LON:MPAC | Molins - On The Radar

21st Aug '14 by bsharman

8 comments 10573 reads

I thought I would start a new post to discuss companies which currently offer seemingly good value. I'll start with Molins:

MOLINS

Molins are based in Milton Keynes. They supply machinery, instruments and services for the production and packaging of consumer products, such as cigarettes. They have a Market Cap of £31m and an Enterprise Value of £26m. This shows that they have cash on the balance sheet and no net debt. They are trading on a low valuation of around PER 7.5 for the current year and a forward PER of 6.5 for 2015 (based on the consensus broker forecasts). They are currently yielding 3.8% which is covered a safe 3.9 times. The other valuation metrics show very healthy numbers (Price to Sales of 0.30) and a score of 97 on the Stockopedia value rank. The price has come down from £1.90 at the start of the year to a low for the year of £1.52 (current price) however this is a result of broker EPS downgrades. The one big fly in the ointment is the huge pension scheme and a large deficit. The deficit funding is expected to cost £1.7m per annum for the next 17 years.. and hence why the market is valuing them cheaply. However they are trading at a substantial discount to their peers on all valuation metrics and also I would suggest that capital equipment requirements throughout the world will only increase as the global economy continues to recover. Could this be an opportunity?

I'm not a holder, but am considering buying a few for a recovery.

Any thoughts?

Ben

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knowlesi

21st Aug '14

I like Molins, have a big soft spot for them...You are right in that they are indeed cheap, they offer good value vs peers, look cheap based on projected earnings, past earnings and cheap when you consider the value of the assets on the BS. Profitably is strong even through the crisis earnings remained stable and margins didn't suffer horrendously - the joys of being linked to a recession proof industry like Tobacco!! The elephant in the Molins broom cupboard is the pension scheme!!!! I've taken a look at the pension scheme for many hours over the years trying to ascertain what sort of a value I should deduct for the liabilities, I wish I could say I found a number I was happy with but my return assumptions o the pension scheme have jumped around so much I have found it a tricky task. My experience of pension schemes generally is that pension liabilities are black death to analysts, they hate them and avoid them like the plague and private investors panic when they hear there's a pension problem. As a result value is often found hear - I would like to see a screen actually that tracks companies with big underfunded pensions - my expectation would be they are overlooked and thus would outperform over the long term. Pensions aren't a problem that need to be dealt with today, tomorrow or even next year - the company has strong cashflow and a management team that has delivered strong ROE in the past. I think it's worth the risk.

davids_h

22nd Aug '14

I don't profess to understand pension liabilities, but is not the problem with pension schemes the drain on cash flow rather than the absolute level of the liability? As you say, that liability crystallizes some distance in the future, but the demands of the pension trustees on the cash generated by the business are more immediate.

In this case, Molins 2013 accounts show that he company have agreed with the trustees to fund the scheme at the rate of £1.7mn pa for the next 17 years. That compares to net cash from operating activities of £6.6,mn for that year (after adjusting for the pension contribution) i.e. around a quarter of operating cash is diverted to fund the pension scheme, which is no small consideration.

shipoffrogs

Whitepjs,

it's the uncertainty in pension liabilities that is the problem, nearly all of which is outside the control of the directors.

So Molins may be paying £1,7m a year now. But that might not be enough.

The liabilities are calculated using assumptions, including: longevity, interest rates and inflation. Any changes to those assumptions might lead to a change in the contributions.

Also, the pension assets will move up and down with market movements - a fall in the value of the assets could lead to a need to pump more into the Scheme.

So, you need to look at the annual contributions. But the absolute level of the liabilities will tell you something about the amount of risk sitting in the pension scheme.

beatingmrindex

I picked up a few shares - look forward to see what Thursday brings...

bsharman

Thanks for all the comments above. I have done a bit more research and am a little concerned that the strength of Stirling could have an impact on their sales. The vast majority of their turnover (91%) is generated outside of the UK and therefore it will be very interesting to see how the Half Year statement reads, when it is released on the 28th of August. Brokers have been trimming their forecasts slightly, however they do note that the valuation is undemanding and have substantially higher price targets. Perhaps the weakness in the share price is due to the expectation of currency headwinds (i.e. it's priced in) or perhaps the numbers released will be weaker than the expectations leading to a profit warning. Mid/long term I feel that this a great opportunity, but i'll wait and see what is reported on the 28th!

@bsharman - In would be very surprised if currency effects are not priced in.... It was a tough call whether to wait or not - I hope the news is as expected which I think will bring an increase in price... We will see on Thursday

also it may not have had as bigger impact as expected and the price may rally on Thursday and those who have waited will miss out.... We will just have to see on the day!

28th Aug '14

Molins (LON:MLIN) has released its half-year report today and it's all a bit ugly i'm afraid. Sales are down due to market conditions in the Middle East and eastern Europe in the Tobacco Machinery Division. The CEO, Dick Hunter, states that trading performance will be weighted to the second half but is mindful of the strength of sterling and the market conditions for the Tobacco Machinery division. This will probably impact sales going forward into the second half and therefore we could see more weakness. The positives are that the Scientific Services and Packaging Machinery divisions are showing growth (in local currency) and there is progress being made with product development into different areas such as nutrition, beverages and healthcare. It can only be a good thing that the company diversifies and therefore reduces the risk of being too reliant on Tobacco. The company has gone from having net cash on the balance sheet to showing a small net debt due to an increase in working capital, pension scheme payments and product development expenditure. I'm going to avoid this one for the time being. It will be interesting to see how Paul interprets this report - So over to you Paul!!

Molins - on the radar

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Bsharman

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