Out of favour and facing temporary problems but with strong financials -- this looks like a contrarian's delight.
It's not the sweetest of times to be in the construction and property consultancy business. But the contrarians amongst us enjoy this kind of thing; it's all about timing though. For the successful contrarian, the wrong sector at the wrong time for a business can become the right one at the right time for long-term investors.
The sector seems to have attracted far more than its fair share of upstart consultancies and fly-by-night operations that prospered during the boom times and are disappearing quickly now. AIM-listed Cyril Sweett (LSE: CSG) certainly isn't one of them, but its valuation suggests that it is.
The company was founded in 1928 and currently employs 750 people, in 27 offices throughout the United Kingdom, Australia, France, India, Ireland, Singapore, Spain and the United Arab Emirates. It's nice to read that the majority of staff own shares in the business. Additionally, the founder's family trust has a very significant holding of close to 17%. The directors also have reasonable stakes and have been buying shares this year in the 25-30p range.
A sorry tale so far
But the shareholders have had precious little to feel sweet about since the company listed in October 2007 as the chart shows -- despite that fact that turnover and profit have steadily grown over the last few years. In fact, it's been downhill more or less all the way since the 122p start. At today's mid price of 31p, the company is valued at just £17.3m.
But as we know, the boom times are over for construction. And a quick glance at the final results to the end of March shows that a few chickens have been coming home to roost. Profits were down a whopping 63% year on year due to restructuring costs, "doubtful debts" and vacant property costs.
So it's all bad news, bad debts, shrinking markets, dodgy outlook and one best left well alone it would seem? I would say not. If we ignore the exceptional costs for the moment, Cyril's pre-tax profits would have come in at £6m in what was a difficult year. And revenues were still up 26% to £79m.
Meanwhile the order book stands at £74m (though it was £86m at the same stage the previous year) and the company has taken decisive action to reduce its cost base. The management team has experience of running businesses through previous recessions and quickly scaled down its staffing levels to 750 from 950 employees. Additionally, the board sees opportunity where others see threats and is confident of gaining market share during the lean times.
On balance…
Talk may be cheap, but the strength of the balance sheet and the order book offer a great deal of comfort. The company has effectively no debt, with net assets of over £28m, and cash of £3.8m. Also, a big chunk of turnover comes from public sector contracts whilst the international business has been growing quickly and now accounts for 22% of revenues.
The brokers have consensus earnings per share of 5.15p pencilled in for this year and 5.51p the following year placing the shares on a forward price-to-earnings ratio (P/E) of 5.6. The historic P/E is even better at a little over 4, though it may take a longer term sustained recovery before we see that level of performance again. But the company doesn't need to repeat that level to be cheap. It's already well oversold if it can keep up anything like its current level of performance. Meanwhile, the shares are yielding over 7.7% if the total 2.4p dividend for the year is maintained.
It looks like Cyril could provide sweet returns for the patient investors amongst us.
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