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VALUE INVESTING
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I continue the series of specific views of non-pyad value shares this week with a look at Delta plc (LSE: DLTA). A trawl through the database using a selection of value criteria threw up this company. Here are the basic facts: Delta is described as manufacturing electrical protection and plumbing products and having other industrial services. After having had fairly flat earnings per share for three years between 1995 and 1997 at around 22/25p normalised, the company went through a bad couple of years with declining earnings which, naturally, ruined the share price causing it to fall to a low of 100p in 1998. By 1999 EPS was down to 10.6p when the recovery looks to have started. An interesting point on recovery situations, which is illustrated here, is that turnover has fallen steadily from £1,019m in 1995 to £694m in 1999. What this may well demonstrate is that in reorganising itself to increase profits, the company may have been disposing of low profit or loss-making activities whilst concentrating on higher margin operations. This picture emerges often in turnarounds and if I am correct is a very encouraging sign. Thus the substantial fall in turnover may well be a good thing if the remaining turnover is of higher quality. The sharp increase in EPS that is forecast may well be due to such pruning. The company operates in the UK and internationally, with business in Europe, USA, Australia and Asia. The chairman's recent comments are interesting. In March 2000 he talked of targets being achieved. In May he made further reference to making progress towards earnings targets. I am not sure what his targets are, but am giving him the benefit of the doubt in assuming they are something similar to the forecasts, reading between the lines. I find it quite valuable to look at directors' recent comments in value plays if possible, and to place one's own interpretation on this, armed with a careful knowledge of the language known as directorspeak. I have only extracts to hand of the reports, not the full text, but I hope I am correct in stating that there is a refreshing absence of whingeing about the strong pound being responsible for profits being hit, for which I congratulate the company. One reads far too often of this being the supposed cause of all the ills in the British business world, a cop-out if ever there was one. However, should the chairman have in fact used the poor old pound as a scapegoat for the company's earlier problems in the full text of his reports, then I apologise for my congratulations. Thus if I am correct about the targets, the share is heading for quite decent value territory, if – and it is definitely if – those targets are met. As I always say about forecast situations, the second year out, 2001 here, is definitely not to be taken too seriously. It is chancy enough having to rely on just the current year forecast. Gearing is definitely on the high side by my standards at 48.7% based on the last accounts. However I read only today that they have sold a US subsidiary for £12m part of which will be used to reduce borrowings. My feeling is that these guys are doing the right thing and consequently it looks like a reasonably decent value share. I won't be going in though because it is not deep enough value for me and I stick to pyad shares, with the occasional side bet, one of which I have on at the moment. The shares have already come back quite a bit this year, from a low of around 101 reached in March to the current 137 as the recovery has been recognised by the market. But on a two year view, assuming the forecasts are achieved and the chairman is going along with this in my opinion, there could be some mileage here, with a decent yield whilst you are waiting; always an essential requirement in my view.
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