James Latham looks well-positioned for the future.
Timber importer and distributor James Latham (LSE: LTHM) is the very antithesis of the many Johnny-come-lately firms listed on the AIM market. On Tuesday it announced encouraging results for the year ended 31 March.
The company, capitalised at around £35m, has been under the management and direction of the Latham family ever since the first James Latham began importing hardwoods into Liverpool in 1757.
Today the family is represented on the Board by Peter Latham (Chairman), Nick Latham (Executive Director) and Pippa Latham (Non-executive Director). Together they own just under 12% of the company's shares; whilst other members of the Latham family hold a further 39%.
Here are the key numbers:
- revenue £115.4m, up 1.3%;
- operating profit £6.4m, up 69%;
- pre-tax profit £5.6m, up 34% (broker forecast £4.7m);
- earnings per share (EPS) 21.5p, up 82% (broker forecast 17.6p);
- dividend per share 7.5p, up 15%; and
- cash reserves £10.5m, down 2%.
In a difficult year, the modest rise in revenue represents a good performance, particularly as it was down 5.9% at the interim stage. The company also reported that the improved level of demand seen in the second half has continued into the first quarter of the new year.
The healthy but widely disparate increases at the various profit levels merit an explanation.
The relatively lower rise in pre-tax profit compared to operating profit was due to a drop in finance income: poorer prevailing interest rates meant that the company earned only £43,000 on its significant cash pile compared to £647,000 last year. There was also a rise in finance costs, namely interest on a pension scheme deficit, which I'll come back to later.
Meanwhile, bottom-line profit and EPS benefitted from a lower tax expense: £1.5m against £1.9m last year.
Doing the business
Latham managed to reduce cost of sales and administrative expenses across the business. It also coped well with unusually high bad debts; but, although these have now returned to more normal levels, 'managing customer credit levels continues to be difficult.'
Sales volumes have been improving and prices picking up, but: 'The future level of demand continues to be uncertain, as cuts in Government spending will affect some areas of activity … It is a difficult climate in which to forecast far ahead.'
The company is focused on adding resources to areas in which there are opportunities for growth, working with suppliers to introduce new products, and using its 'strong financial position to take advantage of opportunities that will occur in the current trading climate.'
Things have been tough in the last few years and the outlook remains cloudy. However, Latham is a well-managed company with a strong balance sheet, and looks well-placed for the future -- a future which evidently may include acquisitions.
I prize organic growth more highly, but this is probably a good stage in the economic cycle for a company like Latham to be picking up assets: it should be able to get them on the cheap.
At a current share price of 180p -- up over 6% on a down day for the markets -- the price/earnings ratio looks attractive at little more than eight times 2009/10 earnings.
In its last annual report (2008/09), Latham reported that the deficit of its defined benefit pension scheme was £5.2m and that it had agreed a seven-year recovery plan with the trustees at a cost of just over £1m per year.
At the same time, the company introduced a cap on pensionable salary increases to a maximum of 1% over inflation, and assured shareholders that it is constantly assessing the risks of the scheme.
In the latest results, financial costs -- principally interest on the pension scheme deficit -- were £0.9m, but we'll have to wait for this year's annual report for more detail.
The pension situation seems manageable to me, though, and with the directors alert to the risks, I believe this slight negative about the company is more than offset by the positives.
Latham is certainly a company that will come under consideration for our 'Family Firms Portfolio', for which the first investment will be made next week.
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