Dewhurst Group PLC (DWHT.L) is a UK-based company, listed on the London Stock Exchange, valued at £75m (you may see quotes at closer to £70m but this stock is so illiquid that bid/ask spreads are, frankly, extortionate!) with two classes of stock – ordinary shares (voting) and A shares (nonvoting). Both shares are equal in all aspects apart from the voting status. In this write-up I suggest buying the ordinary shares as opposed to the A shares, even though the dividend yield is lower. For me, the dividend yields on both shares remains largely insignificant.
This may seem an expensive pick at a P/S of about 1.3x, P/B of 1.25x and P/E of 14.7x. However, it is important to look a little closer at the balance sheet where £24.3m of cash is lying. With long-term liabilities of only £4m (lease and retirement obligations) and net working capital (defined as current operating assets less current operating liabilities) of £10m, that cash can be assumed to be very safe. Therefore, I feel it is safe to back the cash out of the market valuation and value the business a second time.
Valuing the business at a little over £50m makes those multiples far more reasonable. Adjusted P/S becomes 0.88x and P/E declines to under 10x. Of course, this is all very simplistic analysis and would also have been worked out using enterprise value. I haven’t even told you what the business does! But we’re not done with the simplistic analysis yet.
Let’s briefly discuss the real estate carried on the balance sheet. Unfortunately, UK accounting standards aren’t particularly strict and so fittings to the property are included in the same category as the building structure. For Dewhurst, net of depreciation, that figure stood at £14.6m.
If we add that rough £14.6m figure to the £24.3m cash discussed above, we get a value of £38.9m that reflects a conservative liquidation value of the company given that buildings are depreciated at 1.5% on a declining balance basis and fittings are depreciated at 5-20% on a straight line basis.
(Of course, larger investors have the money and resources at their disposal to appraise the value of such real estate better. Unfortunately, I’m not in that position so will have to settle with the quick and cheap method.)
It is true that we can also add some plant, equipment and the current operating assets surplus left after fulfilling all obligations, but valuing such assets with certainty is risky. For reference, these assets amount to about £8.85m (net of depreciation). If we want to be super conservative we can say that 30% of this value gets realised in the event of a liquidation, valuing the overall business at about £41.5m. If this company were to fall below this valuation, I’d say it would make sense to start buying aggressively. However, as we’ve discussed above, the valuation is a little more than that. Further, liquidation is unlikely when the company is earning a strong return on capital. Therefore, it seems wise to fully analyse those returns next.
Some analysts prefer to scrutinise the cash flows as opposed to earnings. In the case of Dewhurst, they generated operating cash flows of £5.68m (roughly in line with earnings of £5.1m) and free cash flows of £4.47m. In 2022, operating cash flows were £2.7m (against earnings of £5.1m) and free cash flows were £1.9m as the effects inflation hit the company (and I’m still yet to tell you what the company does!). In 2021, operating cash flows were £4.9m, net earnings were £7.5m and free cash flows were £2.4m. So in the last three years, where the UK suffered from harsh inflation in 2022 and a recession in 2023, Dewhurst have generated aggregate free cash flows of £8.8m and net earnings of £17.7m. Not bad at all given the circumstances!
Of course, cash flows alone and the market cap isn’t enough to determine whether this is a proper business and one worthy of investment. Therefore, let’s look at the cash returns on net assets (CRONA). I define this as free cash flow divided by average net assets. In 2023, that CRONA was 7.3%. In 2022, CRONA was 3.3% and in 2021, it was 5%. Of course, this is a strict measurement that punishes both capital spending and reinvestments of profit. Further, with a large cash balance, returns look much worse than they really are.
In this case, with no debt in the business, I feel it is more wise to use ROIC to determine the true earning power of the firm. I define this as net profits divided by equity plus lease liabilities less excess cash (I’m aware that the traditional way is to use operating profit after tax but since Dewhurst have an immaterial interest expense, we may as well use net profits). I haven’t fully backed out all of the cash out of the valuation (leaving £4m) to allow for strategic capex, an acquisition or (God forbid!) an awful year. For 2023, the ROIC was 12%.
It goes without saying that ROIC means nothing without a WACC that goes hand in hand with it. In this case, the WACC would be equal to the cost of equity which would have been roughly 7.9% (using CAPM), meaning that Dewhurst comfortably covered its cost of capital in 2023. However, realise that this is a small company that can suffer from fluctuations due to very slight changes in market conditions and it’s for this reason why that balance sheet strength discussed above is so necessary to this type of investment.
If you’ve gotten this far, you’re interested enough to want to know/understand the business we’re dealing with. There’s a reason I didn’t mention it in the opening paragraphs. A supplier of lift, transport and keypad components isn’t particularly exciting. In fact, the details will put you to sleep. Despite the tedious nature of Dewhurst’s business, their customers seems to be generally pleased with the services they provide being on time with their deliveries 93% of the time through 2023!
The majority (over 85%) of Dewhurt’s sales come from the lift segment with smaller revenues in the transport and keypad industry. They don’t make lifts, though. Rather, they supply components to the lift industry such as the displays you see that broadcast news, the pushbuttons that take you to the correct floor, auxiliary equipment (gatelocks, limit switches…)etc. The three main geographies that Dewhurst target are the UK, The Americas and Asia & Australia.
Regarding the future of the business, realise that this is no laggard. Even with the exceptional share price performance over the last four decades, management are continuing to find ways to grow. The latest case in point is through the acquisition to the rights of the E-Motive brand from Avire. Such products make lifts more engaging through a visual screen and there is seemingly demand for it. This will set the company back £0.8m and further engineering development and manufacturing efficiencies will also take place following this move.
Now, for the worse news. The stock is ridiculously unknown (average volume is 654 shares) and there aren’t many obvious catalysts at play here. From the outside, the business looks fairly valued so, even if analysts do notice the appeal to the balance sheet, how does any price discovery take place when the Dewhurst family owns 47% of the voting shares? And that brings me to my second point – no activist investor can force the family to buy back stock or increase their dividend. Investors have to place faith in them to make the right decisions (which, mind you, hasn’t yielded bad results with Dewhurst comfortably beating the S&P500 over the past 25 years!).
Naturally, we’re dealing with a company that can suffer from inflation. Dewhurst is very much a commodity-based business operating in a competitive market. If the price of materials increase, margins shrink. Management are aware of this and have a few tools to mitigate the harmful effects. Firstly, they take on quotes that aren’t too far ahead into the future. If there is a longer timeframe, Dewhurst will try to work an inflationary increase mechanism into their contracts. Secondly, they track component prices. If they envision more inflation, they will strategically and sensibly buy more of that inventory. Finally, they will scour the market and make sure that they have got the lowest price possible before passing on higher costs to consumers.
Not only are Dewhurst subject to inflationary pressures with the components they provide, they also feel the effects of higher energy prices and higher wage costs. Dewhurst give the impression that they’re willing to pay more to retain their workforce which makes sense (and is fair) when there is generally a shortage of workers. However, there is no tangible upside to be felt from higher energy prices. As such, Dewhurst are investing into green energy (such as solar panels) to offset some of the harmful effects of higher energy costs.
Management also give the impression of cautious conservatism in the Annual Report using phrases such as “seeks to reduce or eliminate financial risk to ensure sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably.” Further, executive directors are not paid exorbitant salaries with Mr Bailey (CEO) taking home £300k (which consisted of a £109k bonus). There is no SBC policy in place, either and, as a prospective investor, I have no problem with this.
As we end this piece, I wish to make the fact known that I am not invested in the business, but my timeframe is likely to be longer than most professional investors and I am looking to buy shares when the stock reaches a level that has an obvious margin of safety (I’m still kicking myself for missing the October to January “steal” prices when the stock was close to the liquidation value discussed above). When I do think the stock is ridiculously cheap, a decade or more is how long I’m willing to spend on this business. Hence, I’m not overly flustered about the illiquidity of the stock or the lack of exponential revenue and profit growth. I’m 20 and realise that, assuming an average lifetime, there’s plenty of time to get rich through the purchase of stable common stocks.
Inconclusion, we have a very simple situation on our hands here. A business that is financially very sound, operationally excellent, with management’s interests very much aligned with shareholders. At its essence, this is value investing for the purist.
Best investing,
HV
