VALUE INVESTING
A Cash-Rich Pyad Share

By Stephen Bland (TMFPyad)
August 29, 2003

Litho Supplies (LSE: LTS) (www.litho.co.uk) is a small cap shares that may appeal to some value investors. It is a pyad share. Here are the usual fundamentals:

Share price (mid):               40p
Market cap:                      £9m
52wk high/low:                   42p/23p
5 year high/low:                 157p/23p
EPS y/e 31/12/02 normalised:     6.66p
EPS forecast y/e 31/12/03:       5.50p
EPS forecast y/e 31/12/04:       6.20p
Historical P/E:                  6.0
Forecast 03 P/E:                 7.3
Dividend y/e 31/12/02:           3.0p
Forecast dividend y/e 31/12/03:  3.0p
Forecast yield:                  7.5%
P/TBV:                           0.7
Net cash 31/12/02:               £0.2m
Directors own 5.4%, other majors 34.6%

I should warn point out that there appears to be a huge spread of several pence in the share price, a common situation with very small caps. This adds to their risk because there has to be a substantial rise before any profit can be realised, unlike larger caps which have much smaller spreads.

Forecasts are always very chancy but here there is only one broker reporting, the house firm. I consider this to be even less reliable than in cases where there are several forecasts being made. It's another of the risks of small caps, but I guess people need to be thankful for small mercies because many such companies have no forecasts at all.

The company shows an unbroken line of declining earnings per share over the last five years, from 20.8p in 1998 down to 6.66p in 2002. It is forecast to fall to 5.50p in 2003 before recovering to 6.20p in 2004. Unsurprisingly this has led to a collapse in the share price from a peak of 157p in 1999 down to its current level. It has recovered though from the lows of 24p or so reached over the last couple of years.

Giving the balance sheet a scroot in order to discover the nature of the assets, always an important thing to do when considering P/TBV, I find that net tangible assets were about £12.2m at 31 December 2002. Of this current assets were £11.6m and fixed assets £0.6m. The latter in consequence are unimportant, unless there is some substantial valuation of fixed assets over book of which there is no mention in the notes. So virtually all the company's assets are represented by current assets alone.

Analysing current assets shows stocks £7.8m, debtors £14.6m, cash £0.2m and creditors £11.0m. This gives the net figure of £11.6m and the shares trade well below this figure. It is usually an added attraction where a share not only trades below net tangible assets but below net current assets as well.

What are the outing factors? Well, earnings per share are set to fall in 2003 but to rise next year based on the forecasts although as I mentioned above these may be questionable. Directorspeak is mixed. At the AGM in May this year, the chairman remarked positively on improving cash flow, stating that this "has improved our bank balance compared to the end of last year."  This is a very good sign, cash being the most attractive asset of all. Against that though, on current trading, he referred to "difficulties of our market" and "experiencing growth in some of the divisions" for the current year, which I interpret to mean that not everything going too well at present, a state that is reflected in the falling profit forecast for this year.

A good odour criterion is that action was taken last year to reorganise the company, with the closure of European subsidiaries and the disposal of a UK company. Foreign subsidiaries have long been a graveyard for UK companies and withdrawing from such adventures is usually a positive sign for a value share.

Successful turnrounds are frequently the outer in value plays with a double benefit as the company both sheds unprofitable areas that were a drag on earnings and realises cash in the process. The reorganisation shows here strongly in the cash balances. Last year they owed the bank £5.6m. In the latest accounts they hold a positive £0.2m. That's a reversal of £5.8m which is impressively large for a company whose whole capitalisation is only £9m.

So one that may interest some value investors then, but do beware the additional risks attached to very small caps.

By the way, it is of only minor importance but the business of the company is supplying copying and printing equipment and materials. They describe themselves as UK market leader in the distribution of digital printing equipment, consumable products and related services.