VALUE INVESTING
Metal Bashing Value

By Stephen Bland (TMFPyad)
September 5, 2003

Following on from last week's article, Chamberlin & Hill (LSE: CMH) is another small cap that may appeal to some value investors. It is also a pyad share. Here are the usual fundamentals:

Share price:                   160p
Market cap:                    £12m
52w high/low:                  221p/133p
5 year high/low:               221p/133p
EPS y/e 31/03/03 normalised:   12.5p
EPS forecast y/e 31/03/04:     13.9p
Historical P/E:                12.8
Forecast 04 P/E:               11.5
Dividend y/e 31/03/03:         11.9p
Forecast dividend 04:          11.9p
Forecast yield:                7.4%
P/TBV:                         0.9
Net cash 31/03/03:             £0.7m
Directors own 15.1%, other majors 47.2%

I should point out that, like many small caps that are not traded much, there appears to be a large spread in the share price which adds to the risk

Earnings per share figures (eps) have declined steadily over recent years, accompanied not surprisingly by a declining share price. This is a common picture with value shares, which are often those that have fallen on hard times. The question for potential investors is whether the fall has been overdone and any potential recovery has not been recognised by the market.

The sole reporting broker, the house firm, is predicting rising eps from the historical 12.5p in 2003 to 13.9p for 2004 and 15.4p for 2005. However, because there is only one forecast and it is from the house firm, these figures must be taken much more cautiously than usual. Beginners should note that forecasts are always chancy, even for the bluest of blue chips with a large number of reporting analysts. Here though, we have only one forecast and because the firm is associated with the company there is a tendency to optimism.

Net tangible assets at the last balance sheet date were about £13.4m, of which fixed assets comprised £9.0m and current assets £4.4m. I do not have the full details of the fixed assets to hand but those interested must give this close scrutiny to identify the nature of the items, noting that assets such as property are far more attractive from a value player's perspective than plant and machinery. Always read the full accounts of a value share before deciding to buy.

Directorspeak is not very encouraging. At the AGM in July, this year shareholders were told that "At the present time trading is continuing at a similar level to that seen in the second half of last year." Since last year was the poorest for many years with its normalised eps of 12.5p, I presume that the current year is not going to be too exciting.

Note that the company has been a cash generator despite poor trading. Over the last couple of years, cash balances have gone from an overdrawn £0.3m to a positive balance of £0.7m, an improvement of about £1m. Cash flow has been way ahead of accounting profits over the last five years. This is normally a sign of conservative accounting treatment, and therefore a good thing.

One little item buried in the notes is a negative feature. They state that had the full impact of the accounting standard FRS17 (i.e. pension scheme liabilities) been recognised in 2003, rather than transitional provisions, there would have been an increased liability of about £3.0m instead of £0.8m. Pension scheme deficits are very volatile because the figure depends on the market value of the investments in the fund. At the moment a lot of companies are recording such liabilities to their funds because of the large fall in  the stock market over recent years. However if the market continues to rise then many of these liabilities will automatically disappear.

By the way it is only of minor importance but the business of the company is engineering, specifically products for safety and security applications.