A Stock on a forward Pe Ratio of 5.5

14th Aug '14 by AnonymousUser39518

15 comments 9022 reads

Hello readers. I thought that I would write an occasional piece on stocks that I think are undervalued. By the nature of my pieces, I will hold a stake in the company as why would you not invest if you think it is good? I disclose I have a stake in the company in this piece. I will write maybe once a month but only if there is a cheap company. There is no point in me chasing fair value stocks but this is just to share my thoughts. Nothing serious at all.

That brings me onto Newmark Security (NWT.L) which is a small security firm that I picked up a holding in last week after some interesting results. I spoke to the management team before purchase because the market cap is only £9.5 million so I wanted to check if they might delist. I was comforted by the response I got and because they are profitable and gave away a very good dividend, the risk is low.

Newmark has two divisions. A security division so selling things like locks and safes, and an electronic security division that has access control for buildings like the Gherkin in London. The security division has lumpy sales with contracts with the post office. The electronics division has good recurring revenue and is where the future is. Newmark are rolling out the electronics to Europe and launched in Hong Kong last month. It is all online so cost of sales is low and margins are high.

The chart looks good with the share price breaking out of 2p. Please make your own decisions on the chart as I only glance.

I will bullet the points from the results that I thought were intriguing.

+ Sales up 4.7% to £19.2m. Security division had large not recurring sales last year so depressed the figure
+ Gross margin of 43.2% says great pricing power and helped by the electronics side
+ Profit after tax after exceptional items was £0.984m. Before exceps was £1.84m

What matters, exceptional or without exceptional. Without exceptional. The exceptional item was an impairment charge on some type of banknote cash in transit box that they bought a few eyars ago. Look at the before exceptional.

+ 0.38p in earnings is a price to earnings ratio of only 5.5. Forward earnings forecast is for 0.39p'ish as more revenue comes from electronics so about the same. Next year will show…

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rhomboid1

14th Aug '14

http://www.newmarksecurity.com/aim-rule-26/directors-and-responsibilities/

So a 75 Year old chairman has made his daughter CEO , and the long serving MD has recently retired, all the other directors look to be long in the tooth long term associates of the Chairman.

I'd not want to be in the middle of that lot given how tiny the company is and illiquid the shares are.

Not for me but others may differ

intuitive6191

Stockopedia used to show the free float and give an idea of how much stock was in the hands of directors and long-term institutional holders. I cant see this anymore?

From their website;

"Newmark Security plc currently has 450,432,316 ordinary shares of 1 pence in issue.

Directors Shareholdings

M Dwek. 59,099,467 – 13.1%
M Rapoport. 17,055,000 – 3.7%
Other significant shareholdings

Investec/Estate of late Mr. A Reid and Mrs. GAB Reid. 131,745,283 – 29.2%
The beneficial interests of E. Dwek 75,500,000 – 16.8%
The percentage of shares in issue that are not in public hands is 62.4%"

Which kind of explains why over the last 12 months average number of shares trade per day was 400000 or roughly £8k...so horribly illiquid

AnonymousUser39518

The spread is ok at times but the the p e is 5.5 so it is priced in. The management hiked the dividend to 3.5% which shows alignment with shareholders.

Speak to management I suggest. Dont be so quick to judge. The MD retired because he was very old!

Plenty of worse management teams at the tops of companies with p e ratios of over 15! I bet £100 that you would have said the same thing when the share price was 0.5p and the p e ratio even lower. Sometimes you have to accept that not everything can be perfect :)

Good Luck :)! I respect your comment so thank you :)

I2015

Sully8786

Hi I2015,

I posted about this share on one of the TMF services and the below was an extract of one of the posts.....

A few things you may wish to consider.

The last three years have seen some chunky exceptional items. These items may be genuinely exceptional, or maybe they occur every so often down the years (for the same reason, i.e. development write-offs) and really are part and parcel of this business. So 'underlying' earnings may be flattered here by the write-offs.

The last three years have seen cash capital expenditure (on plant and intangibles) exceed the associated depreciation and amortisation charge by a considerable margin. This may have been an unusual three years in this regard, or perhaps such expenditure is a regular feature and the 'charge' in the P&L regularly understates the cash expense. I suspect earnings are being flattered here somewhat, which is why the P/E looks low.

To be fair, I am not an accountant but would appreciate it if if one did cast their eye over the results and pass on their thoughts.

FWIW I have a small position and thought that the overall tone was positive. We will see how the year unfolds in due course I'm sure.

Best,

Sully - long Newmark Security (LON:NWT)

Hi Sully :)

When I spoke to the management they were confident that there would not be another exceptional this year because the exceptional last year was a separate business they had bought and their r and d is now low risk. Without that then the earnings would have been 0.38p

They capitalised 997k last year of dev spend and had dep and amort of 1060k. cash flows are good. What do the stockopedia scores say? 3.5% divi is comforting for me :)

NB. The p e ratio drops to 4.1 if you take out excess current assets so big margin of safety :). I would fret if this p e ratio was 8+ but it is not even close :). One of the lowest p e ratios on the market apart from dodgy chinese naibu

15th Aug '14

Thank you.
Something strange has just happened - the free float is now back onto the stocksheet. Could someone at Stockopedia tell us if this has just been rectified in the light of this discussion.

Thanks, FWIW, I'm fairly positive on the company but I always look for positives and negatives.

I thought the doubling of the dividend and the positive tone was a good indicator going forward, accordingly, I'm still long and my top up if/when we see things heading in the right direction.

Sully.

shanklin100

FWIW, REFS shows the broker forecast for the current year to have come from Edison and its dated 28-Feb-14. As it implies a halving of the newly increased dividend I imagine it should be taken with a pinch of salt.

Cheers, Martin

Good point. I dont think theyll be hanging to that dividend forecast now :), Their divi forecast just gone was for 0.04p too. came in at 0.075.

I2015

I will call up the company in a few weeks again just to see. if they bag the military contract then I see a swift rerating happening just like when they bagged the post office contract :)

Ticked up to 2.125p and the breakout continues

I2015

17th Aug '14

Also please let me know if there is a standard format you would prefer :). I would like to make this a monthly commitment from my behalf

I2015

28th Sep '14

Hi I2015,

Have you spoken to the company recently? I see that the price has drifted down a little as is often the case post results.

I think your format is fine, you may also want to have a look at Paul Scott's which, I think flows quite nicely

7th Oct '14

Yes and I am happy with them and the stock price is back up too! Suggestion taken

I2015

Wexboy also did a decent write up which, I think has bumped the price a little.

Regards,

Sully.

A Stock on a forward Pe Ratio of 5.5

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AnonymousUser39518

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