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MS International (LSE:MSI) is a group with few synergistic benefits between its older three divisions, (1) manufacturing naval guns and servicing them, (2) making forks for fork lift trucks, and (3) constructing petrol forecourts. However, these three divisions do share engineering knowledge, and, most importantly, having the three in the Group allows it to benefit from diversification.
The addition of a fourth division brings much synergy with the forecourts business. Petrol station customers throughout Western Europe hire it to take care of branding and signage. The relationships and reputation built up in the forecourts construction division allows the selling of branding services, and vice versa. The wisdom of this strategy was proved with a fantastic outcome in the six months to 28th October with the new division making an operating profit of £1.89m.
The story of the Petrol Station Branding division
This started out as Petrol Signs, an independent Dutch company, which MSI bought in June 2015 for €3.4m (£2.6m) cash. The key person and major shareholder was lured to MSI to continue as MD for this business.
For the 2014 year Petrol Signs had revenues of €4.16m and profit before tax of €0.45m. It proved a success straight away; the half year report to Oct 2015 stated that the Group was “boosted by the integration and better than anticipated first time contribution from the forecourt corporate branding and image business of Petrol Sign”
At first, it was part of the Petrol Station Superstructure Division: “The enlarged division now has the ability to offer corporate branding and signage services to its original customer base, either separately or as part of an overall construction package, on both new build stations and the maintenance, repair and rebranding of existing sites. Equally the division has the opportunity to cross sell structures to Petrol Sign’s customer base. I am delighted to see that this enhanced capability is being extremely well received by the market. Furthermore, as part of this process, ‘Petrol Sign’ business operations are being established in both Germany and the United Kingdom” (Interims to Oct 2015)
By April 2016 this business was going great guns: “Petrol Signs….. produced an exemplary performance emanating from an incredibly busy year restyling petrol station branding in mainland Western Europe…..Following the integration of Petrol Sign into the Group, two new ‘Petrol Sign’ branding business operations have been established one here in the UK and the other in Germany. In addition, a forecourt superstructures operation has been opened in The Netherlands to strengthen the company’s market position in mainland Western Europe. We are greatly encouraged by the positive response of the petrol station forecourt market to our business expansion programmes.” (Annual Report 2016)
In mid-2016 it was formed into a separate division, but continued cooperation with Superstructures. Both of the start-up operations in the UK and Germany “have made a very positive start and have won business in their markets.” (Annual Report 2016)
By this Spring the benefits from complementary capabilities of station branding and design, manufacture and construction of canopies and convenience stores was shining through to the managers, even if the published numbers weren’t jumping at that point. “Our broader offering has enabled the division’s marketing operations to gain added impetus.” (Annual Report 2017).
The big breakthrough was in Germany, where work was commenced on rebranding the estate of a major petrol station client, with the original Netherlands’ operation providing support. The first year of the UK business was successfully winning business independently, as well as when it teamed-up with the Superstructures Division, helping those clients requiring a ‘one-stop’ turn-key service.
In six months to October the money from Germany rolled in, helping to raise revenue six-fold to £12m. Operating profits was £1.9m (compared with a loss in the same period the year before).
And, it wasn’t just Germany: “Complementing that momentum, the newly established UK arm of the division, trading under the name of ‘Petrol Sign’, has achieved outstanding progress in establishing a highly regarded position in our domestic market.”
It’s a remarkably positive story, but needs two cautionary notes.
- First, there is a lot of dependence on one contract. Is it a one-off or will it be the start of many?
- Second, the other three divisions have seen declines in profits.
The Defence Division
This designer, manufacturer and servicer of a range of items, but mostly guns on naval ships (Seahawk) has a strong working relationship with the Royal Navy which helps to raise its reputation worldwide – it has sold the guns to the US Navy as well as 14 others, with over 250 systems either on order or in service.
Return on capital employed is respectable, averaging 17% over 8 years, but worries were raised in 2014-15, and the drop in 2018 is concerning.
| £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 | 2.0 | 0.2 | 14.2 |
| 2017 | 20.8 | 1.8 | 0.2 | 12.2 |
| 2018 first half doubled | 20.4 | 0.6 | 0 | 11.9 |
| Average | 2.5 | 14.5 | ||
| Average operating profit divided by net assets | 2.5/14.5 = 17% |
The directors claim that there is little competition for their specialised guns – MSI produces the best, and navies want the best. The poor years are not due to competitors taking market share, but defence budgets going through times of austerity.
Currently, the firm is affected by the UK’s MoD stringency on new equipment, but encouragingly “we are pleased to report that during the period we finalised the renegotiation, and subsequent receipt, of a two year extension to our contract for the support and maintenance of the existing seventy- two MSI-DS 30mm naval guns systems, fitted across the Royal Navy’s fleet. We take immense pride and are most appreciative of the tribute that the MoD made in one of their ‘in house’ publications announcing the placing of this contract with MSI, and I quote ‘…..not only provides excellent value for money for the……….
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