Stephen Bland runs another look of Shaft Sinkers.
This is my fourth review of mine digger for others, but not itself a miner, Shaft Sinkers (LSE: SHFT). Originally, I considered it in September 2011 at 139p; next in January this year at 43p; then in March at 63p, and I'm looking at it yet again today at the offer price of 95p. That's quite some volatility over the period. The reason for the latest review is that the company recently published its accounts for the year ended 31 December 2011, which contain a lot of information that wasn't available earlier.
With small caps in particular, I consider price-to-tangible book (P/TB) to be the king of the value ratios, so I'll consider this first. Net tangible assets at 31 December 2011 were £45.6m, up a little from the £43.8m comparative. With 47.5m issued shares, the net tangible asset per share figure is 96p. This is roughly equal to the share price, so no appreciable value here.
The value prince is net cash, and Shaft continues to score here with £6.1m, although that's down from £11.1m a year earlier. The main reason they hold net cash at all is due to advances from customers; with no new major projects having commenced in 2011, this contributed to the reduced figure. It's a lumpy business, a bit like large-scale construction, so there will never be an even flow of work. Thus any particular year in isolation can be unrepresentative of the business.
2011 was the first year of dividends and they are paying out 7.2p in total, making a historical yield of a high 7.6%, which is well into value territory. The 2013 forecast looks for the same again, though -- as is typical with small caps -- there is only one broker making forecasts.
Earnings per share (eps) was 18.2p for a historical price-to-earnings (P/E) ratio of only 5.2 but the 2013 forecast is for a reduction to 14.9p, giving a forward ratio of a still-low 6.4, which is still easily a value rating. The reduced eps is no doubt the reason for the expected lack of increase in the dividend.
So that's my four classic value tests, with Shaft scoring on three but not on the lead figure of P/TB. However, a meaningful price drop -- provided it is not accompanied by some asset trashing news -- would push this share into the world of pyad.
There's other interesting stuff here, though. At the year end, their order book stood at £207m, excluding the outstanding value Eurochem contract in Russia that they have terminated prematurely. This figure though is well down on the £488m a year ago, but my comments above on lumpiness are relevant. Since the year end, they have won about £59m of new contracts in South Africa, their principal area of operation.
In addition to the order book, at the date of publication of these results on 20 April, they had £1bn worth of tenders out on 10 projects. While there can be no certainty of winning these, they believe they are "well placed" to secure a number of them when they are awarded. Further, they say the current tender pipeline is running at a high level.
Shaft was always a much riskier play than the average UK-based value share. That's because being engaged in a relatively few large-scale projects is generally a riskier business than selling a lot of small items. Just one job going wrong can result in a big hit, and that is exactly what happened with their Eurochem contract in Russia. Also, they operate in what could be seen as politically questionable parts of the world.
As I have mentioned in previous articles, the shares are quite tightly held and being a small cap, too, means that there is a sizeable spread in the price of about 3p. Being tightly held means that there is a gearing effect created by anything likely to affect the share price, having the result of magnifying the actual resulting movement in the price by more than may be justified by the underlying events and causing the aforementioned high volatility. But for the same reason, this can create value when a price fall is overdone.
My current opinion on this heavily fluctuating share is that it is not cheap enough at present to be a really attractive value play, as shown by the lack of discount over tangible book. Similarly, it's a sell if you bought much cheaper. And because it is riskier than many other value shares, it needs to compensate by offering really bargain fundies to a value investor. Right now that is only visible on net cash, yield and P/E and, not least, that great name worthy of a nomenological Nobel. That is all good, but not quite good enough in this particular case to trade off the risks. But well worth keeping an eye on if the price falls back either for no apparent reason, or because you think the reason is being given undue weight.
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