VALUE INVESTING
Mallett - Value In Antiques

By Stephen Bland (TMFPyad)
April 12, 2002

One for small cap players and, like all my company articles, this is not a tip, just a company appearing in my trawls that may be of interest to some value investors who will need to research further if they are interested. It is not a company in which I would be likely to hold shares myself, primarily because it is a small cap. The company flags up as a pyad share, just, on the four basic elements.

Mallett (LSE: MAE) (website www.mallettantiques.com) is an antique dealer appearing in the General Retailers sector of the stock market. It is probably unique in being the only quoted business of this type. It is not an auctioneer as far as I can establish but acts as a principal, trading in antiques to the public. Most of the business arises in the US, 63% of turnover according to the last accounts.

Here are the usual fundamentals:

Share mid price: 185p
52 week high/low: 193p/137p
5 year high/low: 193p/81p
Market cap: £25m
Eps y/e 31/12/01: 21.5p
Eps forecast y/e 31/12/02:  21.1p
Forecast P/E: 8.8
Yield historical and forecast: 4.4%
P/TBV: 1.0
Gearing at 31/12/01: –2%, ie. Net cash of 0.5m
One year relative strength: +16.4%
Directors own: 36%, other majors: 41%

Not a lot of shares in free float then. One fund manager alone, Mercury Asset Management, holds 20% even after having sold off some shares recently.

The quality of profits in a business like this is low. By this I mean that compared with some other businesses, the annual profits will tend to be erratic and unreliable, less of a recurring trend. Antiques are not exactly a necessity buy and depend on a small number of relatively wealthy people for their trade. Also there is a lot of competition in this business.

Eps has indeed been erratic over the last few years, from 10.6p in 97 then fluctuating between about 21p and 26p for the next four years and is forecast to fall marginally in 2002 to 21.1p from 21.5p in 2001. However for 2003 the forecast is for a strong rise to 27.9p How anyone can forecast eps that far ahead in a business like this beats me. Is it really possible to estimate with any accuracy how many "Louis XXI night-commodes" people are going to buy in 2003? In common with the paucity of forecasts for small caps generally, there is only one broker making a forecast so readers should place little reliance on these figures though I suppose we should be grateful for small mercies here because many small caps have no forecasts at all. So thanks Seymour Pierce.

Dividends have over the last few years been well covered by profits and as a result there has regularly been a high level of retained earnings, despite the fluctuating profits. The effect of this is that book value – there are no intangibles – has risen steadily without a setback from 123p in 97 to 189p in 01 and it is this feature that is part of the attraction. This is where the outer may come from if this trend continues. Readers interested further in the nature of the assets, probably largely stock at a guess, will need to research this point for themselves.

Net current assets at 31/12/01 were £22m, not much less than the current market cap. Some investors find a situation where the cap is below NCA to be an attractive value feature and it certainly can't hurt any. We're not quite there with Mallett but not far off it. For most of the last five years it had net cash and even when it ran into net debt, in 98, this was tiny.

The only recent news I could find on the company is that it has signed a lease on a building in Madison Avenue, New York.

Recent directorspeak was guarded. A comment in March stated that "It is more difficult than usual to have a view on the current year..." A remark arising from, I would guess, a potential slowdown in trade in the US following the September 11 attack last year and perhaps possible recessionary problems there.

What's the smell? Well, some readers may know that I usually have little time for specialist retailers standing on high ratings. But Mallet is not selling commodities like computer games or sports gear, is not the kind of  shop that will ever be found in every high street and is not on a high rating. But the profits are of low quality as I said above which makes eps forecasting especially prone to failure. Despite all this though I feel there may be something here for those willing to take the risk. I like the nice steady growth in book value which may well continue, delivering a reasonable though not massive yield whilst you are waiting.

The usual warnings about small caps must apply here.