The net cash position of this small cap is a powerful attraction for value investors.
MS International (LSE: MSI) was thrown up by another one of my net cash trawls that I carried out recently. A previous search on this criterion a few weeks ago revealed IG Group (LSE: IGG) which I reviewed here. Net cash was always a powerful value attraction for me but in these days of the clichéd credit crunch it becomes especially important.
I have done MSI before, way back in 2001. The same thing happened with my recent feature on Mucklow (LSE: MKLW) so it could appear that I am being drawn to these companies from previous experience. That is not the case, it is merely chance that they came up in current searches. There is no emotional attachment or nostalgia in value. All that matters is how the numbers appear now so that any repeat of past selections is just coincidence.
The fundamentals
| Share price | 120p |
| 52 week high/low | 199p/70p |
| Market cap | £22m |
| Eps actual 02/05/09 | 19.5p |
| Eps actual 03/05/08 | 22.0p |
| Historical P/E | 6.2 |
| Dividend 02/05/09 | 4.5p |
| Historical yield | 3.8% |
| Tangible assets per share 02/05/09 | 105p |
| Price/book | 1.1 |
| Net cash 02/05/09 | £8.2m |
| Directors own | 43% |
| Other majors own | 20% |
The downsides
In value fashion, I'll look at the downsides first. There are no forecasts available for the 2010 year, one of the difficulties with very small caps like MSI which have few analysts following them because their client institutional investor interest is low. Also, note that the shares are not very liquid because of the large holdings by directors and other major investors. And what there is floating doesn't seem to be traded much either.
Another point against MSI, but common to many small caps, is the large spread of about 7p in the share price as I write. This represents about 6% of the current offer price and I've seen it higher than that at 10p.
For comparison, big caps trade typically on a very small spread, a fraction of one percent. Consequently investors need to see a much higher percentage rise in the price of MSI than with shares on small spreads before going into profit.
MSI isn't the full pyad share deal by some way because it trades a little above tangible book and the yield is modest. It wouldn't take much of a share price fall though to drive it below book value, and you can see from the 52-week low that it did actually do so for a time in the last year.
It does have a large wad of cash compared with its capitalisation and also stands on a low P/E historically. The low P/E is perhaps not that surprising in view of the fall in eps from 2008 to 2009. The modest yield was not assisted by a held dividend although that had grown in the past along with eps.
The future
The absence of a 2010 forecast makes it difficult to gauge the direction of eps. The only real guide is the directorspeak in the results published recently for 2009 where I read that: "…future results will depend upon the degree and duration of this recession and whilst we are hopeful of an upturn, we are not anticipating that it will happen in the short term, so we are planning our business strategy based upon a continuing difficult market in the year ahead."
In other words don't expect miracles for 2010. Incidentally, congratulations to them for managing to avoid the use of the word "challenging" in their 2009 preliminary results, a word that has become so trite in directorspeak during these recessionary times that I'm tired of hearing it repeatedly.
The outer
So where's the outer here? With eps likely to be no better than static for 2010, MSI is definitely a patience job. But it smells fairly good to me. Although the actual business is of little concern to me, what matters is the numbers, how much money they make out it, the mix of industries is peculiar with naval guns, casting forks for fork lift vehicles and making petrol station canopies.
As you might expect, the defence side made all the running and in 2009 accounted for about half of revenue, 25% up on the previous year whilst the other two divisions, what the company calls Industrial Engineering, went the opposite way and by the final quarter encountered what they describe as "austere trading conditions."
In my experience a value share with a mixture of profitable products and others in decline to the extent that the latter can no longer make any worthwhile profits is likely at some stage to reorganise accordingly or have it done for them, a potential which isn't exactly obstructed by all that cash. This I feel will eventually be the outer here if the Industrial Engineering side doesn't pick up.
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