Dewhurst – plenty of assets and a history of owner earnings

PUBLISHED: 29 Apr 2019 @ 12:40 | Comments (0) |

Dewhurst (LSE:DWHA) has a lot of assets (and no debt) backing its 8.4m shares. When viewing the key numbers below consider that the “A” shares (non-voting) are current trading at £6.50 – £7.50 (they’ve risen since I started posting about them last week – I recently bought at £5.64). Market capitalisation is £72.9m with the 3.3m Ordinary shares at £10.50 and the 5.1m “A” shares at £7.5.

Balance sheet strength (September 2018)

Net asset value in total (excluding non-controlling interests) £36m

Net asset value per ‘A’ non-voting share: £4.28

Net tangible asset value in total (excluding non-controlling interests): £22.84m

Net tangible asset value per ‘A’ non-voting share: £2.72.

Borrowing: zero, and no overdraft facility.

Cash: £9.4m (after buying A&A for £10.5m in cash)

Pension deficit: £7.6m

Conclusion: this is a strong balance sheet, with no suggestion of potential financial distress.

Owner earnings analysis

With owner earnings we are trying to obtain the earnings that, in future, would be left for shareholders 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.

Depending on circumstances, the owner earnings figure may be the same for every future year or on a steadily rising (or falling) trend.

Naturally, owner earnings are impossible to obtain with any degree of precision because many of the input numbers are merely educated guesses about the future. Despite this imprecision it remains an important method for thinking through valuations.

Owner earnings analysis is about future cash available for shareholders to take out of the business. But the only evidence we have available is past data. We start with that, and then use qualitative analysis to judge whether to simply project forward the past pattern or modify the previous trend for future orientated thinking.

In the following we use what the company actually invested in new working capital items and in new fixed capital items, and what they spent on marketing, R&D and staff training etc. already deducted from the P&L.

What the analysis really requires is the amount necessary to maintain the quality of the economic franchise, unit volume and invest in value generating projects. To start with we make the bold assumption that what was spent by the managers was also the necessary amount.

When we move to forward-looking analysis to value the firm we need to make another bold assumption on the real amount needed to invest in new WC, fixed capital items, etc., in the future. The historical analysis helps us make that judgment.

£m YEAR	2009	2010	2011	2012	2013
Profit after tax (excluding non-controlling interests)	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	2017	2018
Profit after interest and tax deduction (excluding non-controlling interests)	3.95	4.11	3.51	4.45	4.04
Add back non-cash items – depreciation, goodwill and other amortisation	1.19	0.99	0.91	0.98	1.57
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	5.43	5.61
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	-1.19	-2.80
Owner earnings	4.09	4.15	2.02	4.24	2.81

A conservative valuation

Average owner earnings over ten years £3.44m. If we assume that there will be no future growth in owner earnings

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