MS International (LSE:MSI) is comprised of four business. Today I’ll look at two of them. Tomorrow’s newsletter will cover Petrol Station Superstructures and Corporate Branding.
Defence The Defence division mostly makes naval guns, selling to 20 countries, with 300 systems already in place. It also services those guns – a source of continuing revenue in times of order drought. The guns have now been adapted for land use, which seems to be a hit with the American army in particular. Defence division numbers £mRevenue Operating profit Capex Assets minus liabilities Operating profit/net assets 201132.6 5.4 0.0 16.6 33% 201229.9 6.6 0.1 15.8 42% 201328.0 2.9 0.1 16.7 17% 201419.4 0.9 0.1 14.4 6% 201517.0 -0.2 0.1 14.1 -1% 201621.9 2.0 0.2 14.2 14% 201720.8 1.8 0.2 12.2 15% 201821.9 2.6 0.02 21.5 12% 201926.7 2.8 0.07 10.4 27% 202023.5 -0.3 0.08 10.0 -3% Half year to Oct 20 annualised17.3 -2.3 0.16 9.3 -25% Average 12.5%From the table I detect a feast-and-famine type of business. There are years when defence ministries order many new guns and others when they hold back. Having said that the profit numbers in recent years have been far lower than those of the early part of the decade. And now they have fallen into losses; hence a major cause of the share price falls from over £3 in 2011 to under £1.30 now. Even if the profits to net assets ratio merely remains the same in the next eleven years as it was in the last eleven, i.e. 12.5%, shareholders will benefit from the business by over £1.2m per year on average (market capitalisation of the Group is £21.3m). But things could be better than that given the directors confidence that recent innovations will restore sales. I’ll look at their optimistic statements after an overview of the business. The defence products and services offered The Seahawk naval ship gun is at the centre of the Defence Division, based in Norwich. The Seahawk is the primary weapon on smaller ships and a secondary weapon on frigates and bigger ships. Cannon options include 5.56mm, 7.62mm, 12.7mm, 14.5mm, 25mm, 30mm & 40mm. A key part of modern weapons is the computer and other tech link up. The Seahawk has a day camera, thermal imaging camera, laser rangefinder and a remote fire control system. Computerised motion stabilisation is also crucial. There is a commando version for unmanned speedboats using remote control settings (trails showed it to be “best in class” for accuracy and dispersion in challenging sea conditions). In recent years MSI has used its knowledge of guns to move into land-based systems. Its Terrahawk (launched 2019) can be mounted on a Humvee or tracked vehicle with gizmos such as computer tracking of thermal and colour images within the terrain. It also has laser sensors. The Terrahawk can act as a heavy machine gun with 12.7mm, 7.62mm and grenade launcher weapon options. It has available 400 rounds of ammunition and can swing through 360 degrees. It can be manually or remotely controlled. Retrospective fitting on already-in-use vehicles is possible. It can also be fitted on unmanned platforms for remote operation. (The videos on the MSI Defence Systems website showing the guns in action are fun to watch). Over 300 Seahawks and Terrahawks (mostly Seahawks) have been delivered to or are on order for over 20 international end users. They have been developed from combat experience, fulfilling multi-role requirements for a variety of naval, military and constabulary services. MSI’s in-house support services works on over 300 naval gun systems already in use offering (a) a 24/7 telephone support, (b) customer in-country depot / maintenance facilities, (c) on demand field service support, surveys, (d) repair and replenishment, (e) ongoing training for operators, maintainers and depot support personnel, and (f) obsolescence management and performance enhancements to coincide with evolving operational and technological demands. Progress of this division The strategy pursued is to keep ahead of the competition through R&D spend, building on its current pre-eminence, and to grow the non-UK market “so that we can effectively counter the varied current constraints on UK MoD decisions regarding future requirements and expenditure.” (2019 Report). And this approach is bearing fruit: “It is pleasing to report that once a………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
0 Comments
MS International (LSE:MSI), a British engineering company, is selling at a low price relative to its past earnings, its net current asset value and its earnings power. I have bought shares at an average of £1.292 for my Buffett-style portfolio (Market Capitalisation is £1.292 x 16.5m shares = £21.3m).
MS International has two economic franchises: (a) specialised defence equipment, mostly unique naval guns, (b) dominant position in building and maintaining petrol station superstructures in Europe. It also has a business forging forks for fork-lift trucks, but this is not a franchise. There is a strong business in corporate branding with a particular emphasis on petrol station branding (signage etc.). I’m not sure if this qualifies as a franchise because, although it had two terrific years, already earning back the €3.4m (£2.6m) paid for it in June 2015, I’m not sure if it has sufficient dominance of its industry? There are three characteristics of a franchise business according to Warren Buffett. The product or service is:
Good in the past, and strong balance sheet MS International is a family-run firm with very experienced managers, most of whom have been with the company for decades. I have followed MSI for years and so have been witness to many managerial statements and subsequent events - there is no dressing up announcements, or over-promising and underdelivering. They just get on and tell it like it is. I’ve also met the directors and concluded that they are likely to act with decency regarding the interests of minority shareholders (although they do tend to pay themselves very well). The four businesses, taken singly, are not especially stable, with falls into losses from time to time. But diversity helps to stabilise overall Group profits, most of the time. Average profits after tax over the last ten years amount to £2.76m. The balance sheet is exceptionally strong, with no debt and £14m………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Seven and a half years ago that I left a tenured professorship to concentrate on investment. Back then the FTSE 100 was around 6,600. The market as a whole has not exactly moved strongly in a positive direction over that time. It is now 6,620 (although there have been dividends of around 3-4% per year).
Despite this, I suppose I can be pleased with my performance so far, especially in light of the fact that my approach – deep value – generally has not done well in an era of great excitement about growth companies. The remarkable downs and ups of this year were a challenge for all investors. Caution was the watchword in February and March when I sold a number of companies vulnerable to deep recession to raise cash for a hunkering down. Out went Dewhurst (at 722p, now 600p), T Clarke (at 112.15p, now at 95.4p), Northamber (at 57.2p, now at 52p) J Smart (at 110p, now at 110p) Caledonian Trust (at 139.1p, now at 140p). Having built up cash reserves I was ready to look for bargains in the panic - always “look for opportunity in the flux”. The first I found was Connect Group (recently renamed Smith News) where I doubled my holding at a price of 15.1p. These shares are now trading at 28.1p. Then I doubled my holding of Character Group in June at 252p. These now trade at 410p. I had to wait until October before I felt ready to gain exposure to the property sector again. But the attractive net current asset value, NCAV, of McCarthy and Stone was just too tempting. Even if the recession turned out to be prolonged this company had so many assets, and manageable debt, that it was a bargain at 71.8p. It wasn’t long before an American private equity company concluded that it was a good business packed with assets, and made a takeover bid at 120p per share. I sold out in early December at 118.5p, a return of 65% in two months. Then there was the owner of Covent Garden, Capital and Counties Properties, which Mr Market had dumped alongside other office and shop owners. It was selling far below its NCAV, even taking a pessimistic line on where property prices were going. But Covent Garden is not like other shopping/office/leisure areas, being dominated by tourism and activity in central London. I thought it would bounce back sooner or later, so I bought at 103.2p. Low and behold, my timing was perfect (pure luck) I bought on the Friday (6th Nov) and on the Monday the Pfiser vaccine was approved resulting in estimates of future footfall within London being revised upward. It is now trading at 144.4p. These two investments demonstrate the benefits of deep value investments: you don’t know what is going to correct the under-pricing – a takeover bid, a management revamp, Mr Market switching from pessimism to optimism, or the liquidation of a competitor – nor when it will occur, but you do know (probably) that one day it will rise to somewhere near intrinsic value. So, all you have to do is estimate intrinsic value, compare that with what the market is asking for the shares, see if there is a good margin of safety and be bold in buying. And be bold in selling. I sold Tandem in August at 370.7p when I was still pretty nervous about the economic outlook and after it had risen to give a 139% return. It was not that I was pessimistic about the company, just that I was concerned that things might go wrong at the company (bicycle enthusiasm has pushed this one up, despite it losing money in its bicycle division for years and having difficulty sourcing bikes to sell in the UK). In hindsight I should have let the share run because it rose above 550p. I comfort myself with the thought that much of the money raised went into McCarthy and Stone and Covent Garden. The money also went into buying back into, and purchasing more of, Dewhurst “A” shares at a price much lower than I sold in February - sold at 722p, bought back at 594p. Very recently I’ve more than doubled my holding in MS International at 129.2p and tripled my Wynnstay holding at 340.5p – I’ll set out my reasoning in a set of Newsletters soon. The Deep Value Strategy performance tables The results (so far) of all the shares bought for the portfolios I’ve been writing about in my Newsletters are shown in the tables below. The comments I made at the time explaining the rationale for each investment are available for you to read in older newsletters - there is nowhere for me to hide from my appraisals made three, four or seven years ago. I present the returns after taking the hit on broker costs, stamp duty and bid/offer spread. (Some of you have joined us recently so, in case you are not familiar with them, I briefly describe the criteria for my portfolios following the portfolio performance tables.) The 2013 Net Current Asset Value, NCAV, portfolio Company Purch date Purch price Divs to 31.12.20 Price 31.12.20 Return to 31 December 2020 French Con.25.7.13 £0.3047 zero Sold July 2015 £0.4378 44% Caledonian T25.7.13 £0.70 zero Sold April 2020 for £1.391 99% Fletcher King6.8.13 £0.30 14.25p Sold June 2016 for 46p 101% Northamber22.8.13 £0.287 1.6p Sold Oct 2016 £0.303 11% Titon5.9.13 £0.379 6.5p Sold May 2016 £1.06 197% Mallett12.11.13 £0.7682 12.7p Sold Nov 2014 £0.60 -5% AVERAGE 75% The 2014 NCAV portfolio Company Purchase date Purchase price Divs to 31.12.20 Price 31.12.20 Return to 31 12.20 Holders Tech10.10.14 & 3.11.14 £0.47 1p Sold March 2017 £0.33 -28% Airea4.11.14 £0.1195 0.9p Sold Sept 2016 £0.309 166% Northamber17.11.14 £0.4265 0.7p Sold Oct 2016 £0.303 -27% Caledonian T30.12.14 £1.39 zero Sold April 2020 for £1.391 0 AVERAGE 28% The 2015 NCAV portfolio Company Purchase date Purchase price Divs to 31.12.20 Price 31.12.20 Return to 31.12.20 PV Crystalox 15.1.15 £0.122 zero Sold Dec 2016 £0.237 94% Arden Partners 1.9.15 £0.422 1p Sold May 2018 £0.364 -11% Northamber 4.9.15 £0.443 0.4p Sold Dec 2016 £0.303 -31% AVERAGE 17% The Buffett-style portfolio This type of share is rarer than the others, and so I combine all years. Company Purchase date Purchase price Divs to 31.12.20 Price 31.12.20 Return to 31.12.20 Dewhurst 9.4.14 £3.18 70.5p Sold February 2020 £7.217 149% MS International 9.10.19 £1.723 3.5p £1.15 -31% Character 20.1.20 & 5.6.20 £2.811 15p £4.10 51% Dewhurst 11.11.20 £5.94 0 £6.00 1% MS International 16.12.20 £1.292 0 £1.15 -11% AVERAGE 40% (I bought some more of Dewhurst in June 2014 at £3.11, December 2014 at £3.75, November 2017 at £5.46, February 2019 at £5.54 and April 2019 at £5.64.These were sold Feb 2020). Modified price earnings ratio portfolio 2015/16 Company Purchase date Purchase price Divs to 31.12.20 Price 31.12.20 Return to 31.12.20 Haynes 11.2.15 £1.159 33.5p Sold 2.10.19 £2.9175 181% AGA 11.3.15 £1.002 zero Taken over June 2015 £1.456 45% Hogg Robinson 10.4.15 £0.4709 2.37p Sold June 2016 £0.656 44% MS International 3.7.15 £1.86 36p £1.15 -19% BHP Billiton 24.9.15 £10.43 127p Sold May 2018 £16.90 74% TClarke 5.11.15 £0.7916 13.61p Sold Feb 2020 £1.1215 59% Premier Farnell 8.4.16 £1.222 3.6p Taken over 20.6.16 £1.632 36% AVERAGE 60% The AGA holding was doubled 30 April 2015 at a price of £0.9466. Modified price earnings ratio portf ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 |
Glen ArnoldI'm a full-time investor running my portfolio. I invest other people's money into the same shares I hold under the Managed Portfolio Service at Henry Spain. Each of my client's individual accounts is invested in roughly the same proportions as my "Model Portfolio" for which we charge 1.2% + VAT per year. If you would like to join us contact Jackie.Tran@henryspain.co.uk investing is about making the right decisions, not many decisions.
Categories
All
Archives
May 2023
|