VALUE INVESTING
Mowlem: How Safe Are Forecasts?

By Stephen Bland (TMFPyad)
January 19, 2001

The construction sector has contained quite a few various shades of value shares in recent times and John Mowlem & Co (LSE: MWLM) (www.mowlem.co.uk) is yet another.

Here are the fundamentals:

• Share price 135p
• High/low 52 weeks 143/81
• High/low five years 154/80
• Market capitalisation £172m
• Normalised earnings per share year ended 31/12/99 9.9p
• EPS lowest recent forecast year ended 31/12/00 11.6p
• EPS lowest recent forecast year ending 31/12/01 17.1p
• Price/Earnings ratio: historical 13.6; 2000 forecast 11.6; 2001 forecast 7.9
• Yield: historical 4.3%; 2000 forecast 4.6%; 2001 forecast 5.0%
• Price/Tangible Book 1.8
• Gearing –2.3% (i.e. net cash)
• One year relative strength 15%
• Directors own 0.1%, other majors 46.7%

The gearing and book value data are from the balance sheet as at 31/12/99, now very much out of date. In fact at the interim stage to 30/06/00 the company's net tangible assets had risen sharply to £160m giving a P/TB ratio of 1.1. This included net cash of £100m, a massive figure compared with the market cap. A lot of this cash and increase in book value was due to the sale of SGB, a scaffolding company, and in fact in October 2000 about £50m of the cash was returned to shareholders by a tender offer to buy back shares at 115p. That would still leave the company with a substantial cash holding though, assuming it has not been dissipated in the meantime. The cash return would have diluted the £160m tangible book value to some extent.

Mowlem has a fine record of increasing EPS over the last few years, the normalised figures going from 2.9p in 1995 to 9.9p in 1999 without a break, followed by the forecast further rises as shown above. Quite an achievement in the often difficult construction industry.

Mowlem stated in the interim report to June 2000 that it intends to grow its service businesses within the construction and property area such that by 2004, 50% of profits will come from services and 50% from actual construction.

Directorspeak is positive. For example, in September 2000 with the interims:

"The board looks forward with confidence for the remainder of the year."

One slightly negative feature, for a value player, is that most of the recent broker recommendations over the last few months rate the share as a "buy", with one exception showing "neutral." The latter is in fact the latest forecast, made in November 2000 by Merrill Lynch. Now the ideal time to buy the perfect value share is when brokers are negative because this helps to drive down the price. However, I am not claiming that Mowlem is the perfect value share; it is nevertheless an attractive one.

The risk as always with plays like this is that the EPS forecasts fail to be met, possibly  in this case because of a downturn in construction which is a very cyclical business. With such companies, things always look very good prior to a downturn in the industry. Brokers forecast EPS on the basis that the good times are likely to continue. I am not forecasting a downturn, that is too macro for me, but sooner or later it is likely to come along and it is essential for a value player buying into construction shares not to be left holding them when things do turn down. So anybody going in here needs to watch things very carefully.

Where Next?

• Value investing discussion board
• Mowlem discussion board

More about the Construction sector in The Motley Fool's Industry Focus 2001.