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In the last two Newsletters I established that MS International’s (LSE:MSI) shares are trading on only 10.8 times average reported earnings per share over the past 12 years, has a very strong balance sheet with high net cash and strong annual cash flow, very little likelihood of facing financial distress, and four divisions with a history of good returns on capital employed.
Today I’ll make a few comments on the managers, the business prospects and its stability.
Managerial quality
All of the directors have served this company for many years, if not decades. Even the youngest of them has been with the company for 18 years. Their experience, relationships with customers and a feel for what is going on are very important in the markets they serve.
Another positive factor is the building up of shareholdings in the firm over the last few years. For example, in 2008 when Michael Bell (71), Executive Chairman, held 24% of the shares he bought some more at £2. In 2011 he bought at 194p and at 242.5p. He now has 29.3% of the company’s shares. His most recent purchase was 20,000 shares at 150p in August last year. He has been on the Board for 37 years.
In 2014 Michael O’Connell (67), Finance Director, added to his holdings at 180p. In February 2016 he bought 11,700 shares at 199p and another 13,143 in July 2016 at 148p. His most recent purchase was at 165p in January 2017. He joined the company in 1980 and was promoted to the Board as long ago as 1985. He now owns 9.2% of the shares.
Nicholas Bell (41) executive director, scion of executive chairman, joined in 1999, elevated to Board 2013. He has 100,000 shares (0.6% of the company).
David Pyle (71), joined as an executive director in 1980, moved to NED in 2013. Owns 10.6% of the shares.
David Hansell (71) Appointed a NED 2014. He retired from his position as MD of MSI-Defence Systems after more than 50 years in the business, having started his apprenticeship in 1962 and at some time or other served in the majority of positions in the Company.
Roger Lane-Smith (71) Appointed a director in January, 1983. Legal background and various NEDs. 50,000 (0.27%) shares
My overall impression is that these engineering focused directors (a) really love the business they are in, having stayed with this firm for over 30 years; (b) are trying to do their best for ALL shareholders; and (c) care greatly about the long term future of the business and their team members (At last year’s AGM I met two middle managers: one had been there 20 years, the other 10 years. Both said the bosses treated staff very well and are genuinely interested in their welfare.)
Comments from others who know them: “Northern English types who simply like to get on with the job and believe (probably rightly) that financial PR etc., is all gubbins if you don’t produce the right results…….. straight-forward, no-fluff talker who under-promises and over-delivers.”
A negative
A negative factor is the remuneration of the directors. The Chairman gets almost £0.5m, with Michael O’Connell at £0.27m and Nicholas Bell at over £0.22m. Total director emoluments are over £1.1m in recent years, but in high profit years they rise considerably, for example, in 2012 £1.69m was paid.
Strategy
In each of its industrial segments MSI faces rivals keen to steal business, but the directors seem to consistently achieve profits overall; when one division is down, the others in the portfolio seem to compensate. Having said that, the simultaneous poor performance by both the Forgings and the Petrol Station Branding divisions have been a drag in recent years.
The directors are convinced that both divisions will recover as they continue to invest millions and prove themselves superior to the competition.
They have a history of competently steering businesses through recessions. For example, in the 2009 – 2012 period EPS fell from 19.5p to only 13.3p before recovering to 34.8p. Also, it increased the cash pile year-by-year.
I like this Chairman’s statement in 2012 with its focus on the long term:
“We are striving against a persistent and variable headwind. We must and will, maintain our prudent approach to managing and steering the Group for the long-term interests of shareholders and not just the immediate future. Corporate focus remains on creating excellence in everything we do”
However this statement in the same annual report suggests that margins regularly come under pressure: “there is no room for complacency in these highly competitive and tight markets that we serve.”
Despite the presence of competition, this 2013 statement indicates that the company is positioned well to respond:
“The outlook may be uncertain but our Divisions are in good shape with excellent market positions, manufacturing facilities, committed employees and the Group’s balance sheet is particularly strong. Our strategy is based upon the belief that maintaining reasonable and acceptable levels of profitability across the three Divisions emanates from an unending commitment to invest wisely in support of ‘in-house’ product development programmes, the upgrading of production equipment to ensure efficiency and striving for the relentless and constant improvement in everything we do. Our commitment to this policy is absolute.”
Michael Bell’s 2017 outlook statement is remarkably upbeat for someone renowned for caution:
“We believe that the Group is in excellent shape and well positioned to achieve further progress following the considerable investment made across the various businesses. The order book is at a higher level than at this time last year; in particular there is a good level of orders in hand for both established and recently developed defence products. The new fork-arm facility in the United States has commenced some initial production and the prospects for our two divisions that service the petrol station market, look most promising”.
I get the feeling that all the divisions are poised, ready to enjoy the benefits of years of strategic investment.
Return on tangible assets
Return on tangible investment numbers often………………….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
