Revisiting the mining supply firm ahead of its full-year results.
Shaft Sinkers (LSE: SHFT) is a share that I reviewed originally back in September 2011 when the shares stood at 139p. It wasn't a pyad play because it traded over tangible book, but was pretty cheap on the other three criteria.
In January 2012 I took another look at the company, essentially because the price had fallen heavily to 43p. There had been some poor news since my original selection, concerning suspension of operations on an Indian contract and subsequently on a Russian contract.
The shares are very tightly held meaning that only a small proportion is traded publicly. In that situation and given that Shaft is a small cap, valued currently at £30m with the shares at 63p, it doesn't take much volume by way of sales or purchases to move the price. So it was easily possible that the pessimism generated by the news was being leveraged into a disproportionate effect on the share price. Thus the question for me at that stage was whether this fall had been well overdone. I concluded that it was too chancy to go in then, due to inadequate information on the latest state of the business following the problems.
In February the company released an update that has caused me take a further look at it. It states that the full results for the year to 31 December 2011 will be published on 20 April so, until that happens, we are still partly in the dark. But something of a light has been shone on the situation with this news, from my value perspective.
Beacons of hope
First, it says that with revenue up 20% to £220m, the results, at least before exceptional items, will be ahead of market expectations.
Second, it confirms it held net cash at the year end of about £6m. This is one of the key factors behind my selection of this share.
Third, it reconfirms that the dividend will be covered about 2.5-3 times and, given that it expects good results, this bodes well for the payout. With the interim already paid of 2.4p and its indication that the final will be two thirds of the total, this suggests the latter will be 4.8p for a total of 7.2p. That makes a high yield of over 11% on the current price.
Seeds of doubt
Okay, those are the good value points in this update but I'm not one to fall into the psychological trap of confirmation bias, seeking only those features that bolster my beliefs and rejecting those that counter them. The major bad news does not involve much that is new but concerns principally the same problems with the Russian and Indian projects, which were probably the reasons behind the earlier big fall in the shares.
The EuroChem Russian project remains suspended due to adverse ground conditions and there is no indication how this will be resolved, although Shaft Sinkers says relations with the customer are "co-operative". This contract represents a significant £93 million of its total order book of £296 million, although against that there is the modest benefit that it been expected to yield a significantly lower margin in 2012 than in previous periods. Stripping out this contract leaves a remaining order book of around £200m, a figure similar to the whole 2011 revenue.
The Indian hydroelectric project, suspended following an earthquake in the region, remains on hold while the surrounding area is being rehabilitated. As a result, margins are behind expectations.
Earnings per share (eps) is forecast to fall in 2012 to 10.3p from the 14.8p expected for 2011, putting the shares on a forward price-to-earnings ratio of about 6.1. That remains low, but do be aware that the earnings of this company will be lumpy because its business involves a small number of large engineering projects, so that any given year may not be representative. Also, as is common with small caps, there is only one broker making forecasts, so these may be even less reliable than such prognostications are in any event.
Oddly, despite the fall in eps predicted for 2012, the forecast sees a maintained dividend in the region of 7p, which contrasts with the company's stated cover ratio of 2.5-3, as it does for 2011. The likely explanation is that the forecast is calculated differently to the accounting basis used by the company but these figures increase my scepticism about just how dependable these forecasts are.
The one figure I can't calculate is tangible book value because the latest news does not deliver sufficient information. We'll have to wait for the full accounts to see that. In my original review last September I put it at 97p per share, and if it is still anywhere near that, then this share has probably become a pyad play. But I see no way to figure out any reliable figure.
Foolish bottom line
The bottom line, though, is that I think we have moved on from my last review of the share. The price has risen, there has been some encouraging news together with no further bad news, so I have more confidence in it. I suggested in my original write-up that it is more risky than many value plays due to its geographical areas of operation and, at the time, that it did not trade below tangible book. At a guess, that latter value omission may possibly now have been remedied but I can't know for sure until the accounts are out.
There's enough here I believe for me to revise my view back to buy, though I continue to see it as more risky than many. Not one for farmers.
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