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This morning MS International (LSE:MSI) shares moved to 158p – 167p. Thus some of the metrics I listed yesterday have changed:
Market capitalisation is now 16.5m shares x £1.67 = £27.6m
One-year PER = 167p/9.6p = 17.4
Cyclically adjusted price earnings ratio, CAPE, over 11 years, is 167p/18.9p = 8.8.
Dividend yield of 8p/167p = 4.8%
All three divisions of MS International have demonstrated good levels of return on capital employed over the past six years.
Defence
The Defence division mostly makes naval guns and sells to 16 countries, with 250 systems in place. It also services those guns. Return on capital employed is respectable, averaging 19% over 6 years, but worries were raised in 2014 and 2015:
| £m | Revenue | Operating profit | Capex | Assets minus liabilities |
| 2011 | 32.6 | 5.4 | 0.0 | 16.6 |
| 2012 | 29.9 | 6.6 | 0.1 | 15.8 |
| 2013 | 28.0 | 2.9 | 0.1 | 16.7 |
| 2014 | 19.4 | 0.9 | 0.1 | 14.4 |
| 2015 | 17.0 | -0.2 | 0.1 | 14.1 |
| 2016 | 21.9 | 1.8 | 0.2 | 14.2 |
| Average | 2.9 | 15.3 | ||
| Average operating profit divided by net assets | 2.9/15.3 = 19% |
Clearly, turnover in this division is volatile, depending on new orders from unpredictable governments. It is also vulnerable due to a concentration of sales; in 2015 one customer (UK?) accounted for £10.7m, and in 2016 one customer accounted for £10m.
The directors consider the 2014 and 2015 years to be aberrations:
“‘Defence’, as we anticipated, continued its recovery with a satisfying upward trajectory in revenue. This was most encouraging following the previous two years when we endured widespread constraints upon international defence budgets that resulted in a disappointingly subdued order intake and ensuing weaker revenues. Meanwhile our investment in products, facilities and personnel development has continued unabated and there are positive signs that we are beginning to reap the rewards of this important commitment.”
However, we have to say there is room for doubt over any speedy bounce-back in orders:
“There is yet to be any meaningful evidence of the anticipated upturn in defence budgets by governments around the world. As is the case for many global suppliers of defence equipment and services, the fragility of this anticipated upturn remains a salient feature in our future business planning and expectations.”
But the team are confident that this division is worth investing in for the long run:
“Yet, during this prolonged period of market weakness, our response has been to continue investing in the business and that policy will be maintained, for there is little doubt that much is being achieved and we strongly believe that we are doing the right thing in order to grow the division. Our defence business already enjoys a world class reputation for both products and support services and in order to sustain and advance that status, the structure of the operation is being strengthened, new items are being added to the product portfolio and marketing has been intensified in both home and international markets.”
The people running this company each have decades of experience of these markets, and of ups and down. I guess we have to trust their judgement that larger volumes of orders will eventually flow.
Forks
This division is called “Forgings” but most of the output is, in fact forks, for the forklift
truck, construction……..To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
