This deep value prospect is doing well in difficult times.
If the UK economy really is beginning to emerge from the doldrums (and admittedly, that's a big "IF") then obviously, it's worthwhile for private investors to consider which sectors and individual companies are likely to benefit. But given that it is a big "if", it's also necessary for those of us who like to cover the downside as much as possible, to consider all scenarios.
The share price of AIM-listed timber merchant James Latham (LSE: LTHM) has taken a bit of a hammering over the last couple of years, as one would expect. In fact, it was more than sawn in half from its peak of 280p in October 2007 to the trough of a quid last Spring. It's recovered a little recently, but the shares still look like excellent value to me, given the strength in the balance sheet and the potential for increased earnings going forward as the country (hopefully…) emerges from the gloom.
Good cop, bad cop
One of the best things about Latham is also one of its downsides; the company is family-controlled. This means that investors are aligning their interests with the owners who are more likely than institutions and private investors with relatively small stakes to protect their company come-what-may -- and to pay a decent dividend.
The downside is that it's far more difficult for as predator to come along and gobble up such a company, rewarding us smaller investors with a quick turn. However, as and when family-controlled businesses are taken over, they tend to go at a greater premium to the existing share price than do institutionally controlled companies.
And the importer of wood would certainly make a tasty chunk for a predator looking for a little business integration one way or the other. With net assets of £40.8m (almost all of which are tangible and which may well be greater in reality due to freehold property holdings) and cash of £9.6m, versus the valuation of £32.7m at the current mid price of 170p, it's easy to see why.
Trading through the storm
So is this a less than profitable company with a patchy track record? Not a bit of it; quite the opposite in fact. Until the last year, when the global recession inevitably caused some contraction of the business, Latham had been growing steadily.
With the interim results to the end of September, the company brought in a very respectable pre-tax profit of £3.1m on sales of over £58m. Earnings per share were 11.7p of which the Board decided to give 2.5p back to shareholders as an interim dividend, giving an overall dividend yield of close to 4%.
We were also told that Latham had seen a steady improvement in revenue for October and November, though future trading remained difficult to predict due to uncertainty in the UK economy. Meanwhile, the company's new Scottish branch is making "steady progress" whilst the move to larger premises at Fareham and Dudley is contributing positively to the results.
Value and recovery
The broker forecast earnings of 14.7p this year, rising to 15.9p next, which places the shares on a forward price-to-earnings ratio of 10.7. This is good but not as screamingly cheap as some we see amongst the inherently riskier small cap sector. But what's particularly appealing about Latham is its track record in trouncing forecasts, its asset base and cash pile, which make the shares look much too cheap to me.
More share ideas from David Holding:
David owns shares in James Latham.
