That leaves the weak share price performance since I initiated coverage seven months ago ('Bargain basement recovery play', 11 February 2014) looking overdone. In fact, although Pittards' revenues fell by £1m to £17.4m in the six months to end June 2014, in constant currency terms turnover would have been £18.7m. Since the half year-end, sterling has subsequently fallen by 5 per cent against the dollar to £1:$1.627, adding weight to the £36.6m revenue estimate for the full year from brokerage WH Ireland, up from £35.8m reported in 2013. The revenue estimates factors in an average exchange rate of £1:$1.68 for the calendar year, up from £1:$1.56 in 2013, and looks sensible at this stage considering that the cross rate started 2014 at £1:$1.66 and peaked out at the end of June at £1:$1.712. If anything it could be too cautious.
Moreover, with the company cutting £332,000 off costs in the first half, its consumer division moving into profit and the order pipeline much "improved", then I expect the vast majority of the £600,000 operating profit shortfall to be recouped in the second half of this year. So too does analyst John Cummins at WH Ireland who is maintaining his full-year pre-tax profit estimate steady at £1.6m, down slightly on the £1.7m reported in 2013, albeit that is still well below the broking house's original profit forecast of £2.5m when I initiated coverage in February. On this basis, expect EPS of 14.9p, down from 15.7p in 2013.
True, there is now a hefty second-half weighting to this year's earnings, which raises execution risk, but I don't think that profit estimate is wishful thinking for a number of reasons. That's because the company's newly created consumer product division is now gaining traction - Pittards England collection of handbags has been well received by the fashion press - and relationships with key customer FootJoy remains strong. In fact, higher volumes of shoe leathers supplied to Footjoy reflect the "great success" of their DNA golf shoe, which was launched earlier this year and features Pittards Chromoskin leather system. Moreover, glove manufacturing in Ethiopia, though still a small part of the business, continues to build.
It's worth noting, too, that there were other 'one-off' factors that impacted glove sales in the period including a very mild start of the 2013/14 winter. Clearly, I am not going to try and predict weather patterns, but I know all too well that the weather has a habit of reverting back to the seasonal mean.
Strong balance sheet
It's also worth pointing out that Pittards has no financial concerns: net debt of £7.5m equates to 45 per cent of shareholders' funds of £16.8m and is well within the company's debt facilities. With a better second half anticipated, Mr Cummins at WH Ireland predicts a reduction in net borrowings to £7m by the year-end. In any case, the company is operating well within its self-imposed upper borrowing limit of £8.4m (50 per cent of shareholders funds).
I would flag up, too, that Pittards' equity is now being valued a third below book value of 181p a share even though there is hidden value in the balance sheet. That's because property, plant and equipment is in the books for £5.9m, reflecting a policy that has seen these assets depreciated at an historic annual rate of between 10 to 33 per cent. But as I have noted in my previous articles, the bulk of these assets have now been fully depreciated even though they have a considerable useful life left. This explains why the non-cash depreciation charge fell from £355,000 to £192,000 in the first half this year.
I would also point out that Mr Cummins has calculated that the replacement cost of each of the company's two main production facilities is believed to be around £18m. This means the last reported book value per share of 183p significantly underestimates the true worth of the assets Pittards owns.
In the circumstances, I feel the shares are being harshly rated on a price-to-book value of 0.67 times and rated on 8 times earnings estimates. That rating attributes no upside at all to the real chance that a likely second half profit rebound continues into 2015 as analysts anticipate. True, I have clipped my fair value estimate to 200p to reflect the change in earnings guidance this year, but this still means that the shares offer 67 per cent upside potential to my target price. On a bid-offer spread of 115p to 120p, I believe Pittards’ heavily oversold shares rate a decent recovery buy.
Please note that I have taken into consideration in making this recommendation the fact that the top six shareholders control over two thirds of the 9.26m shares in issue and with a market value of £11m, shares in Pittards can be volatile due this lower than average free float. My last article on the company was three months ago when I discussed the reasons behind the share price underperformance this year ('Pittards pummelled', 11 June 2014).
■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
