Stephen Bland revisits a promising small cap.
About a year ago I reviewed Molins (LSE: MLIN), and later I brought it into the value portfolio (VP) a few months later when cash became available there. My cost in the VP per share was 103p, which was the (then) offer price -- it has a sizeable spread -- plus costs, and now it stands at 120p bid, about a 16% rise.
At the time of the article, I concluded that the engineer was that rare thing: what I call a pyad share. Broadly, this means that its price-to-earnings (P/E) ratio was low, its yield was high, it traded below tangible book and it had net cash. These four value tests indicate when a share on the face of it is both very cheap and in addition possesses significant downside limitation. Consequently, well worth a little further investigation.
Molins issued its results for the year ended 31 December 2011 recently, so an update is in order. First, I'll repeat the same four value tests to see if they have been blown at all.
Standing the test of time
There is only one broker following Molins and it appears to me that its forecast figures are way out of date, so I'm going to have a stab at this myself. Underlying earnings per share (eps) for 2011 was 18.3p. The directorspeak at this early stage of 2012 does not appear to suggest any problems hitting profits, so I'm going for the same again. Call it 18p and this gives a forward P/E of 6.7. That is low.
The 2011 dividend was 5.25p, up from 5.0p in 2010 where it had remained static at that level for several years. I'll assume the same payment of 5.25p for 2012 giving a forecast yield of 4.4%. That's above average but not a lot.
I make net tangible assets £26.1m at 31 December 2011, against £33.3m a year earlier -- with a £9.6m drop in the pension scheme valuation from a surplus of £6.2m to a deficit of £3.4m largely to blame. That is equal to net tangible assets of 137.6p per share, down from 175.6p; so it leaves the shares continuing to trade below book, but by much less so than before. Price-to-tangible-book value is now 0.87, well up from my earlier 0.57 due to the combination of a rising share price and falling asset value.
Last but most definitely not least, the company still has net cash -- £7.1m at 31 December 2011, down a little from the £9.0m recorded the previous year. But even that lower sum remains relatively high against a market cap of £25m.
What do the numbers tell us?
So Molins still passes my four key value tests, although at weaker levels for the latter three. P/E, though, is actually somewhat lower than I observed a year ago, possibly because the eps forecast I used then was not reliable due to the lack of attention this share receives from analysts. That's frequently the case with small caps, and this is definitely a small cap.
Trying to get a handle on where the company may be heading, and bearing in mind what I regard as the unreliable existing forecasts, the directorspeak talks of entering 2012 with a strong order book -- though there is some reservation, in that they refer to particularly favourable conditions arising in 2011 that were ahead of their initial expectations. The group tends to perform more strongly in the second half, and this is expected to be particularly pronounced in 2012. On balance, as I suggest above, I conclude that the outcome may be little different from 2011 barring some change in circumstances.
So the question is whether this is still a good value share on these latest numbers. And the numbers, as I have said often, is what this is all about for me. The answer is a clear yes. It is not as strong a play as when I picked up on it before, but the value has not evaporated, it remains there in all the key filters that I consider important to the ideal play.
Having found a share, it is not my practice to hindsight it by imagining how it appeared a year ago or whenever. And then to beat myself up if it offered even better value earlier and the price has already risen. Value doesn't work like that for me. A share is either sufficiently attractive as things stand now, or it isn't. How it looked much earlier or what the price has done since is irrelevant to me.
It just happens that I reviewed Molins a year ago, and thus I know how I saw it then and that I put it into the VP. But I try not to let that affect my judgment of it now so, although I refer above to weakening of my filters, what matters really is whether sufficient value exists now. That is way to test a value share that is already held. Not on the past or past price action, but on the presence of sufficient value now. Let the numbers talk to you.
And on that test, I'm keeping Molins in the VP and I'd add, it still looks an attractive play for anyone looking at it fresh in my opinion. But, as always, great patience is needed for this game.
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