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MS International (LSE:MSI) has £22.9m of cash but a market capitalisation under £30m. A company with that much cash relative to the price Mr Market is willing to trade its shares will usually have a poor profits history or a hazardous balance sheet. But neither is true for MSI. It has reported profits in each of the last 14 years, and a rising dividend (now 8.25p, share price 172p – 186p), on the back of at least two economic franchises.
The question of whether the financial structure is risky is something we’ll look at today, alongside a consideration of the company’s net current asset value and its cash flow generating ability.
Net current asset value
| £m | April 2019 | April 2018 | April 2017 | 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 | ||||
| Minus one-third of inventories | -4.2 | -3.9 | -3.4 | -2.3 | ||||
| Minus one-fifth of receivables | -1.4 | -2.9 | -2.3 | -1.8 | ||||
| Ben Graham NCAV (if we can ignore pension deficit) | 10.9 | 6.3 | 5.2 | 8.6 | ||||
| Freehold property | 17.0 | 17.2 | 15.5 | 12.7 | ||||
| NCAV plus property | 27.9 | 23.5 | 20.7 | 21.3 |
At the market capitalisation when I bought my shares, £1.72 x 16.5m shares = £28.4m, I paid only slightly more than the value of NCAV + freehold property value.
Can we ignore the pension deficit? Not really, but it is not a very large sum compared with MCap, at £6.8m (obligations are £30.3m and assets £23.5m). And MSI is coping with annual deficit reduction payments (£0.6m in 2019).
The pension scheme ceased being a defined benefit one in 1997 and is now a defined contribution scheme. The deficit could be wiped out should the discount rate rise by 200bps.
Cash has risen to £22.9m providing a large buffer for future dividends, even if there is a temporary downturn.
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 background for the dividend even if the company suffers an operating loss this year and next:
| Cash generated from operating activities after paying for net additions to working capital and property, plant and equipment, and after tax | ||
| 2011 | £4.9m | |
| 2012 | £1.7m | |
| 2013 | £5.1m | |
| 2014 | £5.6m | |
| 2015 |
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