Molins PLC principally a manufacturer of machines for the tobacco industry (strong cash business) with a growing packaging arm (the hope for the future).
Approached by Coesia of Italy it sold them the Tobacco machinery business for circa £30m gross, £27m net.
2nd Iteration
MPAC Plc. A company with a too large central overhead, (developed to run two separate businesses) and many managers used to the “old” way of doing things. This is one of the key issues that needed to be addressed by the company after the sale of the tobacco business and has been, I think, a key feature in the briefings they have been giving since the sale (August 2017). Also with considerable strategic change across a number of fronts as the company needed to get used to being both smaller and more focussed.
3rd Iteration
MPAC as a separate business. Significant change in the managemen but with an unproven strategy (One MPAC etc), various operational issues (£1m reduction in profits over 2 contracts), and having backed itself into a corner over its cash pile. (Having announced it was keeping the cash from the sale of the tobacco business to support working capital and acquisitions the management couldn’t then use it for anything else. So needed an acquisition that all too easily could be a frittering away of the cash).
4th Iteration
Based on discussions with the company in December 2018 and the results from the YE 31/12/18.
Please note I do not intend to reprise my earlier review of the company as it was. Please look at my blog if you want this. What I intend to do is make some assumptions as to what I was expecting from the company operating at a level that I think the company has already obtained (much like Bruce Greenwald advocates with EPV). This will of course not be delivered as such in the 2019 results. There will be a combined entity and there will be acquisition costs.
- |
2018 £m |
Ongoing £m |
- |
Revenue |
58.3 |
62 |
(1) (2) |
GP |
14 |
16.7 |
- |
GP% |
24 |
27 |
(3) |
Operating and Fin Costs |
-14.1 |
-14.1 |
- |
Genuinely exceptional GMP equalisation |
-7.3 |
(4) |
|
Profit Before Tax |
-0.1 |
2.6 |
- |
- 2018 Orders £63.8m so this level of delivery does not seem unreasonable.
- Company is looking for 10% revenue growth so this does not seem unreasonable.
- This is the GP % made in 2017 (an unusual year) but also reflects no further loss making legacy contracts. No new ones have been raised since ½ year 2018. Also as T/O increases almost all manufacturing businesses improve their margin until capacity constraints kick in.
- MPAC is a bit keen on suggesting items are outside the normal business operations, but this one I think is genuinely worth removing from underlying operating profit.
Please note this is not intended as a forecast of the 2019 results, which I would have hoped to beat this (before the acquisition), but a base case for valuation.
5th Iteration
Acquisition of Lambert Automation Ltd. (NB Automation is the Holding company of a group Lambert Engineering is the interesting bit).
Again using both 2018 numbers and where I think the company is now, (principally based on the significantly improved order book).
- |
2018 £m |
Ongoing £m |
- |
Revenue |
17.9 |
22 |
(1) |
GP |
7.2 |
9 |
- |
GP % |
40 |
41 |
(2) |
Operating and Fin Costs |
-6.4 |
-6.4 |
- |
Exceptional |
- |
||
Profit Before Tax |
0.8 |
2.6 |
- |
(2) Reflects slight improvement in margin to reflect growth in sales to historic levels.
Possible valuation
As a combined business we are now looking at £2.6M + £2.6m £5.2m as a pre tax base. Let us say an additional 10% to reflect customer benefits and an additional 10% to say margin improvements and other incorporation of best practise. (You can see the difference in the margin between the two operations).
£5.2 * 1.2 = £6.24m
This valuation is outside the standard EPV as it does contain 2 additional points that the company has not yet delivered on. However I think there are a number of factors that I have not reflected that make me reasonably confident that these multipliers are sensibly conservative.
MPAC is paying circa 20 times pre tax (including earn out), so let us say 7.5 as a possible valuation. I guess that any look through to future profits I can do so can MPAC so the 20* is not a sensible criteria.
£6.24m * 7.5 = £46.8m + £10m for cash on the balance sheet now largely freed up as an acquisition has occurred. I do not expect this to be significantly paid out to shareholders any time soon but I do expect that with the Lambert acquisition management will feel free to use it to develop the business in the most sensible way.
Current underlying value £56.8m. With possibly more upside to be delivered. Current market cap £35.8m. (178.5p a share). There seems to be a significant margin of safety.
I have a position and may add.