Coincidently while thinking about writing my next article, I came across a piece written by Charlie Munger. It is a work of fiction that explains how companies destroy wealth. Here is the bit that caught my eye :“A wiser board would then have bought in Quant Tech’s stock very aggressively, using up all cash on hand and also borrowing funds to use in the same way”. This reminded me of Deallogic (LON:DL.) which I covered in my last investment case. As per 21st June announcement, it has delisted at a price of 330 pence per share. I am a bit disappointed as the company was cash generative and the shareholder returns were good.

The reasons for delisting can be found here and look very reasonable. I believe that the Company directors made a sensible decision which is in the interests of owners. I also hope fellow investors benefited from the research.

What’s Next?

So moving along, here is another company which I feel is highly profitable but is currently ignored by the markets for the reasons discussed below. (To avoid reader’s bias I will disclose the company’s name and business later so first the numbers). The sales, pre-tax and EPS are declining with a static dividend as shown in table below (from Digitallook)

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About the Author

Puneetk

Premium Member

I am a full time IT professional (financial services) and a part time private investor. Started investing in 2003  as a hobby inspired by reading "The Intelligent Investor".  I categorise myself as a long term value investor and am interested in stocks were value is supported by numbers not stories. Though I must admit to my share of mistakes (speculative buying) and hopefully I will keep on learning from those. more »

2 comments

fourayes

That was an interesting read, for which I must thank you.

According to Hemscott, not their refs numbers but from TD Waterhouse site, their only forecasting broker, Numis are suggesting a div of 1.5p for REC for 2011 and 2012. Still that gives 4.6%.

fourayes

Reply
puneetk

Hi fourayes,

Thanks for your comments as you have raised a valid point about dividends. Well personally I am sceptical about broker estimates but I understand for lot of us who rely on broker research it is relevant.
So lets try to analyse from company's annual numbers perspective. As per their annual report their Mar 2011 underlying PAT was £8.93 million. As per last quarter update I don't thnk so they will do either extermely well or bad, they have announced "a net fee reduction from a client of £2.9 million on an annualised basis" and based on that I worked out PAT of circa £8.1 million.
Now I feel company can afford a dividend cover of 1.5 - 1.6 times, translates roughly to £5 mill - £6million in dividend i.e. 2p - 2.59p per share (# of shares 221 million). Thats a yield is a around 6.5% - 8%.

Having said that it may still reduce the dividend to broker's forecast of 1.5p that comes to £3 million, cover of 2.6 times.
Given Record's record, it is bit conservative as I won't be surprised that lots of its shares are held by owners and employees. Why would they want to conserve cash unless they have plans for exapnsion, acquisitions, buy backs or new product development but I didn't come across any of these in the AR or latest announcements.
But as you said with 1.5p also the yeild is still comes to 4.6% which is not bad.

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Year Ending Revenue (£m) YoY Decline Pre-tax (£m) Pre Tax growth EPS EPS Growth P/E Div Yield Op Margin ROCE
31-Mar-08 66.15
40.39
12.7
6.8 2.61p 3.10% 59.36% 211.69%
31-Mar-09 46.8 -29% 26.77 -34% 8.73 -31% 7.6 4.59p 7.00% 55.25% 95.09%
31-Mar-10 33.42 -29% 16.61 -38% 5.39 -38% 11 4.59p 7.70% 49.04% 65.14%
31-Mar-11 28.2 -16% 12.54