Dewhurst (LSE:DWHA) reported its annual results to 30th September 2020 this morning. They were very pleasing. Basically, they had to adjust operations considerably during lockdown, but by dint of dedication and teamwork, overall sales were down only 1.5% and adjusted operating profit was up from £7.7m to £8.6m.
If I add back exceptional costs that will not reoccur then underlying profit after tax is £6.35m compared with £5.4m in 2019. That is earnings of 78.5p per share (or 74p if we deduct the non-controlling interests). The A non-voting shares are trading at £6.50 to buy. At that the PER is £6.50/£0.74 = 8.8. “Owner earnings” for 2020 is even more remarkable. Profit after tax and deduction of non-controlling interests was £5.98m. Adding back depreciation and amortisation we get to £8.99m. Cash was released from working capital (£2.43m) but some money was spent on capital items (which is not disclosed so I’ve estimated at £0.32m). Thus “owner earnings” is roughly £11m or £1.36 per shares. Of course, we should not take just one year’s owner earnings to estimate earnings power. But it is encouraging to see such a large lift in “owner earnings” last year. (Owner earnings for the previous 8 years were provided in yesterday’s newsletter). Most of the rest of the newsletter was prepared before I knew that annual results will be announced today. I have however updated the data and analysis below. Return on net tangible assets, RONTA Today’s newsletter looks at a stab at a valuation of a Dewhurst “A” share through a consideration of its return on net tangible assets. Profits, assets and liabilities £’000s Year end September 2020 2019 2………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
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Dewhurst (LSE:DWHA) has a lot of assets, and no debt, backing its 8.08m shares. When viewing the key numbers below consider that the “A” shares (non-voting) are currently trading at £5.50 - £6.50. Market capitalisation is £66.7m with the 3.31m Ordinary shares at £11.60 and the 4.77m “A” shares at £5.94 (what I paid).
Balance sheet strength (March 2020) Net asset value in total (excluding non-controlling interests) £40.4m Net asset value per share: £5 Net tangible asset value in total (also excluding non-controlling interests): £29m Net tangible asset value per share: £3.59. Borrowing: zero, and no overdraft facility. Cash: £15.1m Pension deficit: £10.6m Conclusion: this is a strong balance sheet, with no suggestion of potential financial distress. Owner earnings analysis With owner earnings we are trying to obtain the earnings that, in future, would be left for shareholders after the managers’ use of cash generated to pay for items of expenditure to maintain the strength of the economic franchise (e.g. additional capital items, additional working capital, marketing spend, R&D and staff training) and to maintain unit volume and to invest in all value-generating projects available. Depending on circumstances, the owner earnings figure may be the same for every future year or on a steadily rising (or falling) trend. Naturally, owner earnings are impossible to obtain with any degree of precision because many of the input numbers are merely educated guesses about the future. Despite this imprecision it remains an important method for thinking through valuations. Owner earnings analysis is about future cash available for shareholders to take out of the business. But the only evidence we have available is past data. We start with that, and then use qualitative analysis to judge whether to simply project forward the past pattern or modify the previous trend for future orientated thinking. In the following we use what the company actually invested in new working capital items and in new fixed capital items, and what they spent on marketing, R&D and staff training etc. already deducted from the P&L. What the analysis really requires is the amount necessary to maintain the quality of the economic franchise, unit volume and invest in value generating projects. To start with we make the bold assumption that what was spent by the managers was also the necessary amount. When we move to forward-looking analysis to value the firm we need to make another bold assumption on the real amount needed to invest in new WC, fixed capital items, etc., in the future. The historical analysis helps us make that judgment. £m YEAR2009 2010 2011 2012 2013 Profit after tax (excluding non-controlling interests)3.27 3.50 2.90 3.75 1.30 Add back non-cash items - depreciation, goodwill and amortisation0.58 0.70 1.31 0.88 2.50 Totals to: Amount available for distribution to shareholders before considering the need to spend on fixed capital items and working capital items to maintain the company’s economic franchise, unit volume and invest in value generating projects.3………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Dewhurst (LSE:DWHA) owns a number of niche manufacturing and distribution business with many displaying high market shares, strong reputations and long-standing relationships with customers and the agents of clients (e.g. an architect specifying Dewhurst lift components for new high rise building).
The UK and European businesses Dewhurst UK Manufacturing What it makes:
2018 Report: “Sales declined at Dewhurst UK for the second consecutive year mainly due to overseas markets being less buoyant than had been expected. The UK market was also quite stagnant, with a recurring theme of projects being delayed. We have been extremely active on the product design side. We launched our first wholly new rail product for many years. The Train Despatch Equipment Unit has been developed in conjunction with Network Rail and brings together all the components required by a train despatcher, into one module. For the lift industry we have extended our Profile Plus Landing Station range to include three new widths.” (These directors are justly proud of their engineering!) 2019 Report: “Sales improved as our drive to increase fixture sales gained momentum. The UK market was particularly strong with an increase in demand for infrastructure products, especially within the rail sector. We fulfilled our first order for signalisation of a new range of lifts for London Underground (LUL). We expect further orders over the coming years to support LUL’s program to install lifts in all their surface stations. Overseas we started delivery of fixtures for the first of 180 lifts for the new Riyadh Metro. This is a significant order for Dewhurst UK…We have also added to our Lift Indicator range with a number of new offerings based on glass designs.” Thames Valley Controls Lift control and remote monitoring of lifts (e.g. gives operational information online such as reports lift performance). Also, CCTV, e.g. in Manchester’s Arndale Centre. This business was sold 30th September 2019 to a specialist in the field which benefits from economies of scale, particularly R&D. Dewhurst and TVC will continue to work together on projects. Traffic Management Products Mostly the manufacture of road bollards that bounce back when run over. This division was bought over a decade ago and was a perennial disappointment. However, in 2016 sales grew “significantly”, and in 2017 “slightly”. These bollards are highly customisable regarding style, signs and banding (976 variations available). Far Eastern sales are growing. In 2018 “business fell slightly… we have taken the decision to move key manufacturing processes in house. Good progress has been made on this project, which has led to some major changes for TMP. We have relocated the business to Birmingham…This should allow us to generate a significant improvement in both the gross and net profit of the business.” 2019: “We had a particularly difficult first half of the year at TMP, when revenues were especially soft. At the same time the team at Wednesbury still had a great deal of work to do at the new factory, ensuring that the plant was running efficiently, refining the manufacturing and assembly processes and establishing new Health & Safety and Quality procedures. There had been a greater turnover of sales staff at TMP than is ideal” Half year to 31 March 2020: “had a strong first half, continuing the progress made in last year’s second half” A&A Electrical Distribution – the new UK division This business was bought June 2018 for £12.25m cash. It has a 55,000 sq ft warehouse in London containing 30,000 lift components, cable and electrical equipment, such as those for escalators. It has stocked Dewhurst’s products for many years alongside those from other manufacturers and can supply anywhere in the UK within the day using its own vehicle fleet. Leading products include electrical trailing cable, s………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Dewhurst non-voting shares (LSE:DWHA) are in my Buffett-style portfolio. It’s earnings history is not spectacular, just one of steady progression over the years. But earnings are based on firm foundations of strong market positions, which bodes well for future growth.
Sales, earnings and dividends Sales, £m Earnings per share (p) Dividend per share (p) 2009 36 38.43 6.06 2010 37 40.97 6.36 2011 42 34.35 6.69 2012 52 44.48 7.02 + 5 special 2013 44 15.7 8.0 2014 47 43.87 9.0 2015 46 50.21 10 + 3 special 2016 47 40.75 11.0 2017 53 52.65 12.0 2018 55 47.93 12.50 2019 66 (continuing: £56.5m) 116.23p 13.0p H1 2020 28 20.78p 3.75p (2019: 3.75p)In the table above the 2019 earnings number is raised due to the inclusion of a capital gain on selling the Thames Valley Controls, TVC subsidiary, In the next table we remove that element as well remove the profit contribution made by operating the TVC business in the financial year. Underlying earnings of continuing businesses only (in 2019 that means excluding capital gain on sale of TVC and the £1.1m profit after tax TVC made): 2019 £000’s 2018 £000’s (excluding profit from TVC) Profit from continuing operations after tax 3,095 3,543 Add back exceptional: pension female/male equalisation charge 639 0 Add back exceptional: amortisation of acquired intangibles 1667 555 Less tax on exceptionals -461 -111 Underlying profit after tax before minority interests 4940 3,987………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 I’ve bought Dewhurst “A” non-voting shares (LSE:DWHA) at a price of £5.94. This is after selling all my A shares in March at £7.22. I explained back then why I sold in a 2nd March newsletter “not because I judged it to be over-valued but because I wanted to rebalance my portfolio so as to have more cash available for post-Covid purchases.” This turned out to be very useful – see recent purchases of Capital & Counties Properties and McCarthy & Stone.
In March I added that I didn’t think the Dewhurst A’s were seriously over-valued, but wanted to take a very cautious approach through the pandemic, “The Dewhurst A’s were selected to be turned into cash because they were trading close to intrinsic value, not because Mr Market had pushed them up beyond a reasonable level. Ordinarily I would have held on to the Buffett-style investment when it traded near – or even slightly above - intrinsic value. But we do not live in ordinary times. I judge the supply and demand shock of Covid to the world macroeconomy to be so great that I feel much more comfortable with a large buffer of cash”. So, I’m relieved to have bought back into this excellent company at a lower price (by 18%) at a time of economic revival on the back of vaccines. Dewhurst has a strong economic franchise, managers who are both competent and behave with high integrity toward all shareholders, good accounting numbers and the shares are available at a low price relative to past earnings and a reasonable expectation of future earnings (its “earnings power”). I bought Dewhurst shares at various prices over the last six years: April/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. Newsletters setting out rationales for those purchases can be found at those times: 12th – 22nd Dec 2014, 15th June 2015, 14th – 17th Dec 2015, 25th – 27th July 2017, 21st, 22nd Nov 2017, 3rd – 5th Jan 2018, 20th – 24th July 2018, 25th – 30th April 2019, 19th – 23rd Dec 2019, 2nd March 2020. Brief description of the firm Dewhurst is over one hundred years old, started by the grandfather of the current brothers who command both share control and operational control. It manufactures its own components for lifts, ATM’s and other keypads, and for trains. It also sells other manufacturers’ electrical and other components to the trade (such as lift repairers), and supplies handrails for escalators and various traffic products such as large road bollards. Richard and David Dewhurst have decades of experience in this field: Richard, age 63, joined in 1985 and has been Chairman since 1991; David, aged 58, Group Managing Director joined in 1987. They are supported by a longstanding, loyal, professional team. Over the last two decades they have grown profits both by organic means with an almost obsessive interest in design prowess and manufacturing efficiency, and by a measured acquisition strategy of companies supplying (generally) complementary products. Often these acquirees have a long association with Dewhurst as suppliers or customers - the managers know each other in this small engineering world, and the Dewhurst brothers know the weaknesses and strengths of the firms they are acquiring from the perspective of suppliers or customers. Demand for individual product l………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 I’ve sold my “A” non-voting Dewhurst (DWHA) shares for £7.22, not because I judged it to be over-valued but because I wanted to rebalance my portfolio so as to have more cash available for post-Covid purchases.
Dewhurst A’s were selected to be turned into cash because they were trading close to intrinsic value, not because Mr Market had pushed them up beyond a reasonable level. Ordinarily I would have held on to this Buffett-style investment when it traded near – or even slightly above - intrinsic value. But we do not live in ordinary times. I judge the supply and demand shock of Covid to the world macroeconomy to be so great that I feel much more comfortable with a large buffer of cash (as well as my put options on the Dow). I bought Dewhurst shares at various prices over the last 6 years: April/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. You can read Newsletters setting out rationales. I still regard Dewhurst as an excellent company, and I will be looking to buy back in later in the year or next year if I can achieve a value price. Summary of previous analysis A different share structure There are 3.3m Ordinary shares carrying voting rights and 5.1m Non-voting ‘A’ shares. Thus, any overall earnings or valuation figure should be divided by 8.4m shares to derive per-share numbers. The Ordinary shares and the ‘A’ non-voting ordinary shares rank equally in all respects pari passu except that the ‘A’ non-voting ordinary shares do not carry the right to receive notices, attend or vote at meetings of the company. Market capitalisation: 3.3m Ordinary shares x £10 = £33m 5.1m Non-voting ‘A’ shares x £7.22 = £37m Total market capitalisation = £67m Brief description of the firm A manufacturing and electrical component distribution company that designs and manufactures components for lifts, ATM and other keypads, and for trains. It also supplies handrails for escalators and various traffic products such as large road bollards. In June 2018 it greatly expanded the distribution, wholesaling and retail selling of lift components and other electrical items, through the purchase of A&A Electrical Distributors for £12.25m, offering a range much wider than what it manufactures itself. Revenue, Earnings and Dividends The various businesses making and selling components for lifts has grown to about 80% of turnover. In rough terms: one-third of sales are in UK, one-eighth in Europe, with one-quarter in North America and one-third in Australasia and Asia. Sales, earnings and dividends (including TVC business which was sold 30th Sept 2019 (yearend) - both operating profits and capital gain made on TVC’s sale are included) Sales, £m Earnings per share (p) Dividend per share (p) 2010 37 40.97 6.36 2011 42 34.35 6.69 2012 52 44.48 7.02 + 5 special 2013 44 15.7 8.0 2014 47 43.87 9.0 2015 46 50.21 10 + 3 special 2016 47 40.75 11.0 2017 53 52.65 12.0 2018 55 47.93 12.50 2019 66 116.23p 13.0 In the table above the 2019 earnings number is raised due to the inclusion of a capital gain on selling the TVC subsidiary – we can now remove that element as well remove the profit contribution made by operating the TVC business in the financial year. Underlying earnings of continuing businesses only (in 2019 that means excluding capital gain on sale of TVC and the £1.1m profit after tax TVC made):... ………………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 [email protected] investing is about making the right decisions, not many decisions.
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