A Very Cash Rich Small Cap
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The company is the engineering group Delta Plc
(LSE: DLTA)
, which today announced a 12% rise in first-half operating profit from continuing operations on 6% higher revenues. After exceptional items, both pre-tax profit and earnings per share dipped slightly to £11.7m and 5.6p respectively.
The interim dividend was upped to 1.6p from 1.5p a year ago.
Not really that exciting. But read on. The interesting bit is in the balance sheet.
Because unusually, even for a quoted manufacturer, net assets per share actually exceed the current stock price by over 13%.
But firstly, how's business?
Operating profit in the engineered steel products (ESP) division ratcheted up slightly to £7.5m from £7.4m on sales 4% higher, with the highlight being improved revenues in Australia. ITI, the last remaining UK ESP operation, made losses on lower sales.
Galvanising services (GS) saw operating profit up almost 25% to £5.6m as Australian sales volumes increased comparably to the US, with both regions enjoying good underlying margins.
So there are good growth areas. But there are also a few problems...
The company said that the electrolytic manganese dioxide (EMD) area remained very competitive in the face of Chinese competition. Selling prices for EMD, used for making disposable batteries, had not risen to allow for higher ore prices and hikes in other direct costs.
With anti-dumping issues circulating as well, Delta is clearly not happy about the losses it is stacking up here, and has announced planned action to address falling sales and to 'preserve shareholder value'.
In other words, to get out of the EMD market. Which would be a good sign of management's willingness to respond to problems it cannot control, and not to keep pouring good money down the drain.
Which brings us back to that balance sheet.
A share in Delta currently costs you 124p. It buys you nearly 142p in net assets. That's like buying £1 for 87.5p.
So what are those net assets?
Plenty of cash, for a start. There is £109m, net of a small amount of debt, in the bank, equivalent to over 57% of the market capitalisation of £190m. And nearly £34m of property included at cost and after depreciation.
And though the company's pension scheme completely dwarfs Delta's market value, as a result of the ongoing asset disposal programme, there is no actuarial deficit.
With a prospective 2008 price to earnings ratio (PER) of 11 times and a more than twice covered yield of 4.2%, Delta is clearly a cheap share. There has been a recent theme running on the Fool boards about whether it is always likely to remain so. Could be. Certainly it's not obvious what's going to catalyse that value.
But my approach has always been to hold a portfolio of shares like this. Particularly if your investment horizons really are long term and not just focused on next week's relative performance. You never quite know when things are going to happen, but in the end, value will out!
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