Dewhurst’s valuation

PUBLISHED: 21 Nov 2017 @ 10:10 | Comments (0) |

Dewhurst (LSE:DWHA) is a family dominated (three generations) engineering company supplying lift components, push-buttons for ATMs, elevator parts and similar items it generally manufactures itself. Previous Newsletters fill in the detail on Dewhurst: 12^th – 22^nd Dec 2014, 15^th June 2015, 14^th – 17^th Dec 2015, 25^th – 27^th July 2017.

I bought Dewhurst ‘A’ shares in April 2014 at £3.18 as a Warren Buffett style investment, with a strong economic franchise and able, trustworthy managers.

The shares now stand at £5.30 (market capitalisation £45m), and the question facing me is whether to buy some more at that price. I’ll use both the owner earnings method (mostly copied from an earlier Newsletter) and the RONTA method.

Reported numbers

Sept.	2010	2011	2012	2013	2014	2015	2016	1^st half 2017 times 2
Sales, £m	37	42	52	44	47	46	47	52
EPS, p	41	31	40	9	44	50	41	52
Div., p	6.6	6.7	7 (+ 5 special)	8	9	10 (plus special 3)	11	Interim up 0.5 (17%) to 3.5

This company has grown both its revenue and its earnings through a combination of organic growth and acquisitions. Despite the superficially impressive growth we must be cautious because, I’ll we’ll see in tomorrow’s Newsletter, the company uses quite a lot more shareholders’ capital today than it did six years ago.

Owner earnings analysis

With owner earnings we are trying to obtain the earnings that would be left for shareholders to take out of the business after the managers’ use of cash generated to pay for items of expenditure to maintain the strength of the economic franchise (e.g. additional capital items, additional working capital, marketing spend, R&D and staff training) and to maintain unit volume and to invest in all value-generating projects available. (see Newsletter 26^th July 2017 for an explanation of owner earnings)

£m YEAR	2009	2010	2011	2012	2013
Profit after tax	3.27	3.50	2.90	3.75	1.30
Add back non-cash items – depreciation, goodwill and amortisation	0.58	0.70	1.31	0.88	2.50
Totals to: Amount available for distribution to shareholders before considering the need to spend on fixed capital items and working capital items to maintain the company’s economic franchise, unit volume and invest in value generating projects.	3.85	4.20	4.21	4.63	3.80
Deduct fixed capital and working capital investment. (The figures shown are actual expenditures and are therefore a rough proxy for the ‘needed’ expenditures to maintain franchise, etc.)	-0.4	-0.64	-0.48	-1.50	-0.60
Owner earnings	3.45	3.56	3.73	3.13	3.20

£m YEAR	2014	2015	2016	1^st half 2017 times 2
Profit after tax (excl. gains on property)	3.95	4.11	3.51	4.37
Add back non-cash items – depreciation, goodwill and other amortisation	1.19	0.99	0.91	0.81
Totals to: Amount available for distribution to shareholders before considering the need to spend on fixed capital items and working capital items to maintain the company’s economic franchise, unit volume and invest in value generating projects.	5.14	5.10	4.42	5.18
Deduct fixed capital and working capital investment. (The figures shown are actual expenditures and are therefore a rough proxy for the ‘needed’ expenditures to maintain franchise, etc.)	-1.05	-0.95	-2.40	-2.49
Owner earnings	4.09	4.15	2.02	2.69

Pessimistic scenario:

Assume annual owner earnings stick at £2.69m for every future year. Then intrinsic value is the £2.69m perpetuity discounted by the required rate of return on a share of this risk class.

£2.69m/0.08 = £33.6m.

Dewhurst has 8.47m shares, therefore the intrinsic value derived from operations of each share is £3.97.

But in addition to the cash it needs to run the business it has £15m (no debt) doing absolutely nothing. This can be paid out to shareholders without affecting the operating business.

To the £33.6m we could add £15m, giving a total value of £48.6m or £5.74 per share.

A slightly more optimistic scenario:

Assume owner earnings are £2.69m next year, but then grow at a rate of 3%.

Intrinsic value of the owner earnings with growth of 3%:……………………….

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