MS International (LSE:MSI) is trading on a low price relative to earnings over the last eleven years. It is a diversified engineering company with four strong divisions, each of which has been run by the same team of skilled managers for many years. These are attractive features. So why is the share at a low price? Perhaps it is the case that though earnings might have been good in the past it now has a fragile financial structure; a shock will cause severe problems resulting in strategy and profits being knocked off course. With that in mind, I’ll look at its finances today.
Market capitalisation is £36.6m at 222p.
Balance sheet data
£m | Extracts from balance sheet April 2019 | Extracts from balance sheet April 2018 | Extracts from balance sheet April 2017 | Extracts from balance sheet April 2016 | ||||
Cash | 22.9 | 15.9 | 15.2 | 12.8 | ||||
Inventories | 12.6 | 11.7 | 10.1 | 7.0 | ||||
Receivables | 7.0 | 14.6 | 11.4 | 9.0 | ||||
Other current assets | 1.8 | 1.2 | 1.1 | 0.9 | ||||
Total current assets | 44.4 | 43.4 | 37.9 | 29.7 | ||||
Minus current liabilities | -26.3 | -28.7 | -25.6 | -15.4 | ||||
Minus non-current liabilities (excl pension deficit) | -1.6 | -1.6 | -1.4 | -1.6 | ||||
Current assets minus all liabilities except pension deficit | 16.5 | 13.1 | 10.9 | 12.7 | ||||
Pension liability | -6.8 | -6.4 | -7.5 | -7.6 | ||||
Current assets minus all liabilities | 9.7 | 6.7 | 3.4 | 5.1 | ||||
Freehold property | 12.3 | 12.3 | 11.0 | 11.0 |
The first thing to note is the amount cash, and its build up over the years.
Is that because it also borrows a lot?
No, it has no bank debt.
Is there a problem within the current liabilities number?
No, 97% of it is “Trade and other payables”, which is a normal way of financing activities, and should be sustainable.
Over the period 2016 to 2019 turnover rose by 44% from £53.8m to £77.7m. If we assume that the operating business needed all that cash (£12.8m) sitting in its balance sheet in 2016, and further assume that the cash pile needs to grow in proportion with turnover by April 2019 it “should be” £18.5m.
In fact, its risen to £22.9m indicating a very large buffer for a company with a MCap of £37m. And my assumptions here are open to challenge: did the company really need £12.8m in 2016? Does it really need to increase the cash as turnover grows?
There is a small pension liability, but that will disappear when discount rates used to calculate pension liabilities mean-revert. The defined benefit pension members ceased to accumulate that type of benefit way back, in 1997. Between 1997 and 2007 it was a defined contribution scheme, and since 2007 the company defined contribution scheme has been administered by a UK pension provider.
All in all, we have to conclude that the balance sheet is very unlikely to be a source of trouble.
What about cash flow?
The regular positive cash flow also supports the picture of a stable
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