-term, Thorpe will be relying on new innovations to sell more lighting. Its newest wireless systems allow customers to control the colour temperature of lamps, potentially improving the wellbeing of workers. A warehouse lighting system tracks staff to enable planners to lay things out better, and an emergency lighting system, installed in a hospital near FW Thorpe’s headquarters in Redditch, automatically measures temperature, humidity and carbon dioxide levels.
A share price of 281p values the enterprise at £236 million, about 18 times adjusted profit in the year to June 2018. The earnings yield is 6%.
Also on the watchlist...
Clipper Logistics is growing fast due to the popularity of internet shopping. The company stores and delivers products for retailers, and manages returns, a business that is becoming increasingly complicated, automated and critical to the reputations of the retailers it represents. Operating from 46 locations, mostly in the UK, but also in Germany and Poland, Clipper says: “We have the facilities, the processes, the experience, the fleet and, most importantly, the people.”
Although it only floated in 2014, Clipper Logistics was founded by Steve Parkin in 1992. He heads up an experienced board that has grown the enterprise to a valuation of £500 billion (about 21 times adjusted profit in the year to April 2018), and still owns 25% of the shares.
The shares are not obviously cheap, and the company has hefty financial obligations in terms of bank borrowings and operating leases. In mitigation, Clipper says its contracts with blue-chip customers from Amazon to Zara allow it to pass on costs and give it a stable income, so it shouldn’t get into financial difficulty.