The company has a number of diverse business activities ranging from being a major supplier of naval equipment to the UK Royal Navy, a designer and manufacturer of petrol stations forecourt superstructures, and manufacturer of high-quality open die hammer forgings for use within many industrial applications.
The reason I recommended buying the shares in the first place was primarily down to the prospect of a recovery in earnings from MSI's defence activities and the upside from an earnings accretive acquisition in the summer which boosted its petrol stations forecourt business. On both counts the company has delivered, with the defence business reporting a marked narrowing of trading losses to £163,000 in the six months to 31 October 2015, down from a loss of £1.1m at the same stage last year.
Bearing this in mind, it's worth flagging up the comments of chairman Michael Bell, who notes that the UK government's recently announced Strategic Defence and Security Review confirmed a 10-year commitment to increased spending on defence. In addition there is a "commitment to maintain and support the current number of Royal Navy surface warships, uphold the current naval ship building programme and assist companies such as ours to grow and compete in the world defence equipment markets."
This commitment gives Mr Bell "confidence to pursue our policy of continuous improvement in our business to meet customers' expectations." He also raises the valid point that the increasing awareness of current regional threats that exist to international stability "could well result in further spending on defence initiatives". This can only be positive for the second-half performance and beyond.
Fuelled for a profitable recovery
But it wasn't just a sharp narrowing of losses from defence activities that led to a surge in MSI's pre-tax profit from £71,000 to £395,000. The successful integration of the Petrol Sign BV acquisition into MSI's 'petrol station superstructures' business means it's now able to offer corporate branding and signage services to its original customer base, either separately or as part of an overall construction package, on both new-build stations and the maintenance, repair and rebranding of existing sites. Equally, the enlarged division has the opportunity to cross-sell structures to Petrol Sign's customer base. Mr Bell notes that "this enhanced capability is being extremely well received by the market" and 'Petrol Sign' business operations are being established in both Germany and the UK. With the benefit of a four-month contribution from the acquisition, trading profit from the division rose 43 per cent to £970,000.
True, the half-year result would have been more impressive if MSI's forging business hadn't dipped into the red, reflecting unfavourable exchange rates and a lacklustre level of activity in global markets. However, I still feel that there is enough momentum building in both MSI's defence and petrol stations business to warrant running the 17 per cent profit on the holding, especially as Mr Bell looks to the "future with optimism". Clearly, so do the rest of the board who maintained a half-year payout of 1.5p a share and with net funds of £11.5m on the balance sheet, a sum worth 69p a share, a repeat of last year's final payout of 6.5p a share looks on the cards given the vested interest of the board: non-executive director David Pyle, finance director Michael O'Connell and Mr Bell between them own 49 per cent of the shares in issue. On this basis, the shares offer a decent dividend yield of almost 4 per cent.
The shares are attractively priced on 1.2 times book value, too, which I think is a harsh rating given that the company has net cash and property assets worth a combined £26.5m, a sum representing almost 80 per cent of its market capitalisation of £34.6m. As I noted when I initiated coverage six weeks ago, if MSI can make headway back to the net profit of £2.5m earned in the 2014 financial year then expects its shares to make headway towards the 240p bull market high.
Trading on a bid-offer spread of 208p to 210p, I would recommend running profits.
Please note that for a limited period of time, my book Stock Picking for Profit is being offered for sale at a promotional price of £11.99 plus postage, subject to availability, full details enclosed below.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies since the start of last week:
■ Ensor: Buy at 99p, target 125p ('Bid watch', 23 Nov 2015)
■ Marwyn Value Investors: Buy at 216p ('Cashing in on a top performer', 23 Nov 2015)
■ Trakm8: Run profits at 262p ('On track for record earnings', 24 Nov 2015)
■ Walker Crips Group: Buy at 49p, target 60p ('Profit from a profit surge', 24 Nov 2015)
■ Renew Holdings: Buy at 362p, new target range 390p to 400p; Cambria Automobiles: Buy at 73p, new target 90p; Tristel: Run profits at 142p; Pure Wafer: Sit tight at 165p and await details of capital distribution ('Running small cap winners', 25 November 2015)
■ Cohort: Run profits at 418p; Inland Homes: Run profits at 70p ('Riding momentum stocks', 26 November 2015)
■ Record: Hold at 28.75p ('Record awaits the Fed decision', 26 November 2015)
■ First Property: Run profits at 47.5p ('Investing for bumper gains', 30 November 2015)
■ Paragon: Run profits at 384p; Redde: Run profits at 174p; Fairpoint: Run profits at 175p ('Capitalising on investor overreactions', 1 December 2015)
■ LMS Capital: Tender your pro-rata allocation ('LMS tender on the money', 1 December 2015)
■ Vertu Motors: Buy at 78p, new target range of 85p to 90p ('In the fast lane', 2 December 2015)
■ MS International: Run profits at 210p, target bull market high of 240p ('Engineered recovery', 2 December 2015)
■ Mountview Estates: Buy at 11,500p ('Mountview's accounts reveal hidden value', 2 December 2015)
■ Character Group: Buy at 485p, new target 600p ('Playtime for a popular Character', 2 December 2015)
■ For a limited period and strictly subject to stock availability, Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com at a special promotional price of £11.99, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
