MS International – I’ve doubled my holdings

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MS International (LSE:MSI), a British engineering company, is selling at a low price relative to its past earnings, its net current asset value and its earnings power. I have bought shares at an average of £1.292 for my Buffett-style portfolio (MCap = £1.292 x 16.5m shares = £21.3m).

MS International has two economic franchises:

(a) specialised defence equipment, mostly unique naval guns,

(b) dominant position in building and maintaining petrol station superstructures in Europe.

It also has a business forging forks for fork-lift trucks, but this is not a franchise.

There is a strong business in corporate branding with a particular emphasis on petrol station branding (signage etc.). I’m not sure if this qualifies as a franchise because, although it had two terrific years, already earning back the €3.4m (£2.6m) paid for it in June 2015, I’m not sure if it has sufficient dominance of its industry?

There are three characteristics of a franchise business according to Warren Buffett.  The product or service is:

  1. Needed or desired
  2. Is thought by customers to have no close substitute
  3. Is not subject to price regulation

(Previous Newsletters on MS International: 8-15th July 2015, 1st Dec 2015, 23-24th June 2016, 19th July 2016, 14-16th July 2017, 7-9th Dec 2017, 3-5th July 2018, 20th – 28th June 2019, 15th – 23rd October 2019)

Good in the past, and strong balance sheet

MS International is a family-run firm with very experienced managers, most of whom have been with the company for decades. I have followed MSI for years and so have been witness to many managerial statements and subsequent events – there is no dressing up announcements, or over-promising and underdelivering.  They just get on and tell it like it is.

I’ve also met the directors and concluded that they are likely to act with decency regarding the interests of minority shareholders (although they do tend to pay themselves very well).

The four businesses, taken singly, are not especially stable, with falls into losses from time to time. But diversity helps to stabilise overall Group profits, most of the time. Average profits after tax over the last ten years amount to £2.76m.

The balance sheet is exceptionally strong, with no debt and £14m of cash – that is a lot of cash for a £21.3m market capitalisation company.  On top of that it has £17.7m of freehold property.

In fact, the share price is now so low that MSI almost qualifies for my Net Current Asset Value portfolio as well as the Modified Price Earnings Ratio portfolio and the Buffett style one.

If projected owner earnings numbers are discounted to present value, and then the surplus cash held within the firm on behalf of shareholders is added, we arrive at an intrinsic value that could easily justify a share price more than double the price I paid.

Justified, that is, so long as we can assume that the recent losses are merely a temporary problem.   There are indications in the latest comments from the directors that the company will be back on track before too long, bar a calamitous macroeconomic background.

An attractive profits history

MS International has been profitable in fourteen of the last fifteen years.  But there are two unattractive features of the profits history that seem to put off Mr Market from buying its shares.

  1. Profits were lower in the last five years than they were in the previous five years. And that is before we look at the losses made in the last year and half (even before Covid-19)
  2. Group profits move around, ranging from around about £2.5m – £3.9m before 2011 to over £6m in 2012, before falling back to around £1.5m for three years. 2018 and 2019 were average years, with profits of £3.39m and £3.81m. Now we’re into losses. There is certainly not a smooth upward progression which is very off-putting for Mr Market.

So, the question is: if we are faced with the same pattern over the next 10-14 years would we be content to buy shares at 129.2p? Here are some numbers to start our thinking:………………To read more subscribe to my premium newsletter Deep Value Shares – click here

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