VALUE INVESTING
James Latham - A Square Share

By Stephen Bland (TMFPyad)
October 26, 2001

Another tinpot this week, Latham (LSE: LTHM) has some strong value features. One interesting point is that potential investors will be flying blind because there seem to be no analysts forecasts available. Here are the usual fundies:

• Share price - 243p
• 52w high/low - 278p/238p
• 5 year high/low - 278p/142p
• Market cap - £12m
• Eps y/e 31/03/01 - 40.6p (normalised)
• P/E ratio (historical) - 6.0
• Yield (historical) - 6.0%
• Price/tangible book - 0.5
• Gearing – net cash of £0.9m at 31/03/01
• One year relative strength -  +29%
• Directors own 9%, other majors 16%

Latham is primarily a timber importer and distributor with a sideline in the distribution of suspended ceiling components. Broadly, a building materials supplier then but don't worry too much about what it does, that gets in the way of deciding whether or not it might be a good investment.

Eps over the last few years runs from 24.1p in 97 to 40.6p for 01. As I say, there are no forecasts. The increase has not been straight up, in fact it was static at around 30.5p between 98 and 00. However there was no actual decline in this period. Turnover has hardly changed over this time and the increase in eps I would guess is largely due to reductions in interest charges on the rapidly decreasing and ultimately disappearing debt to which I refer below.

Dividends though have increased quite nicely every year during that time, from 7.75p to 14.5p in 01 with cover being maintained throughout at between 2 and 3 times.

Directorspeak is quite positive with the following quote when the results to 31/03/01 were published in July -"...is in a strong financial position which will enable it to take advantage of opportunities to expand the group". A few weeks later at the AGM they reported that sales were ahead 2.5% and made other encouraging noises.

Borrowings, which stood at £8.2m in 97, have come down sharply each year since, going into net cash with the 01 accounts. Net current assets at that point were £21m, far greater than the market cap of £12m, which to Ben Graham fans is a definite value attraction. Plus the whole company is trading at around half tangible book value as well.

Downsides? Well it is a very small company with all the associated risks. The share price has moved in a fairly narrow band over the last five years so there is little action going on here which is one of the risks of small caps – often nobody takes any notice.

The share is square, a term I coined for myself many years ago to describe those with P/E and yield at the same figure, superficially an interesting state of affairs though you wouldn't invest on that basis alone of course. You would at least have to consider whether you like the name. Normally of course P/Es are higher than yields but value shares will have these two ratios much closer than most shares. Getting them the same though is quite rare.

Last but not least I find the name fairly neutral, unlike last week's share, TJ Hughes, which has a fairly nice ring to it. Nomenology is condemned by some unenlightened investors as being on a par with astrology or chartism, but I find it useful. Have you noticed how trashy companies often have trashy names? It is no accident that all those failed techs were frequently called something like Purple Earwig and that value plays are often called something like Hardcastle Steel.