VALUE INVESTING
People Value at KBC

By Stephen Bland (TMFPyad)
August 23, 2002

A slightly unusual business this, being a consultancy to the oil industry. Here is the fundamental data for the KBC Advanced Technologies (LSE: KBC) (www.kbcat.com)

Share price - 50p mid (but spread may be large)
Market cap - £25m
52w high/low - 149p/50p
5 year high/low - 430p/50p
Eps y/e 31/12/01 normalised - 1.85p
Eps 6m/e 30/06/02 - 0.54p (actual per accounts)
Eps forecast y/e 31/12/02 - 4.80p
Eps forecast y/e 31/12/03 - 5.60p
Forecast P/E on 31/12/02 - 10.4
Yield on 31/12/02 forecast dividend of 4.1p - 8.2%
P/TBV 1.2 (based on interim figures at 30/06/01)
Net cash at 30/06/02 - £10.7m
Directors own 1%, other majors 64%

There is very little trading in the shares, resulting in an unusually large spread.

The company made two acquisitions in the six months to 30/06/02 which resulted in substantial goodwill additions. This would be quite normal in a business like this which relies more on people for its income than many others. The resulting amortisation of that goodwill has created a hit to earnings per share (eps).

Eps has declined rapidly from a few years ago. In 1997 for example it was a normalised 10.3p, but by 2001 had fallen to 1.8p. The share price has followed suit over these years and is now at its lowest point in that time.

Directorspeak has been guarded over the six months to 30/06/02, speaking of difficult trading conditions and the like, during which eps fell to only 0.5p in the half year compared with 13.6p in the comparable period to 30/06/01. However things appear to be looking up and in June the company signed its largest ever contract, worth $15m over 30 months. They claim also that the acquisitions have integrated successfully and have begun to show a profit and have "confidence that the underlying performance of the business will improve in the second half". In view of this the interim dividend has been maintained at 1.3p.

This is not an asset play, although it appeared in a trawl for pyad shares. That is because taking the annual figures to 31/12/01, which my database used, the net tangible assets exceed the share price. The recent acquisitions, with their large goodwill element as shown in the interim figures to June, have had the effect of reducing tangible assets. But it is unusual to find a people-based business trading at near asset value. Such businesses will normally trade at many times tangible book, the asset base being small because it is essentially intellectual product they are selling rather than physical goods. In 1997 as an example, the price hit 430p against net assets of only 23p. What has happened with KBC is that the drop in profits has been sufficiently severe to drive down the share price to around asset value.

Normally I have little time for people-based businesses. I don't like them much because you can't kick the main assets. Well you could, but you know what I mean. Give me a load of cash, property etc. any day. Moreover, staff aren't assets in the sense of things that are owned by the company. Although some commentators occasionally talk about the main assets being people in such businesses, in fact such talk is fallacious, they are not corporate assets at all. Short of a return to slavery, you can't own people and they are not on the balance sheet. So although these businesses can be highly profitable, there is often little in the way of downside protection and consequently they are rarely good value plays. KBC may be an exception.

I see this share as a gamble on a recovery in profits, the value factors being the net cash, the high yield – though that may be in doubt - and the relatively low, for a people-based business, P/TBV. The P/E is not that low but if the company can manage to return to its earlier profitability, there could be a sharp re-rating of the shares. How big that "if" may be is the key point here.

Note the usual additional risk factors accompanying small caps, including only one broker making the above forecasts, though it is not the house broker.