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Both the printed circuit board supplies business and the Lighting business of Holders Technology (LSE:HDT) suffer from competitive rivalry in these industries. We should find, over time, that a positive return is generated on capital devoted even in competitive industries.
Holders has made use of around £4m to £5m of shareholder’s money to support trading each year. It’s difficult to assess the proportion of that money allocated to PCB and to Lighting, but we can conclude that performance has been awful.
In the case of PCB supplies, we observe low profits over the last seven years – an average operating profit of £145,000 (see table below). From that we need to deduct a proportion of annual central overhead, say £45,000.
The Lighting business has performed even worse with an average operating loss of £162,000 over the seven years.
Today we look at the history of the two businesses and whether these businesses might have turned a corner and are now poised to produce adequate future profits.
Printed Circuit Boards
Holders Tech has been a distributor of specialist materials, tools and equipment to the PCB industry for over 40 years. “Holders continues to pursue a PCB strategy based on dual positioning: both as a low-cost source of standard products used throughout the industry; and as an exclusive supplier of technically sophisticated products to the PCB sector.”
PCB’s – Costs and Profits
| £000’s | 2012 | 2013 | 2014 | 2015 | |||||
| Revenue | 11,036 | 11,011 | 11,025 | 8,304 | |||||
| Gross profit | 2,760 | 2,640 | 2,546 | 1,853 | |||||
| Gross margin | 25% | 24% | 23.1% | 22.3% | |||||
| Distribution costs | 316 | 301 | 333 | 272 | |||||
| Administrative costs | 2,257 | 2,154 | 2,182 | 1,707 | |||||
| Other operating income | 47 | 56 | 45 | 98 | |||||
| Division operating profit | 234 | 241 | 76 | -28 | |||||
| £000’s | 2016 | 2017 | 2018 | 2019H1 | |||
| Revenue | 8,336 | 9,453 | 9,374 | 4,291 | |||
| Gross profit | 1,852 | 2,284 | 2,206 | 967 | |||
| Gross margin | 22.2% | 24.2% | 23.5% | 22.5% | |||
| Distribution costs | 288 | 335 | 331 | 159 | |||
| Administrative costs | 1,498 | 1,693 | 1,625 | 778 | |||
| Other operating income | -67 | -42 | 30 | – | |||
| Division operating profit | -1 | 214 | 280 | 30 |
Gross profit and net profit (losses) reached low points in 2015-16. There followed a couple of years of modest return on money invested, but less than the required rate of return of around 8% – 10%.
The six months to 31 May 2019 were yet another disappointment, badly affected by the downturn in the Germany car industry. In this half year PCB sales declined by 9.8% compared with the same period a year before to £4.29m, while PCB overheads rose by 1.7 percentage points to 18.1%. Even with these problems PCB’s made an operating profit, but only just (£30,000 compared with £159,000 in 2018H1).
The PCB business is split into two parts, the UK PCB operations based in the Scottish Borders and the German PCB operations near Frankfurt.
UK PCB operations
This business was established in 1987 and now rents a 1,170m2 warehouse in Galashiels where it also leases 270m2 of offices. It focuses on supplying PCB destined for the aerospace and defence industries.
As well as warehousing, Holders do some processing there “for the back-up and entry materials” being “equipped with CNC saws, punches and routing machine capability. Flexible materials are panelised on slitter machines.”
Over the last seven years UK PCB revenues have fallen by about two-thirds, from £4.1m to £1.3m, and it is barely profitable – see table below, which also includes the comments made in annual report about the division.
PCB UK Division: comments in reports
| Revenue £m | ||||
| 2019H1 | n/a | PCB sales (UK, Germany and other) in the period decreased by 9.8%, from £4,756,000 in 2018 to £4,291,000, while PCB gross margins decreased by 0.7% to 22.5%
PCB overheads (UK, Germany and other) as a percentage of sales increased by 1.7% to 18.1%. Overall our PCB activities recorded a pretax profit of £30,000 (H1 2018: profit £159,000). Our PCB business continues to face challenges due to unfavourable market conditions. However, PCB operations remain profitable, and management has recently implemented targeted cost savings to further improve profitability. |
||
| 2018 | 1.3 | Satisfactory revenue in the year despite a lower level of market demand than 2017 | ||
| 2017 | 1.5 | UK PCB operations achieved encouraging revenue growth from a number of new product lines. The directors expect modest revenue improvement in 2018. | ||
| 2016 | 1.4 | PCB overheads were reduced…divisions were restructured.
A reduction in revenue but the major changes made within this entity enabled it to achieve a small positive contribution for the year. A strategic review of the PCB businesses was undertaken in view of their reduced profitability. As a result of the review, both businesses were restructured to imp |
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