Northamber Share Discussion Threads

[rainmaker] 20/9/2013 20:01

Hi Glen, I think we probably share the same attitude with regard to CEOs that, unless we have evidence to the contrary or that person or organisation has shown themselves to be untrustworthy or unreliable, we should expect them to be competent and able and accept what they have to say at face value. I think there are too many cynical Investors trying to interpret everything a Company says.To paraphrase a famous Playright, a cynical Investor knows the price of everything but the value of nothing. I think there is high uncertainty here but of course that doesn't always equate to high risk-although numerous Investors would lump the two together and in those sorts of situations, therein lies opportunities.

regards

[profdoc] 20/9/2013 10:26

Thanks, Ben, Arthur and RM, for providing much food for thought. I think we all agree that this company has a lot of value, but have different degrees of faith in the prospect of Mr Phillips behaving with honour and treating all shareholders equally. Given the evidence that I gathered (see earlier post) and the comments from RM, I, for one, am prepared to trust him (as investors, we cannot distrust everyone – there lies paralysis). Putting to one side the integrity of the CEO we will still need to be concerned with the tendency of executives to love their business and continue in the same line of work. This can cloud their judgement with regard to ROCE – an optimism bias. Ideally we need capital reallocated to higher return areas. If it was me, I would see Northamber as Berkshire Hathaway in 1965. Stuck in an industry with poor economics. I would then allocate capital to value investing opportunities. What Northamber lacks in terms of industry prospects when compared with Titan it makes up for with an enormous gap between asset values and market capitalisation.

[rainmaker] 18/9/2013 13:31

Ben, I hate to disagree with one of the Country's top Stock Market Value Investors twice in two days but that's exactly the way I see it :>)

best wishes

Rain

[rainmaker] 18/9/2013 13:29

Hi Ben-I don't feel the same way about the CEO. I think he's done an outstanding job in managing the business by controlling costs tightly and debt risk in a market with over capacity, wafer thin margins and cut throat competition. IMHO he's already run the business with the aim of enhancing shareholder value and always been fair to shareholders with special dividends and share buybacks. Obviously his and shareholders interests are mutally compatible.I would be very surprised if he shafted shareholders and with him owning some 64% of shares how much would he really save by making a derisory offer.Would this be worth sacrificing his good reputation for?

Northamber are competing against much larger players and as I see it, their only real advantage is the ability to move quickly and capitalise on opportunities as and when they occur.Perhaps Northamber will be a case of a rising tide lifting all boats and perhaps competitors will reluctant to continue to chase turnover for the sake of it in a period of economic expansion after several difficult years. With a Company like Titon you know that their future is bright but obviously the same cannot be said of Northamber.

My impression of Northamber at current prices is that there is a definite opportunity and there is also a substantial margin of safety available as well.Given the Company's high stock turn,average debt collection period and low bad debt risk(at the height of the recession their bad debt figure was just 0.25%) and from memory, lack of stock provisions ,I would personally not discount it's value of inventory or accounts receivables.As a Value Investor, I'm always prepared and willing to err on the side of caution and take a very conservative measures of values but I just don't think it's needed.Unusually for a Value share I have no idea how the intrinsic value will be closed but there are numerous possibilities.

AIMHO, DYOR

eregards

[ben value] 17/9/2013 14:14

Hi Arthur - I don't know much about David Phillips but the final sentence from the annual report does not seem to have the tone of someone who would "screw us all". I could be very wrong. I hope not as I added to my holding today.

"We are fortunate to have deep strengths in our balance sheet and capable of withstanding pressures. Coupled with the ability and willingness to detect and act quickly and decisively to changing circumstances, we are best placed to benefit from any commercially viable opportunity that becomes available that do not overly risk our custodianship of our shareholders asset base. "

regards

[arthur_lame_stocks] 16/9/2013 20:07

Well I bought a few today and pretty much agree with your analysis profdoc.

On the property front as far as I can see the head office has been written down from a cost of £4m to just £2m so it is possibly worth a lot more than current value and the warehouse was being sought by a developer so there may be some hidden value in that asset as it sits in 5 acres.

The question in my mind is whether Mr Phillips is so attached to his lifes work that he's willing to take us all down with a sinking ship or whether he'll do the decent thing and consider liquidating the business and looking for something more lucrative to invest his and our money in.

There is also a risk that he will delist the business and screw us all and that is one of the reasons I have kept my investment small.

Cheers

Arthur

[profdoc] 16/9/2013 15:14

Northamber appears to qualify as a Net Current Asset Value, NCAV, share. However, Benjamin Graham and I both like(d) an NCAV company to also have 'good prospects for the business'. This is where the doubts creep in. Any help would be appreciated.

Market capitalisation is £7.7m. Based on the last (interim) balance sheet to 31 December 2012 the company has current assets of £22.4m including £3.2m of cash (no debt). To calculate NCAV we deduct current liabilities (£7.4m) and non-current liabilities (£0.05) to give an NCAV of just under £15m – almost double the current market cap. Of course, we cannot take the receivables and inventory at face value but need to reduce them to build in a margin of safety. Even taking an ultra-pessimistic approach NCAV is greater than market cap.

A further consideration is the shift in the balance sheet over the past two years. Whereas it used to have over £11m of cash (resulting in the net cash being greater than NCAV) the directors decided to stop paying rent on its warehouse. They had been trying for years to buy the freehold and they finally got a chance to do so. They paid £6.7m. Rent expense will now fall to zero from £0.6m (a 9% return on the spare cash rather than virtually zero). The company also owns its office building. In total there are around £9m of property assets. These have a reasonably stable market value.

So, if worst came to the worst the company could run down its inventory (£6.6m) and its trade receivables (£12.7m). The proceeds, after paying off creditors (£7.4m), could be added to the cash of over £3m to provide a very nice cash pile (even if the amounts received for inventory and receivables are much less than the BS value). On top it could sell or rent out its £9m of property. There could be a company consisting of property plus cash of £3m? £10m? or £15m? Thus, there is reasonable hope that market capitalisation is covered by either (a) NCAV, or (b) property assets. If both turn out to be as valuable as the BS makes out we have a potential trebling in market price.

The fly in the ointment
Northamber trades in an industry with some of the worst economic characteristics I have come across. It is a medium sized player in an industry in which entry is wide open (there is little customer captivity/loyalty). Suppliers hold a great deal of power. Customers can quickly obtain alternative prices from competing wholesalers. Substitute methods of getting the product (e.g. computer) to the end-user are viable (e.g. manufacturer selling direct). Furthermore, the year on year product price falls and manufacturers on wafer thin margins expect wholesalers to also operate with low gross profits (in Northamber's case 7.7%).

So what can save this company from cash burn and continuous slide?
NCAV shares have serious problems but they usually improve their positions in one or more of the following ways:
(1) Industry economics change as result of competitors exiting the industry. The last man (men) standing gains in pricing power to return to reasonable profitability. This is possible with Northamber, but unlikely. It will be one of last standing because of its strong BS and its ability to reduce overheads as sales fall to remain close to breakeven, but I cannot rely on there being a sufficient number of competitors exiting to make a material difference to profitability. There is a good chance that new competitors will emerge.
(2) Earnings power will be lifted. Management will stop the slide by returning the company to fair ROCE through excellence in operations or by stopping the head-against-brick-wall-banging and reallocating assets to areas of business with better returns. Here we have some hope. The senior team are very experienced and have shown a willingness to drop low margin products
(3) Liquidation. This is a possibility. It seems to be happening to some degree by stealth: Over the past 6 years turnover has declined from around £200m to around £80m, and with that there has been the release of cash from working capital and quite high dividends and share buy backs.
(4) Takeover. Perhaps another industry player will bid for it, but how valuable is the client list when buyer switching cost is so low.

Managerial quality and commitment
Directors have sensibly withdrawn from the most unprofitable activities rather than chase after sales in a highly competitive industry. There is always a worry that majority share controlling directors will behave dishonourably and suck money out of the company while it is decline. However here is evidence of a sense of responsibility and duty to fellow shareholders and workers: Chairman and CEO, David Phillips, again waived a large portion of his salary in 2012. It was reduced to only £15,000. The annual reductions in workforce shows grit, but as also resulted in reported low morale on the shop floor. The sound financial position is used as a competitive weapon in negotiating with both customers and suppliers.
Lost vendors such as IBM, Fujitsu and Allied Telesis in the past 2 years, often due to failure to push through enough volume. High degree of realism in assessing the business and the industry economics, e.g. 'it is not possible to be positive about the immediate future'. (Interim Statement 2012)

Stability
Over the last five years profits average out at just above zero. However, this must be seen in the context of very poor sales in the industry and a halving of sales for this company. There seems to be an ability to stabilise the roughly breakeven position by improved overhead control (down by £0.6m in 2012), improved stock turnover ratios (9.9 times in 2011 and 13.8 times in 2012 resulting in £4.7m of cash being released), shift to higher gross margin product lines (gross margin in 2010: 6.69%, 2011: 6.8%, 2012: 7.7%) and directors waiving of salary. The saving of £0.6m rent each year will again help stabilise. Solvency is not an issue, nor is pension fund obligations (there are none) nor rent obligations (none).

Dividend yield is currently 4.5% (1.3p/29p). Given the BS strength, this should be sustainable. Despite the high dividends (2008: 2.2p, 2009: 1.6p, 2010: 1.6p, 2011: 2p) NAV has declined only a small amount: 2008: 90.1p, 2009: 89.4p, 2010: 88.5p, 2012: 85.7p December 2012: 82.7p. It is thus treading water rather than collapsing in a heap.

David Phillips, the founder and 61.47% shareholder, is now 68 years old and has shown some signs of wishing to hand over responsibility to others. The transition phase may lead to some instability. Peter Hammett was brought in as a senior operations manager (not on Board) in 2013, but left after just 6 months 'to save costs'. He is on 'holiday' – classed as a consultant.

Questions:
(1) Will they get swamped by the competitive pressure in this industry, resulting in perennially low profits but continued high capital commitments? Or will the industry economics improve sufficiently to allow acceptable ROCE?
(2) Alternatively, will they increasingly see themselves as 'property plus cash firm' with an irritating appendage of a wholesaling business draining managerial attention and other resources for little reward? If so will ROCE potential outside of wholesaling become the guiding light? Or will outright liquidation or liquidation by stealth be attractive options? If so will the directors treat the minority shareholders decently?
(3) Are they capable of weighing up the alternative uses of the capital at their disposal rather than automatically stick with what the activities they know and love regardless? Is there sufficient clarity on the future industry economics for them to work out the best uses of shareholder capital? Are they true to the fundamental meaning of the statement in the Dec 2012 interims: 'we are best placed to benefit from any commercial viable opportunity that becomes available that do not overly risk our custodianship of our shareholder asset base'.

For supporting evidence for NCAV investing Testing Benjamin Graham's Net Current Asset Investing in London by Glen Arnold and Xiao Ying published in the Journal of Investing, obtainable at www.glen-arnold-investments.co.uk).

[hugepants] 16/9/2013 12:51

perking up a bit here

my notes:

28,158,735 shares in issue

Freehold property worth £6.3M = 22p
Networking Capital = £15M = 53p
Cash = £3.2M = 11p
Net tangible asset value=84p

Yield over 3%
Cash flow positive.
Trading at breakeven?

[diku] 05/9/2013 19:40

Anybody know what's been mentioned in the other premium thread?....

[profdoc] 23/8/2013 15:36

Northamber appears to qualify as a Net Current Asset Value, NCAV, share. However, Benjamin Graham and I both like(d) an NCAV company to also have 'good prospects for the business'. This is where the doubts creep in. Any help would be appreciated.

Market capitalisation is £7.7m. Based on the last (interim) balance sheet to 31 December 2012 the company has current assets of £22.4m including £3.2m of cash (no debt). To calculate NCAV we deduct current liabilities (£7.4m) and non-current liabilities (£0.05) to give an NCAV of just under £15m – almost double the current market cap. Of course, we cannot take the receivables and inventory at face value but need to reduce them to build in a margin of safety. Even taking an ultra-pessimistic approach NCAV is greater than market cap.

A further consideration is the shift in the balance sheet over the past two years. Whereas it used to have over £11m of cash (resulting in the net cash being greater than NCAV) the directors decided to stop paying rent on its warehouse. They had been trying for years to buy the freehold and they finally got a chance to do so. They paid £6.7m. Rent expense will now fall to zero from £0.6m (a 9% return on the spare cash rather than virtually zero). The company also owns its office building. In total there are around £9m of property assets. These have a reasonably stable market value.

So, if worst came to the worst the company could run down its inventory (£6.6m) and its trade receivables (£12.7m). The proceeds, after paying off creditors (£7.4m), could be added to the cash of over £3m to provide a very nice cash pile (even if the amounts received for inventory and receivables are much less than the BS value). On top it could sell or rent out its £9m of property. There could be a company consisting of property plus cash of £3m? £10m? or £15m? Thus, there is reasonable hope that market capitalisation is covered by either (a) NCAV, or (b) property assets. If both turn out to be as valuable as the BS makes out we have a potential trebling in market price.

The fly in the ointment
Northamber trades in an industry with some of the worst economic characteristics I have come across. It is a medium sized player in an industry in which entry is wide open (there is little customer captivity/loyalty). Suppliers hold a great deal of power. Customers can quickly obtain alternative prices from competing wholesalers. Substitute methods of getting the product (e.g. computer) to the end-user are viable (e.g. manufacturer selling direct). Furthermore, the year on year product price falls and manufacturers on wafer thin margins expect wholesalers to also operate with low gross profits (in Northamber's case 7.7%).

So what can save this company from cash burn and continuous slide?
NCAV shares have serious problems but they usually improve their positions in one or more of the following ways:
(1) Industry economics change as result of competitors exiting the industry. The last man (men) standing gains in pricing power to return to reasonable profitability. This is possible with Northamber, but unlikely. It will be one of last standing because of its strong BS and its ability to reduce overheads as sales fall to remain close to breakeven, but I cannot rely on there being a sufficient number of competitors exiting to make a material difference to profitability. There is a good chance that new competitors will emerge.
(2) Earnings power will be lifted. Management will stop the slide by returning the company to fair ROCE through excellence in operations or by stopping the head-against-brick-wall-banging and reallocating assets to areas of business with better returns. Here we have some hope. The senior team are very experienced and have shown a willingness to drop low margin products
(3) Liquidation. This is a possibility. It seems to be happening to some degree by stealth: Over the past 6 years turnover has declined from around £200m to around £80m, and with that there has been the release of cash from working capital and quite high dividends and share buy backs.
(4) Takeover. Perhaps another industry player will bid for it, but how valuable is the client list when buyer switching cost is so low.

Managerial quality and commitment
Directors have sensibly withdrawn from the most unprofitable activities rather than chase after sales in a highly competitive industry. There is always a worry that majority share controlling directors will behave dishonourably and suck money out of the company while it is decline. However here is evidence of a sense of responsibility and duty to fellow shareholders and workers: Chairman and CEO, David Phillips, again waived a large portion of his salary in 2012. It was reduced to only £15,000. The annual reductions in workforce shows grit, but as also resulted in reported low morale on the shop floor. The sound financial position is used as a competitive weapon in negotiating with both customers and suppliers.
Lost vendors such as IBM, Fujitsu and Allied Telesis in the past 2 years, often due to failure to push through enough volume. High degree of realism in assessing the business and the industry economics, e.g. 'it is not possible to be positive about the immediate future'. (Interim Statement 2012)

Stability
Over the last five years profits average out at just above zero. However, this must be seen in the context of very poor sales in the industry and a halving of sales for this company. There seems to be an ability to stabilise the roughly breakeven position by improved overhead control (down by £0.6m in 2012), improved stock turnover ratios (9.9 times in 2011 and 13.8 times in 2012 resulting in £4.7m of cash being released), shift to higher gross margin product lines (gross margin in 2010: 6.69%, 2011: 6.8%, 2012: 7.7%) and directors waiving of salary. The saving of £0.6m rent each year will again help stabilise. Solvency is not an issue, nor is pension fund obligations (there are none) nor rent obligations (none).

Dividend yield is currently 4.5% (1.3p/29p). Given the BS strength, this should be sustainable. Despite the high dividends (2008: 2.2p, 2009: 1.6p, 2010: 1.6p, 2011: 2p) NAV has declined only a small amount: 2008: 90.1p, 2009: 89.4p, 2010: 88.5p, 2012: 85.7p December 2012: 82.7p. It is thus treading water rather than collapsing in a heap.

David Phillips, the founder and 61.47% shareholder, is now 68 years old and has shown some signs of wishing to hand over responsibility to others. The transition phase may lead to some instability. Peter Hammett was brought in as a senior operations manager (not on Board) in 2013, but left after just 6 months 'to save costs'. He is on 'holiday' – classed as a consultant.

Questions:
(1) Will they get swamped by the competitive pressure in this industry, resulting in perennially low profits but continued high capital commitments? Or will the industry economics improve sufficiently to allow acceptable ROCE?
(2) Alternatively, will they increasingly see themselves as 'property plus cash firm' with an irritating appendage of a wholesaling business draining managerial attention and other resources for little reward? If so will ROCE potential outside of wholesaling become the guiding light? Or will outright liquidation or liquidation by stealth be attractive options? If so will the directors treat the minority shareholders decently?
(3) Are they capable of weighing up the alternative uses of the capital at their disposal rather than automatically stick with what the activities they know and love regardless? Is there sufficient clarity on the future industry economics for them to work out the best uses of shareholder capital? Are they true to the fundamental meaning of the statement in the Dec 2012 interims: 'we are best placed to benefit from any commercial viable opportunity that becomes available that do not overly risk our custodianship of our shareholder asset base'.

For supporting evidence for NCAV investing Testing Benjamin Graham's Net Current Asset Investing in London by Glen Arnold and Xiao Ying published in the Journal of Investing, obtainable at www.glen-arnold-investments.co.uk).

[sleepy] 15/1/2013 14:12

I wonder if they are in a close period?

[hybrasil] 15/1/2013 14:04

No trades forever and suddenly 650k goes through today. Bet it s the co buying its own shares

[rainmaker] 23/3/2012 13:32

Thanks FTG, agreed.I can't say I'm too tempted at current levels probably around 30p is when I give them Company some serious attention with a view to buying. I've seen similiar comments about Titon Holdings(TON)returning capital to shareholders through a special dividend.However Investors need to take into account these Companies working capital requirements ie what capital they need to finance their day to day operations without resorting to additional borrowing. I think Northamber's working capital requirement was circa £9mln.

It's very easy to calculate a company's trade cycle, in effect the number of days it takes for their cash to go into trade payables, into stock, into account receivables and back into cash again. You just need to work out the number of days inventory add the number of days accounts receivable and subtract the number of accounts payable. Some businesses will actually have a negative conversion cycle so they receive payments before they spend on operating expenses. Some good examples are Amazon, Dell Computers, Newspaper Groups.Mallett's annual Masterpiece exhibition in which they hold a 23.75%stake, is another one as they receive payment from Exhibitors some 8 months before the vast majority of expenses are incurred ie when they stage the actual exhibition.

regards

[feedthegoat] 21/3/2012 14:33

time for a share buyback i think

[rainmaker] 15/11/2011 00:06

Sleepy-I spoke to them once and they were very guarded with their responses. I didn't get anything of any value.

regards

[sleepy] 14/11/2011 20:58

Rainmaker
Thanks for your comments.
I havn't got anywhere when I have tried talking to NAR.
Have you had more success with them?
Sleepy

[rainmaker] 14/11/2011 19:17

Don't have too much fun, Sleepy.But seriously, I'm not cynical about attending AGM and good luck, I hope you come away with some special insight that makes it all worthwhile but I really don't see the need to go.I would rather spend the time taken traveling there and back searching on line. The answers I need to questions are out there and if there're not, then I can make a quick call to the Company but it's very rare that I need to ring them.



regards

[sleepy] 14/11/2011 11:11

Looks like I will be on my own

[sleepy] 12/11/2011 19:35

Anyone going to the AGM?

[rainmaker] 24/9/2011 22:58

Hi M-As the shares are trading at less than book value,it makes a lot of sense for Northamber to buy back their own shares for cancellation as it boosts NAV, eps and cuts the cost of the dividend.It's also the most tax efficient way of returning value to shareholders.However we shouldn't forget that it also increases the Chairman's percentage holding as well, meaning that as the majority shareholder it will cost him less to take the Company private, should he wish to do so-I believe he's now past the retirement age so MBO is a stronger possibility.

I'm personally not much of a conspiracy theorist and I generally take Peoples actions at face value.You know, I'm not looking for hidden meanings all the time. Nevertheless I'm beginning to wonder if the Chairman doesn't want a stronger share price since it will cost him more to take the Company private. I have a problem with his sincerity-on the one hand he remarks upon the large disparity between the share price(currently 56p) and net asset value of circa 89p yet the subsequent share buybacks seem token gestures.OK he recently bought back 100k at 57p but mostly they've been small purchases of 10k shares.When I last calculated working capital requirements at Northamber they were circa £8mln but with £10mln in the bank they could, and indeed should, have been far aggressive with buybacks.

I take my Hat off to the Chairman and his fellow Directors because I think they have done a tremendous job under difficult circumstances-rising costs,product deflation, wafer thin margins and cut throat competition, bad debt risk through the recession etc but I've been a seller of the shares and I'm liquidating my positions. I don't see much upside for the shares (or downside for that matter)from current levels as the markets there're involved in are very difficult and the play on rising interest rates is a non runner since rates will probably not rise until 2014.The Northamber share price is some 50% up since I started this thread and has more than doubled since I first identified this Company as a good opportunity two years ago so it's a reasonable success.

regards

[mctmct] 24/9/2011 14:48

The Chairman says "With daily headlines reminding or declaring new found levels of economic uncertainty, it would be far too courageous to provide any guidance.

Market events and our experience during this last year lead to the simple conclusion that it would not be sensible to offer any optimism for the near to medium future."

Yet they keep buying their own shares.

Either this was deliberate de-ramping, or they just don't know what is going on.

[rainmaker] 03/6/2011 01:21

Welcome back OB-Thanks,I'll have a look at Parkwood Holdings which I'm sure will make for an interesting case history.I'll glad I'm not the only Person who thinks something may be afoot-more questions than answers I feel-who are the Company's Broker,Fox Davies buying for?It's not the COE or another Director since there would have been an RNS and it can't be someone acting inclusion with management since that would be a "concert party" and illegal.Why a 200k share buyback? Why would any Investor want to buy shares in this horribly illiquid, rarely traded Company?(It took me many months to accumulate a decent holding)Unless some would say they knew something and of course that would also be highly illegal as "insider trading" so we can rule that out.

I love share buy backs-the most tax efficient way of returning value to shareholders whilst for Companys like Northamber simultaneously boosting net asset value and earnings per share and cutting the dividend expense.Perhaps less appreciated,is that a majority shareholder's percentage holding will increase after a share buyback(assuming that they does not sell any shares)and they will pay less(in total) for the remaining shares that they do not own.

regards

[rainmaker] 03/6/2011 00:40

Certainly not-it's been described as a job creation scheme due to it's low returns. But due credit to the management who IMHO have done a terrific job safeguarding their substantial case pile by slashing costs and protecting the Company against bad debts even if their fiercely competitive industry hasn't allowed them to generate a satisfactory return on capital employed. I'm not faintly tempted to sell at current levels with a minimum liquidation value circa 79p.Ok so the general rules may not apply since NAR are a private public limited Company(the CEO owns the majority of it's shares) but they're surely worth more than current prices and the Company's own broker, Fox Davies gives me some comfort since they have been hoovering up everything offered at 59.5p (see them on level 2, FOXD) so they're providing support at current levels. If nothing else, interest rates are heading back up(currently 0.5%) if NAR can eventually collect 5% yield on that £10mln cash pile that will be a useful contribution for a £17mln market cap Company.Somehow I don't think that NAR will remain a listed Company for that much longer but all IMHO.

regards

[rainmaker] 03/6/2011 00:08

Hybrasil-the 201k or 0.7% purchase was the Company for cancellation

regards

[old boy returns] 02/6/2011 12:07

I suspect they are trying to manufacture an MBO using the company's cash. The same has just happened with another of my shares - Parkwood Holdings - where the directors owned the majority of the shares. Strategy was to buy as much as they could in the market and then launch a tender offer buyback by the company to get the rest not already held by management. That way they get the company without having to actually part with any cash to buy shares themselves.