Hard to find anything positive to say about Morson’s (MRN) 2011 figures. Operating profits down for fourth year in a row, at £7.1m, operating margins down yet again, to a wafer thin 1.6%, and net debt up more than 40 %, to £33.3m. Worse still, the board, which has already axed the final 4p dividend, now warns that there can be no guarantee that any dividend will be paid in respect of the current financial year.
About the only positive thing that can be said about MRN is that it is continuing to increase its market share. Contractor numbers are up 700 at 10,900 and revenues have topped £500m for the first time. But it is paying a high price for its bid for market share.
Since 2006, when the company was floated, revenues have risen 55%, but operating profits are down more than a quarter. Operating margins have fallen every year, and are now roughly half what they were in 2006. Meanwhile, net debt has risen from £10.9m in 2009 to £33.3m at the end of 2011, reflecting higher working capital requirements and the need to finance a long overdue expansion of the group’s international business.
There are all sorts of ratios that can make MRN shares look cheap at current levels. It is trading on less than four times earnings, and a discount of around a third to its net asset value after goodwill has been stripped out. Meanwhile. its balance sheet still looks surprisingly strong with interest cover of 8.7 times.
MRN’s decision to axe its dividend is in marked contrast to Matchtech (MTEC), a smaller rival, which has been finding the going equally tough with cutbacks in public sector spending and the general recession severely squeezing its recruitment margins.
MTEC has held its dividend and its shares are yielding 7% and trade on 11 times earnings compared with MRN’s 3.4 times. Its dividend cover of 1.3 times compares with MRN’s 6.1 times based on the 2p divi paid last year. MTEC generates more profits than MRN, even though the latter’s revenues are some two thirds bigger, and it has nearly three times as many staff. No surprise then that MTEC’s market capitalisation of £45.6m is almost three times MRN’s.
Despite the markedly differing share ratings both companies have a lot in common. Aside from both being floated on AIM in 2006, they also have managements with a sizeable stake in the business. MRN’s chairman and his son, the chief executive,own 45% of the company, whilst the three founders of MTEC, which include the current chairman and finance director, also own 45% of their company.
One of the supposed benefits of having a large family shareholding is that it should encourage the good stewardship of a company’s assets over the long-term. MRN and MTEC are an interesting test of this thesis.
For what’s its worth my money would be on MTEC, and that is not just because of its generous dividend yield. It has a much better balanced board (five non-execs compared with MRN’s sole independent non-exec), MTEC’s managers pay themselves far less well, and MTEC has done a better job diversifying away from the UK’s low margin temporary staffing business, and expanding into higher margin overseas markets.
Normally, MRN’s lowly stock market rating would have alerted predators. But the combined voting power of MRN’s chairman and CEO make any unsolicited takeover approach most unlikely.
However, things could change. MRN’s chairman is in his seventies, and several large contracts, accounting for a third of group revenues are due for renewal or extension in 2012. If MRN fails to renew the bulk of these contracts on reasonable profit margins, then MRN’s institutional shareholders ought to pressing for a change at the top.
Who knows, a face saving acquisition of MTEC might be the solution to MRN’s problems which increasingly seem to have more to do with the quality of its top management team, than the markets in which it operates.
Filed Under: Staffing Family Firms,