A Cash Rich Value Share

I'm returning to value investing today for my first article in 2008. I've neglected my first love in articles of late in favour of an affair with High Yield Portfolios (HYP). But it feels good to return and see if there's still enough life left in the old beast to give me that unique tingle somewhere between what's left of the hair on my head and my toenails.

Delta appears to be the only pyad share in the market right now, well alright not wholly so, but pretty close. It's a long time since I've seen one though unfortunately it's not perfect as I'll show.

I have a vague memory of this share being discussed by value players more than once on the board in the distant past, maybe I've even written about it myself before, but with my memory these days being worse than a lobotomised jellyfish, I'm never sure of such recollections. Anyway with value, what went before is not usually of much relevance, the test is what it looks like now. And as far as the numbers go, it looks like this.  

Share	Delta Plc (LSE: DLTA)
Website	www.deltaplc.com
Offer price	115p
Market Cap	£171m
Directors own	under 1%
Eps y/e 31/12/06	12.6p
Forecast eps 31/12/07	10.7p
Forecast eps 31/12/08	11.1p
Dividend y/e 31/12/06	4.5p
Dividend forecast 31/12/2007	4.7p
Dividend forecast 31/12/2008	5.0p
Tangible book value per share 30/06/2007	135p
Net cash	£109m/71p per share
Forecast p/e 07	10.7
Forecast p/e 08	10.4
Forecast yield 07	4.1%
Forecast yield 08	4.3%
P/TBV	0.85

The forecasts, always chancy with any share, are less meaningful here because there is only one broker producing figures. Increase that pinch of salt to a skipful.

Two small weaknesses of the Delta pyad case are that the forecast yield is not quite 1.5 times the market average which I set down my original rules and the p/e is above 2/3 of the market. The All-Share yield is about 3.1% and p/e 12.1, so the Delta figures are better than the market but not quite to the pyad extent.

However the biggest weakness I see is not those points but that there appears to be no obvious outer. Typically, rising forecast eps is a feature I like to see to out the value, but here we have a fall from actual 06 to forecast 07 with only a tiny and unreliable rise to forecast 08. Failing obvious outers, the value player needs to consider whether there are any unobvious outers. I think there are.

The trading aspects of this company then are questionable. It's not a loss maker but its record is patchy and there are no clear signs of a turn round that will improve its fortunes to any substantial extent. That may happen at some stage but I can't advocate a value purchase on that basis.

No, the real value attraction I think is the fact that it trades below tangible book combined with the fact that the cash figure of £109m represents a little over half of those assets. It's one thing to trade below book but you always have to consider the quality of the assets concerned. Some assets are more attractive than others and cash is tops. Note though that there is always the risk that management will blow that cash on some dumb acquisition.

My value case, my unobvious outer, rests upon the potential that others may want to shake up Delta as it simply is not making the best of its assets and hasn't done for some time causing the share price to have fallen heavily to below book. Those others could for example be bidders, rebel shareholders or new management making major changes.

Don't forget though that extreme patience extending to years is necessary to reap the rewards of value. If something is going to happen you can never know when that might be and it may well be later rather than sooner. This is not a game for those seeking very short term rewards. If you don't possess that patience you will not make a good value player because you will sell too soon due to lack of action.

Some readers may note that in my true value style I haven't mentioned the nature of Delta's business. That is deliberate. Anyone interested can look it up but I've never had much interest in the actual business of the business. It's the numbers that talk to me.

Finally, this is not a bet-the-farm value share. It needs to be perfect for that and Delta though cheap is not the perfect play.

More: A Very Cash Rich Small Cap