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I’ve bought some more shares in MS International (LSE:MSI), the engineering company, at 172p (MCap = £1.72 x 16.5m shares = £28.4m). I previously bought MSI for my Modified price earning ratio portfolio. But now I think it qualifies as a Warren Buffett-style investment.
MS International has two economic franchises:
(a) Specialised defence equipment, mostly unique naval guns,
(b) Dominant position in petrol station superstructures in Europe.
It also has a business forging forks for fork-lift trucks, but this is not a franchise.
There is a strong business in branding petrol stations. I’m not sure if this qualifies as a franchise because, although it has certainly had two terrific years of high profits resulting in earning back the €3.4m (£2.6m) paid for it in June 2015, I’m not sure if it has sufficient dominance of its industry?
There are three characteristics of a franchise business according to Warren Buffett. The product or service is:
- Needed or desired
- Is thought by customers to have no close substitute
- Is not subject to price regulation
(Previous Newsletters on MS International: 8-15th July 2015, 1st Dec 2015, 23-24th June 2016, 19th July 2016, 14-16th July 2017, 7-9th Dec 2017, 3-5th July 2018, 20th – 28th June 2019)
A good record
MS International is a family-run firm with very experienced managers, most of whom have been with the company for decades. I have followed MSI for years and so have been witness to many managerial statements and subsequent events – there is no dressing up announcements, or over-promising and under-delivering. They just get on and tell it like it is.
I’ve also met the directors and concluded that they are likely to act with decency regarding the interests of minority shareholders (although they do tend to pay themselves very well).
The four businesses, taken singly, are not especially stable, with falls into losses from time to time. But diversity helps to stabilise overall Group profits, most of the time. In the last fourteen (and probably going further back, but I haven’t checked) there hasn’t been a year without a profit. Average profits after tax over the last fourteen years amount to £3.25m.
The balance sheet is exceptionally strong, with no debt and £22.9m of cash – that is a lot of cash for a £28.4m market capitalisation company. On top of that it has £17m of freehold property.
In fact, the share price is now so low that MSI almost qualifies for my Net Current Asset Value portfolio as well as the Modified Price Earnings Ratio portfolio and the Buffett style one.
Return on capital employed is well into double figures, twice the required rate of return. This high level is helped by the strength of the franchises. If we are justified in projecting forward the historical rate of return, and then discounting the resultant forecast cash flows we get a result indicating that the shares are currently selling at less than half value.
Similarly, owner earnings analysis suggests a capability of producing more than £3.7m per future year – if we can assume the past figures will be repeated.
If projected owner earnings numbers are discounted to present value, and then the surplus cash held within the firm on behalf of shareholders is added, we arrive at an intrinsic value that could
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