Things are not always as they seem when companies display many of the traditional value characteristics.
There has to be something wrong with a company with a forward price to earnings ratio of less than five, which is yielding 10% and whose valuation is covered around three quarters by cash, right?
"Maybe" is the short answer I'm afraid. AIM-listed Interior Services Group (LSE: ISG) certainly looks exceedingly cheap at first glance. ISG does what it says on the tin, providing refurbishment and fitting out services internationally with operations in the UK, Europe and Asia.
The company carries out around a quarter of London's refurb' and fit-out work for commercial offices. More recently, it has opened an Asian division which employs 450 staff and which has secured £40m of work over the last three months -- including £20m for a resort and casino in Singapore and £8m to re-fit Abu Dhabi's national football stadium.
You wouldn't imagine this was exactly the ideal business to be in at the moment. With construction and commercial property on its knees and refurbs put on hold in an attempt to preserve cash, the immediate future can't be all that bright.
Defiantly robust
But the interim results for the six months to the end of December were defiantly robust in light of market conditions, showing revenues up 11% to £562m and adjusted profit before tax up by the same margin at £7m. Basic earnings per share came in at 15.6p and the order book at 31 December was £950m of which £494m is for delivery in the current financial year and £365m for next year.
Today, with the shares standing at 132.5p, ISG is capitalised at a smidgeon over £41m. The consensus forecasts for the four brokers covering ISG are for earnings of 29.1p this year, falling to 28.4p next. Whilst I take such forecasts with a good dose of salt, they are consistent with the interim results and, if accurate, put ISG's shares on a forward price-to-earnings ratio for next year of 4.7. This is clearly too low, so something's got to give. Similarly, if the dividend level is maintained, the shares are paying off at an anomalously high 10% and there's over £30m in net cash on the balance sheet. Also, the directors have been buying in reasonable chunks at prices varying from 95p to 184p over the last year.
The bad news
All these stats combined would seem to make ISG a raging buy; and it may well be. But perhaps all is not as it seems? We haven't yet heard any hard news that trading isn't going well, and the company expected the second half to be ok, but it did refer to recent economic and political events as having an "impact" on business.
And it wouldn't take much to make the figures look a lot less rosy. This is a high turnover, low margin business. Also, of the overall net assets value of £47.4m, there are intangibles of over £90m, so this is by no means an asset play. For the value hunters amongst us who would discount the goodwill, ISG effectively has net debts of over £40m, whilst "trade and other receivables" of over £200m may be cold comfort if the crisis continues and debts simply don't get paid.
Safer pebbles on the beach
The market seems to be pricing in a profits warning that hasn't happened. But is it a case of "hasn't happened …yet"? Who really knows? On the one hand, the low forward rating, the unfeasibly high yield, the healthy cash balance and director confidence suggest a bargain. On the other, how can ISG stay relatively immune to the crisis given the nature of its business?
Overall, this is an interesting example of a company where all looks hunky dory and the shares look cheap. It's been touted around as a "buy" in the media and it may well prove to have been cheap in hindsight. But given the debts and the potential for the seeming value to unravel, it's one best left alone in my opinion. There are plenty more pebbles on the beach without jagged edges.
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