Ms Share Discussion Threads

[xdavid] 28/6/2006 09:46

I'll enclose a SAE for the reply...

[sidebar] 28/6/2006 09:43

xdavid. Agreed, the rise to over 1-90 looked overdone & yesterday & today's pullback looks pretty much what you'd expect.

Do you reckon they'll write back? :-)

[xdavid] 28/6/2006 09:37

Sidebar, I'll write to them. I could phone, of course, but I'm not that concerned. This is a smallcap. Also, remember that the directors own 30% of the company.

What we are seeing here is that stockmarket double act: fear & greed. It will all look pretty silly soon enough.

[sidebar] 28/6/2006 09:27

ChrisG: Thanks for your time & effort. A well thought out summary.

I am continuing to hold but obviously would like some further explanation of the results. What chance is there of that with the companies macho "leave us to run the business and don't ask questions" attitude?

Xdavid. You say thet you'll wait until you get an explanation from MSI themselves. How will that happen?

Isn't this where a transparent operating company would brief institutions and investors about exactly what's going on?

[rivaldo] 28/6/2006 08:12

Yep, nicely written Chris. But if you look at past years' company outlook statements you'll find similar comments about the need for investment - just last year MSI said:

"Recognising that the future prosperity of our Company depends critically on technological and innovative investment, we propose to direct further capital into these areas in the current year."

The stress on investment has actually lessened in no longer being "critical" and now only being "appropriate". Past reports have also stressed competitiveness and challenges, but have not stopped MSI delivering stellar performance.

So my conclusion is that nothing has materially changed in MSI's presentation or wording on the cost side - but that what HAS changed is that the wording on the overall outlook is much more bullish than previously as pointed out earlier, especially given the record order book and the known contract wins.

It's never wrong to bank a profit! But with a bit of press support from the IC etc in the next week or two I can see MSI topping 200p and going on from there.

EDIT - looks like a bit of patience will be required first though as usual with MSI...

[xdavid] 28/6/2006 01:15

Thanks for the considered response Chris. I guess buyers and sellers will always have polarised opinions - otherwise they wouldn't be on their respective sides!

24% growth (diluted) on last year (PEG 0.53) is damn fine by me. If the earnings were down in each 6 month period in turn, then fair enough, but there are plenty of businesses which emphasise one or other of the periods. I'll wait until I get an explanation from MSI themselves.

Good luck.

[chrisg] 27/6/2006 23:26

I'd prefer not to engage too much here, as I am not now a holder and don't want to be accused of deramping. But to answer some of the comments made:

1. Second half earnings lower than both the first half of the year under review and the second half of the previous year is what I called consistent: i.e. down in both cases. You can argue the semantics of the word I used but they are the facts and that is the reason.

2. Timing of receipt of orders can certainly have an impact on recognition of profits, but timing of sales invoices can't. UITF 40 has seen to that. (UITF 40 is an accounting regulation which fairly recently came into full force for both accounting and tax purposes, which is designed to ensure that profits cannot be manipulated by tinkering with the timing of invoices, by forcing full recognition of appropriate profits irrespective of the issue of the invoice.)

3. The figure for closing stock is a deduction from the cost of sales figure in the P&L account. That is mathematically true, but what you cannot do is to simply put in a reduced stock valuation so as to spread profit from one period to another. That is false accounting, and directors can go inside for that. It is also tax evasion, as I said previously. I rather think that you can very safely ignore any suggestion that MSI is producing lower profits by playing with its stock figure declarations. The alternative is that rivaldo is correct in his comments and therefore the company is being dishonest in its results and deliberately mis-stating its profits, at great risk both to the directors personally and to the suditors professional indemnity insurance.

4. Yes the outlook did state that there were new orders being won. But profits are the important thing. Revenue was up significantly in the second half of the 2005-06 year reported today. But earnings were down. So comments about a record order book mean nothing. Margins are clearly being squeezed. And the outlook statement made it very clear today that they would be squeezed more in the current year, from the direct quotes I put in my previous post. Turnover may well be going up, but the important thing is the amount of profit being earned per pound of turnover. In the second half, they had more turnover than previously, but their earnings were actually lower. And there are more costs to come: we know that because the company said so today.

The nature of MSI's business is that they constantly need new business to replace contracts that complete. It is just like a revolving door. All the vibes I got today are that the new business is being won on narrower margins than the old contracts they replace. See their comments about the need for greater competitiveness.

It may just possibly be future turnover can go up faster than the decline in margins, and thus keep profits going up slightly. But don't bank on it, because the results released today do not show that that is what has happened in the most recent accounting period.

I have no issues if people want to wear rose-tinted specs, but in looking at an investment, I prefer to look at real facts, and read the reality of what is actually said about future cost increases ("investing in the business") and the reality of visibly narrowing margins, rather than trying to put the best possible spin on the puff provided via the company's PR agency (Weber Shandwick in this case). My largest client is a PR company so I do know how to interpret what they write for people.

If a company says it is having to increase its investment in the business, then you can be absolutely sure it will impact on margins. If it will not have any impact on margins (and therefore profitability) why on earth would such comments be made in a statement such as today's? A company with growing turnover and growing volumes would be expected to take on extra staff to handle the extra business, and they would be paid for purely from the extra business with no impact on margins. MSI clearly intend for us to know that their costs are going to increase. Why? So they don't surprise people at the interims with measurably narrower margins. The company does, after all, have obligations to avoid a false market in its shares.

Anyway, I've gone on long enough. I'm out and I'm not trying to deramp, but merely trying to point out what might have been overlooked by some, and to explain why I've gone.

Good luck to those continuing to hold. You will be hoping I'm quite wrong!! Time will tell. And I can relax because my profit's banked. But I will leave you in peace, having explained my position. Cheers for now.

[xdavid] 27/6/2006 14:56

I've just reread and reread the chairman's comments and sorry, ChrisG, but I think you're being REALLY selective and narrow in your interpretation.

For example, you say... "We must .... continue to invest appropriately in each of our businesses ....." is a "warning" about climbing costs. If you take that part of the statement in its entirety, you get the correct context...

"Across the Group, our trading positions have strengthened markedly as a result of our determination to constantly improve our efficiency and effectiveness. We must, and will, continue to invest appropriately in each of our businesses to advance the Group's performance and augment our competitiveness in the world markets"

Sounds perfectly rational to me. The alternative is "OK, lets sit back on our laurels after having a terrific few years and a record forward order book".

For the next part, you selectively quote... They also say: "all three divisions .... are well equipped to meet the known tasks before us." They don't specify the tasks, they don't say they will meet the tasks (just that they are well equipped to do so) and they do imply that there is no margin for error in their plans, by the use of the expression "Known tasks".

What Michael Bell actually said was...

Our order book remains strong and all three divisions - each of which
is a leading supplier in its selected international markets - are well equipped
to meet the known tasks before us."

Remember the earlier stated "record forward order book"?

That statement was as bullish a one as MSI have ever made!

[cockneyrebel] 27/6/2006 14:51

yep, not sure I'm with you there ChrisG. A large rise in MSI's divi too (by their standards) suggests they are confident.

I think a bit more detail (as we were discussing yesterday) would help all investors but I can't see these results as "I'm a seller, get me out of here" results. With big orders and big invoices it might only require one invoice to get finalised a week or two late and fall into the following half year and have completely unbalancing effect to earnings. It can also be staff or costs falling into the year just finished while the payments arrive the followin half that also hits the headline figures imo.

H1 Nov 2003 = 1.1p
H2 June 2004= 3.1p
H1 Nov 2004 = 4.8p
H2 June 2005 =6.0p
H1 Nov 2005 = 7.7p
H2 June 2006 =6.6p

It's only this half that is off about 2p from the sequence we migh thave expected but that could easily get rebalanced in H1 imo depending on tooling and staffing costs that might have happened in order to fill the gun orders.

Mildly disappointing in like Manchester United fans discovering they were buying Ronaldo and then finding out it was the Portuguese rather than the Brazilian when it happened. But still turned out a decent buy.

CR

[smiler1] 27/6/2006 14:45

The results look fairly solid imho. The cash position is superb given the 14%increase in turnover and as rivaldo suggests, there is probably some unrecognised profit left on the balance sheet. The high level of money received on account (£4m more than last year)explains the relatively low level of stock / work in progress, and perhaps the larger / longer term contracts that the company is now undertaking afford the opportunity to retain some profit until their completion. This assumption is backed up by the fact that the gross margin % has reduced year on year by 1.7 percentage points (impact of £0.6m). Not sure why the jv profit has fallen away in the second half (loss of £27k v profit of £467k in first half), although there are similar trends in previous 2 years, albeit not so pronounced.
Another positive is the relatively bullish outlook statement compared to the usual cautious remarks.

[xdavid] 27/6/2006 14:06

"In addition to the now established pattern of eps moving backwards" and "consistently backwards-moving eps" ?

What is "consistent" and "established" about one 6 month period?

"outlook comments which are just too cautious by half"... You obviously didn't read any of the previous results comments - the really cautious ones just before they doubled earnings!

Each to their own, though. That's what makes a market.

[chrisg] 27/6/2006 12:52

I've noted the comments on here about second half earnings being lower than those for the first half. Nobody has yet commented that second half earnings were also lower than last year's second half.

Last year's eps were 12.4p, with 5.4p in H1 and 7.0p in H2. This year the eps figure was 15.0p, with 8.1p in H1 and only 6.9p in H2.

It might also be worth commenting that the lower stock figure shouldn't have any effect on profit. Yes, for sure lower stock equals higher cash, but stock which is held for future use, can't simply be put into costs to drive profit down a bit. That is tax evasion and is one of the main things auditors are on the lookout for. Especially nowadays with the recently implemented International Auditing Standards.

In addition to the now established pattern of eps moving backwards, I also noted the outlook: We must .... continue to invest appropriately in each of our businesses ....." Investing in the business is a well-established way of saying "we must increase our staff numbers/costs". They also say: "all three divisions .... are well equipped to meet the known tasks before us." They don't specify the tasks, they don't say they will meet the tasks (just that they are well equipped to do so) and they do imply that there is no margin for error in their plans, by the use of the expression "Known tasks".

Sorry, but with the consistently backwards-moving eps, and with outlook comments which are just too cautious by half, I'm outa here! Better value elsewhere.

[xdavid] 27/6/2006 11:55

There was also the comment last year about the cash reducing due to stocking up on raw materials to ensure deliveries (then noted as "stocks" rather than "inventories"). Maybe we have just unwound that position back to normal?

[diogenesj] 27/6/2006 11:52

Lol, xd (post no. 659, commentary). :-)

[rivaldo] 27/6/2006 11:48

Interesting about inventories being well down at the year end compared to last year despite the increased business and record order book. This would of course help boost year end cash (as would as the increased year end creditors).

But the reduced year end stock would also increase cost of sales and therefore bring down operating profits. I'm just wondering if there's a bit of nifty accounts management going on to produce nice steady year-on-year PBT and EPS growth by reducing year end stocks and thus decreasing profits to a nice, manageable growth rate, rather than showing superlative growth this year which might not necessarily be matched next year.

Whatever the case, at these prices MSI remain good value imo looking forward to a single-figure P/E and with record order books and market leadership in 3 sectors. A terrific hold for the old ISA.

[goatman] 27/6/2006 11:13

Thanks chaps.

CR, did you see the trading update for ELM today?

G

[xdavid] 27/6/2006 11:13

Actually, Goatman, you have to look at the PDF to see the whole range of stuff they do (interceptors and access covers etc)...



(Try to ignore the commentary about "meeting the needs of the filling station of the 1990s" :-0)

[cwa1] 27/6/2006 11:13

Morning MSI ers

Just grabbed a few. That RNS was about as upbeat as any I've seen for a while and I was slightly surprised to see it down 7%. Obviously expectations had been pretty high for MSI in the first place. Have any of you on this board spoken to MSI to see about some broker coverage/ press profiling, etc? Seems a shame to have a story like that and nobody really gets to hear it. From reading through a few of the posts here it seems as if the board are a touch parsimonious. Maybe they should raise their game to just being a bit frugal and splash out for some coverage?

[xdavid] 27/6/2006 10:58

goatman, see global-msi.com for what they do (includes the stuff underground too). Don't know about cost of entry but MSI are the "sole contracted canopy partners for Shell, Esso and Jet throughout Europe" and a "leading european forecourt structures partner" for BP.

I had a closer look at the reduction in revenue etc between the 1st and 2nd 6 month periods. Actually, the same thing happened to revenue in 2005 (although about half as much) so suggests that there is some kind of annual pattern - maybe MOD payment structure? Worthy of a question to MSI, methinks, and something to remember when next interims come in.

However, although revenue was down in 2nd period, the share of operating profit (before interest and tax) was actually UP in 2nd period compared to 1st. I suspect it will take a better accounts person than me to explain it all properly...:-) but I'm reassured that there is nothing untoward in the pattern and frankly I look forward to further earnings jumps due to the obvious success of the new gun contracts and the huge european forecourt developments planned this year by Shell (mentioned in posts a few days back).

[cockneyrebel] 27/6/2006 10:44

just the canopies and the prefabricated stores as for On the Run I believe goatman, along with the car wash bays.

CR

[goatman] 27/6/2006 10:24

I have held MSI in the ISA since May last year and increased in May this year. It now forms 20% of my ISA and I'm happy with that for now...

Not sure what the barriers to entry are to building petrol station forecourt structures. But if they are getting the work, then fine! More specialised would be the fuel metering pumps. Do they make the pumps, does anyone know? Always fascinated me how those things work..we all trust 'em to deliver the fuel we pay for!

G

[mr. t] 27/6/2006 09:47

I've reduced my holding after the results, to balance my portfolio. After the recent rise, MSI was over 25% of my share holdings. It is now a more reasonable 12%.

The results were good, but the 2nd half turnover, profits and EPS were less that the first half. To me, I couldn't go on holding that many shares when there is now a risk of the growth petering out.

However, the fact is that their year on year growth is still there, the prospects look excellent and the cash generation is something to die for. Also, the directors' share holdings and their attitude to share buybacks are fantastic.

I will happily hold my remaining shares and look forward to them appreciating in value...

[cockneyrebel] 27/6/2006 09:46

sensibility will return imo.

As for the golf ranges, yes, part of the comopies business so an extension of that imo. Part of the investment may have gone into this for payback in the coming year or two along with the guns imo.

I'm delighted to be holding a PE this low and a solid company with an excellent track record.
Earnings in H2 may have bee sacrificed a bit for investment but that's the right thing, not the short term thing.

Those that get bored will drift away and miss the payback I suspect - probably buying back higher when it gets tipped in the tip sheets or ecognised in the press. I'm holding, it's done me well over 2 years and I expect it to do even more over the coming year.

CR

[iandippie] 27/6/2006 09:28

Well, still happy to hold, but wont be adding just yet. I was hoping for 18 eps, and although MSI is going great guns, I don't think this will get to 270 in the next couple of months. However, happy to be heavy in these, and happy to be proved wrong about 270.