Look before you leap with this small cap.
This company has an 8.5% yield at today's prices, nearly one-third of its market capitalisation in net cash and no borrowings.
Sounds good? It is -- but there is a potential fly in the ointment.
Car crash
The company concerned is Nationwide Accident Repair Services (LSE: NARS), the UK's largest dedicated provider of accident repair services, mostly to the insurance industry.
What's happened?
NARS published its 2011 results today, giving investors a chance to see what's happened since a trading statement in November caused its share price to plummet.
Although the resulting £8.1m restructuring programme pushed it into a £2.6m statutory loss, business has remained solid.
Total revenues of £173m were pretty much unchanged from last year, but underlying profit before tax fell by 9% from £6.0m to £5.5m, cutting underlying EPS from 10.4p to 9.2p.
The dividend has been hiked by 3.8%, taking the total payout for 2011 to 5.5p. This provides a massive 8.5% yield at the current share price.
NARS' net cash position continues to be one of its most attractive features -- it has no borrowings and net cash of £8m, nearly a third of its market cap.
Fly, ointment
Of course, no company is perfect and NARS' particular demon is its whopping pension deficit -- and the cunning accounting ruse it uses to disguise it.
The company shows an £11.4m pension 'asset' on its 2011 balance sheet, suggesting a surplus. However, the cashflow statement for the year shows a £2.6m pension contribution, as it did in 2010. Why contribute if the pension is in surplus?
A thorough reading of the footnotes reveals that the pension scheme recorded actuarial losses of £37.5m in 2011 (2010: £23.7m) and has a current deficit of £26.1m (2010: £14.1m).
The pension 'asset' is the difference between the actuarial loss and the deficit. Because the deficit is smaller than the loss, this produces an 'asset' -- although not in the way that normal people would understand the word.
Defer those losses
What's happening is perfectly legitimate.
At present, companies can opt to amortise all actuarial gains and losses on pensions that fall outside a 'corridor', defined as 10% of the greater of assets and liabilities. This enables companies to defer the recognition of losses or gains on pension assets.
It would be a lot easier for investors if companies were forced to recognise pension gains and losses in the year they occurred, and from January 2013, IASB accounting rules are changing to make this happen.
Accident waiting to happen?
Despite the undesirable pension deficit, which relates to a scheme that closed in 2003, NARS has a sound business and offers an attractive income. The pension situation has existed for years without spooking investors; unlike with borrowings, companies are rarely called to account for their pension obligations.
NARS could yet prove an excellent investment, but for me, the pension deficit tips the balance away from committing.
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