The government has recently got into a tizzy about companies sitting on piles of cash. However, from a shareholder perspective, companies hoarding cash is arguably a cause for celebration at the moment. Cash is a buffer against market volatility - and once volatility has passed, it should either be invested or returned to shareholders.
Our screen this week attempts to identify cash-hoarding firms that have the potential to generate strong returns when and if they invest their treasure chests. Cash levels are found on the balance sheet (or in the notes to a company's accounts) and cash generation is shown in the cash flow statement. Neither is a measure of profit, the metric that matters most in many valuation methodologies, so looking at cash can be a great way to find hidden value.
This is what we've screened for:
■ Market cap over £200m, as a larger company usually makes a safer investment;
■ Companies with net cash as a proportion of market cap among the top 20 per cent the market;
■ Average cash conversion (based on operating cash flow as a percentage of operating profit) over the last three years of 100 per cent or more;
■ A return on equity, which is a crude measure of the return on each new pound invested in the business, of at least 10 per cent;
■ Forecast underlying EPS growth in the coming year;
We've also excluded all financials from our screen due to the structure of their balance sheets.
The results:
Asian Citrus
| TIDM | Price | Market Cap | Net Cash/Market Cap | Forecast PE | DY | Forecast EPS Growth |
|---|---|---|---|---|---|---|
| AIM:ACHL | 33p | £398m | 54% | 5 | 4.6% | 45% |
The main headwind for Asian Citrus's share price over recent years has been recurring rumours and press reports questioning the ownership of its orange plantations in China and its reported client base. To underscore the fact that this is a real business, Asian Citrus has substantially boosted its interim dividend and begun a £20m buy back programme. It's also run site visits to its facilities. If management can convince the market of its merits, then the shares could rise substantially - and there's the prospect of of increasing yields as plantations mature. The main risks are the vagaries of commodity prices and the Chinese economy.
Last IC View: Buy, 37p, 27 Feb 2012
Petrofac
| TIDM | Price | Market Cap | Net Cash/Market Cap | Forecast PE | DY | Forecast EPS Growth |
|---|---|---|---|---|---|---|
| LSE:PFC | 1,486p | £5.14bn | 18% | 13 | 2.3% | 18% |
The oilfield services market has been buoyant of late and Petrofac has a very strong bid pipeline as a consequence. The group's position is further strengthened by the advantage its cash pile gives it when it comes to bidding for new work along with its impressive track record when it comes to implementing projects. It is hoped a recent reorganisation of the company into four divisions will further aid growth and allow the market to focus on the quality of its revenues - a 25 per cent hike in the full-year dividend in March will also have helped. Risks include a weakening oil price.
Last IC View: Hold, 1,574p, 6 Mar 2012
Fidessa
| TIDM | Price | Market Cap | Net Cash/Market Cap | Forecast PE | DY | Forecast EPS Growth |
|---|---|---|---|---|---|---|
| LSE:FDSA | 1,449p | £533m | 13% | 18 | 5.6% | 0.4% |
IT group Fidessa is something of a fallen stock-market angel. Its formidable track record as a growth play has come unstuck recently as its customers in the financial services industry have cut spending. However, management has plans to boost performance by targeting larger clients and pursing opportunities in the derivatives market. That will require substantial investment, but the cash pile does mean ongoing special dividend payments, which account for the high historic yield, are expected to continue despite the slower growth.
Last IC View: Sell, 1,547p, 1 May 2012
Kentz
| TIDM | Price | Market Cap | Net Cash/Market Cap | Forecast PE | DY | Forecast EPS Growth |
|---|---|---|---|---|---|---|
| LSE:KENZ | 375p | £434m | 33% | 11 | 2.1% | 5% |
Like its peer Petrofac, business has been booming recently for engineering consultant Kentz. A recent trading update revealed that both its order backlog and its bid pipeline were rising healthily. Revenue visibility is good and the cash also means there could be the prospect of earnings-enhancing acquisitions. Recent oil-price weakness has been weighing on the shares, though, and directors sold shares in April. But the rating is 20 per cent below that of its peer group, according to Investec.
Last IC View: Buy, 5 Apr 2012, 445p
Betfair
| TIDM | Price | Market Cap | Net Cash/Market Cap | Forecast PE | DY | Forecast EPS Growth |
|---|---|---|---|---|---|---|
| LSE:BET | 739p | £734m | 21% | 18 | 0.9% | 29% |
Betfair is looking a better bet than it has for some time following a recent management overhaul and investment in its products. Technological innovations means the company’s betting exchange business is enhancing its presence and moving into new parts of the market. What's more, integration of Betfair's sportsbook with its betting exchange could produce major benefits. Broker Numis reckons the integration could increase EPS by as much as 40 per cent by 2014. The company has also been meeting with some success in the development of its racing business in California.
Last IC View: Fairly priced, 809p, 14 Dec 2011
Computacenter
| TIDM | Price | Market Cap | Net Cash/Market Cap | Forecast PE | DY | Forecast EPS Growth |
|---|---|---|---|---|---|---|
| LSE:CCC | 379p | £558m | 20% | 9 | 4.0% | 11% |
IT services group Computacenter has faced a number of trading headwinds over the past few years and poor conditions in the UK have proved a particular drag recently with both the public sector and the finance industry cutting spending. Nevertheless, analysts believe the company is set for a seventh consecutive year of double-digit profit growth in 2012. Strong demand from France and Germany, which has recently become the group's biggest market, have buoyed performance and prospects for the coming year look good. The Eurozone crisis is a concern, though, given the company's presence in the region.
Last IC View: Buy, 411p, 13 Mar 2012
SDL
| TIDM | Price | Market Cap | Net Cash/Market Cap | Forecast PE | DY | Forecast EPS Growth |
|---|---|---|---|---|---|---|
| LSE:SDL | 684p | £544m | 13% | 17 | 0.8% | 9% |
Translation software company SDL is attempting to move its products up the value chain and away from the increasingly commoditised basic translation business. The company is currently integrating analytics software firm Alterian which should help it win more marketing-related work. Its translation expertise will potentially give it an advantage in this competitive market as should its fast growing web content management software business. Trading in the group's first quarter met expectations but performance was somewhat mixed across its businesses.
Last IC View: Buy, 689p, 28 Feb 2012
Playtech
| TIDM | Price | Market Cap | Net Cash/Market Cap | Forecast PE | DY | Forecast EPS Growth |
|---|---|---|---|---|---|---|
| AIM:PTEC | 359p | £1.04bn | 11% | 10 | 3.7% | 1% |
Gambling technology firm Playtech continues to grow impressively by providing gambling companies with the technology they need to do business online. However, it's had frayed relations with its partners in the past, most notably with joint venture parter William Hill. And there are concerns about corporate governance; founder Teddy Sagi still owns 48 per cent of the shares. Earlier this month, the company abandoned plans to spend €95m aquiring social gaming companies owned by Mr Sagi. Currently on Aim, the group plans to move to the official list later this year.
Last IC View: Hold, 333p, 16 Mar 2012
