Components firm puts together a solid year - Share Watch Feb 15 update

Lift manufacturer going up

Each month Richard Beddard trawls through annual corporate results for his Watchlist and the Share Sleuth portfolio of companies that satisfy key valuation metrics such as earnings yield and return on capital - and profiles the most interesting candidates.

Component manufacturer Dewhurst made strong progress last year, with its improving revenues restoring profits to the business after a disappointing 2013.

If you haven't already, you can read a full analysis of Richard's thoughts on Dewhurst as he attempts to justify the company's inclusion in the portfolio.

Elsewhere, tiny Titon has ramped up revenue after a decade of marginal results, mainly due to growth at its joint ventures in South Korea. Meanhwile, Electronic Data Processing and Treatt are also worth a closer look.

Add: Dewhurst (DWHT)

Strong progress from Dewhurst in improving markets is reflected in the company's full-year results. The component manufacturer improved revenue by 7 per cent and adjusted profit by 33 per cent in the year to 30 September 2014, after a disappointing 2013. Profit was almost on a par with 2012, Dewhurst's best-ever year. The company's cash position improved too. It has no debt.

Dewhurst manufactures pushbuttons and related components for lifts, railway carriages and ATMs, as well as bollards and signage for traffic management.

It benefited from a resurgence in local authority spending on lifts - one beneficiary being its CMS Anywhere product, a web-based monitoring system for housing and facilities managers (who are increasingly required to report on lift performance). Sales in its recently acquired US subsidiaries, which the company has restructured under a single head, have improved too.

Otherwise, Dewhurst focused on improving efficiency and product development in 2014. It launched a redesigned solar-powered bollard, an enhanced security ATM keypad and a remote indicator display that enables facilities managers to provide residents with service updates by texting a screen in their building.

The company reports stable demand but economic uncertainty, and it warns that the strong pound may continue to reduce overseas revenue, which accounts for about 70 per cent of total revenue. Currency fluctuations should even out over the long term, though. Its share price of 465p values the enterprise at £26 million, about six times adjusted profit. The earnings yield is 17 per cent.

The risks are mostly speculative and insufficient to undermine the attractiveness of shares on such a low valuation. Dewhurst is controlled by members of its founding family, which gives its directors the power to operate the company in their own interests rather than those of shareholders in general.

However, payments to plug the defined benefit pension fund deficit will reduce cash flow in coming years, while Dewhurst's mixed results from product and geographical diversification may indicate that, although it has profitable businesses, it's not always successful in growing new enterprises.

Balancing those concerns is Dewhurst's decades-long record of profitable growth and financial prudence, which indicates that the company's management has been a good steward that has enriched all shareholders, and that Dewhurst's position in established niches, particularly lift pushbutons, is entrenched. Progress may not always be smooth, but in the long term, Dewhurst should be a good investment.

Watch: Electronic Data Processing (EDP)

Software company Electronic Data Processing is struggling to raise revenue in a competitive market. It's still profitable, though, and its shares may turn out to be cheap if it can gain more customers.

EDP's revenue in the first half of the financial year was hit by delayed customer orders, and the company failed to make good in the second half. Overall, revenue fell by 5 per cent in the year to 30 September 2014 and adjusted profit fell by 41 per cent. EDP has no debt, but its cash surplus also fell slightly.

The company is not attracting enough new customers, and it's losing some as it encourages them to migrate from older versions of its software, installed locally in customers' businesses, to modern hosted services, which now account for just over 50 per cent of revenue. Hosted software is served over the internet from EDP's hosting centre in Milton Keynes.

EDP says next year will be challenging too, due to continuing price competition and the loss of a major customer after the client bought a competitor software company and subsequently migrated to its newly acquired software. EDP appears to be relying on cost savings to make up for lost business, while still investing heavily to remain competitive.

Its principal products are Quantum VS - specialised business software for distributors - and Vecta general sales and customer relationship management software.

The company has to work hard to stand still, which has resulted in a gradual erosion of annual revenue over the past decade. EDP's management thinks it has a strong business based on long-term software contracts lasting for up to five years and hosted services that provide customers with most of their IT requirements, but EDP's difficulty in growing turnover suggests competitors may be stronger.

A share price of 69p values the enterprise at just over £5 million, about 12 times adjusted profit. The earnings yield is 8 per cent. Given that EDP is thinly traded and that buying shares is therefore likely to be expensive, that price may not represent good value.

However, the company has been trying to dispose of two surplus properties it owns. Should it succeed, reduced costs and increased cash would change EDP's valuation substantially, putting it on an earnings yield of about 12 per cent. That makes EDP something to think about - especially as it has rock-solid finances already - but only if the company can sell more hosting agreements.

Watch: Treatt (TET)

Treatt shook off something of a curse in its full-year results published in December. It increased profits and also raised revenue, which had been flat for three years. Treatt processes and trades essential oils, flavourings and fragrances distilled from plants and used in the production of food, drinks and products such as air fresheners.

Treatt says the increase in revenue is the result of selling more value-added products. It has added value to its products by, for example, pairing its vegetable distillates with herbal ingredients such as basil, sage and ginger, to add a twist or kick to its vegetable drinks. It has also been developing products that combine well with new natural sweeteners such as Stevia.

Rising turnover might indicate that the 125-year-old ingredients trader is both operating more efficiently and successfully developing more valuable flavours and fragrances, both part of a sustainable growth strategy launched in 2012.

In the year to September 2014, Treatt increased revenue by 7 per cent and adjusted profit by 9 per cent. The company's modest level of debt rose, though, as it stocked up on ingredients to guard against shortages caused by political, economic or weather-related factors.

It will probably make good on its promise to grow profitably by focusing on value-added products as well as the commodities it trades, but a share price of 140p values the enterprise at £84 million, about 13 times adjusted earnings. The earnings yield is 7 per cent.

Like an increasing number of strong, well-managed companies tracked in the Watchlist, Treatt is not obviously cheap, but it's not glaringly expensive either.

Watch: Titon (TON)

After a decade of marginal results, tiny Titon has finally produced a definitive full-year profit. Revenue increased by 22 per cent and adjusted profit increased by 595 per cent - from a very low level - due to growth at Titon's joint ventures in South Korea, where the company manufactures and distributes ventilation products.

Return on capital was 14 per cent, the highest level of profitability recorded by the company since 2003. Meanwhile, more benign market conditions in the UK - its larger market, where it also manufactures window and door hardware - staved off the prospect of losses earlier in the year.

In the UK, Titon benefited from demand from private housebuilders - particularly for window and door furniture, which earned 84 per cent of total revenue in the previous year - and from government-funded social housing projects making use of its mechanical ventilation with heat recovery (MVHR) systems. Demand from social housing developers is likely to tail off, though, as funding falls away.

In addition, Titon expects growth to slow in South Korea, where competition is intensifying. Prospects for European exports depend on faltering European economies, although the company hopes to increase MVHR sales in continental Europe.

A share price of 68p values the enterprise at just over £5 million, about five times adjusted profit. The earnings yield of 19 per cent is incredibly tempting. However, the company has struggled for profits in the past, and recomputing the earnings yield based on average profitability gives just 8 per cent, which is perhaps a fairer indication of future returns from the business, considering the challenges Titon faces in maintaining its profitability.


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