The sale of the tobacco machinery business, and a property transaction in Canada, has left the renamed MPAC with cash of about £25m and a market cap not much more than that.
NTAV is about £50m with market cap of £25m, when the results came out, and £28m as I am writing this update.
However £29.3m of the NTAV is due to excess funding in the pension scheme, which MPAC is still obligated to pay into. In short if it is a real asset, and I have my doubts, it is a very, very, long term asset.
So effectively MPAC is valued at cash and whilst it is a large pension fund with a small business attached the pension is well funded. That said the US pension scheme is a liability, though much smaller, it does require ongoing funding.
As described by another holder of the shares. Realistically there is a very limited downside with zero expectation of the management. If they were to get a few things correct this could quite easily double in value.
The half year results clearly demonstrated why there is so little expectation of the management.
At £28.2m sales were up 11% compared to PY but were basically the same compared to the July-Dec figure 2017.
The growth in orders being heralded at the start of the year has fallen back and the order book is only being replenished at current sales levels.
Both of these figures (Orders and Sales) are particularly uninspiring given the claims by management about sales staff training and refocusing after the previous year end’s more positive results.
The Group has two business parts – Original Equipment and Service. The OE side seems to be reasonably strong in terms of new business the Service side was weak with reduced gross margins. In part this seems to be that Service personnel were assigned to help OE, rather than focus on Service.
Particularly blamed for the poor profitability were two OE contracts. One in the UK and one in Canada. MPAC likes to use the term “legacy” when things go wrong. Over the last few years there has been quite a lot of “legacy”. This was a reasonably legitimate line when Mr Steels, the CEO, was new, but as he became CEO in June 2016, it has rather lost its lustre.
He has been there long enough to be expected to understand larger contracts and to take responsibility for them.
The company went from circa £1m profit for the ½ year 2017 to circa £1m loss for the ½ year 2018.
I am concerned that management seem to be routinely surprised both by larger contracts and by customer behaviour. I am also concerned that management is retaining the significant cash levels rather than paying out a dividend.
Personally I would be in favour of a couple of limited in size acquisitions to add turnover and potentially some additional offering to the customer base.. I am concerned that MPAC is looking for a truly significant acquisition. Most acquisitions do not work and this is particularly true of larger acquisitions.
Given management have yet to demonstrate real control of the business they already have I am not convinced that doubling the size would be a good idea. Given the company wrote off £100k on a failed acquisition it is either overpaying its advisors or looking at companies larger than I would think best suits their ability.
In the report the group does claim execution to its strategic plan, some positive developments in orders post the half year and a focus on simpler more deliverable projects in the order pipeline. But these have been claimed before and not noticeably sustained or delivered.
The group also claims some new product development, though gives no view on the importance of these and progress on improving its sales platform, its Service offering and its Canadian management.
I see this as a limited downside opportunity, though should there be a significant acquisition there would need to be a quick appraisal of the situation, with a potential doubling of the share price easily available to competent management. Cash of £25m with a well run company returning less than 10% of NTAV or Sales for a PBT of £5m on a PE of 5. Gives you a £50m company. A PE of 5 is low for a well run company.
At the £25-£30m valuation MPAC is potentially of a size where an activist investor could make a difference. Schroders currently holds 20%, but through 4 different funds. Each of these funds is £200m+ in size so in no case is MPAC a core holding. As such I am continuing to hold and looking for management to improve their performance.