The company in question is James Latham, these days a nationwide business operating from 10 sites across the UK to service its customer base with a comprehensive range of temperate and tropical hardwoods sourced the Americas, Asia, Africa and Europe and high-quality joinery softwood from Scandinavia and North America. It controls over 9 per cent of imports of hardwood into this country, 5.5 per cent of plywood and around 6.6 per cent of medium-density fibreboard (MDF) and oriented strandboard (OSB), both of which are used extensively in the construction industry.
The aim of the business is to be the supplier of choice for joinery manufacturers, shopfitters, kitchen manufacturers and specialist product supplier to timber and building merchants. Around half the end market by sales value is in construction and housing and a fifth is in retail, but importantly the company is not over exposed to any one client as its top 25 customers only account for 16 per cent of total sales.
And there is a lot to like about this business. For starters it is conservatively run and has a focus on mitigating risk given the highly cyclical nature of the timber market, which in periods of high demand has been characterised by product shortages, high prices and overbuying by the trade. When demand is soft, weaker prices lead to stock reductions in the supply chain that exacerbates the price falls. So by adopting a strict policy of stock control and reducing reliance on commodity products the company lowers the risk of being overexposed to low-value, high-volume and price-sensitive items.
This conservative approach is also adopted in how Latham sources product to mitigate political risk in regions less politically stable than Europe and North America. By dealing across a wide range of countries, no one region poses a strategic threat to supply to the company. True, the company is clearly not immune to economic slowdowns given that the UK is its main end market, but it reduces the risk of being over exposed to any one industry by maintaining a customer base across a wide range of sectors.
And it is fair to say that the business has recovered strongly since the dark days of the recession in 2009. Alan Hanson of broker Northland Capital estimates the company's revenues will rise from £115m to £125m in the financial year to end March 2011 to produce pre-tax profits of £6.7m, up from £5.5m, with diluted EPS almost 20 per cent higher at 25.4p. Moreover, he expects the full-year dividend to be raised from 7.75p to 8.6p. So with the share price at 217p, valuing the business at £42m, the prospective yield is a decent 4 per cent and the shares are lowly rated on a multiple of 8.5 times earnings.
Latham is also modestly rated on a price-to-book value basis, trading in line with its market value of £42m, and around a quarter of its net assets are likely to be in cash at the financial year-end. And the board is using this cash wisely, having last week acquired a UK based importer and trader in hardwood, DLH, from Dalhoff Larsen & Horneman. Latham plans to develop the business by building on existing trading relationships with customers and will use £4.2m of its cash to pay down DLH's debt. The acquisition brings in £15m of revenue, of which £4.5m was attributable to Latham, and assuming the company retains around 50-60 per cent of the balance of DLH's revenues - some of DLH's clients are rivals to Latham so this business will not be retained - then the acquisition should generate around £300,000 of annual profits assuming an operating profit margin of 5 per cent. In turn, this will underpin another year of profit growth.
So priced in line with book value, rated on a PE ratio of 8.5 and yielding 4 per cent, I can see ample scope for a further rerating of Latham's Aim-traded shares (LTHM: 217.5p) towards my year-end target price of 275p.
• Fiberweb's one-for-three rights issue at 60p had a decent 94 per cent take-up which is a fillip for shareholders who have seen the shares come under pressure on news of the £23.9m fundraising. In fact, having advised buying the shares at 66p (), adjusted to 64.5p for taking up our rights entitlements, the share price reversed all the way back to 73p and wiped out most of the 50 per cent paper profit we were sitting on only three weeks ago.
However, I am sticking with my buy advice as the shares now trade 40 per cent below pro-forma net asset value of 119p, on 7.5 times Numis Securities 2011 EPS estimate of 9.6p and yield 4 per cent based on a pay-out ratio of 30 per cent of underlying earnings. Moreover, the proceeds of the rights issue together with a recent £15m property sale and lease back have reduced net debt from £151m to £112m, which is well within the group's £210m facility, and means gearing is only 55 per cent. And let's not forget that the business is performing strongly, having just delivered .
