newsletter 15 - Holders technology (lse:hdt) the first purchase for the 2014 ncav portfolio 4th november 2014

It was not easy to make up my mind on this company.  On the one hand the Net Current Asset Value, NCAV, is more than double the current price (and net total assets per share are almost three times market price)

On the other hand, the two markets in which the company operates are very competitive, with customers commanding so much power that sometimes Holders Tech can make a profit and in other years it cannot.  On average, over 6 years, it has done no more than breakeven (including exceptional costs).  Also the market capitalisation of only £1.7m means that it is a pretty illiquid share.

So, why did I invest?

First, it meets the quantitative criteria in spades. Second, it does reasonably well on the qualitative criteria, with the exception of the industry economics.  There is a good chance that it will continue in a weak position vis-à-vis customers in its product areas, and therefore this investment will turn out to be a dud.  I estimate the probability of this occurring as greater than 50%.

But, if it does find a way, either through managerial enterprise or shear good fortune, to consistently make profits the share price should at least double – it might even rise back to 169p it was in 2007.  Even if the odds of the upside occurring are less than 50% it is worth it, especially given the underpinning of the current assets, very conservative financial structure and very unadventurous managers (unlikely to squander the cash and other assets).

What it does

Printed circuits board, PCB, manufacturers need components and other things.  Holders Tech supplies them, mostly in Germany, UK and other places in Northern Europe.   The ultimate use is in defence, aerospace, automotive, solar, medical and consumer products. Holders seems very keen to maintain market share by undercutting ‘competition from a wide range of companies’, which frequently leads to losses, but at least they have decades of experience and contacts in this business.

LED lighting components and ‘solutions’.  Started this 3-4 years ago and grew turnover rapidly, but still ‘we have yet to achieve critical mass’ in an industry with over-capacity.  Currently investing in UK and German sales and management teams and in visiting trade exhibitions  – which is the latest excuse for poor profits. It is trying to move into more technically sophisticated products; perhaps this will allow profits?

In tomorrow’s newsletter I’ll examine its balance sheet and profit record.