Safeland PLC is engaged in the property trading, property refurbishment, property investment and property fund management. The company’s expertise is identifying opportunities to buy properties that they can add value to by reconfiguring or changing use.
Safeland stock price is £0.58 in London and its NCAV is £1.03. This means that price to NCAV is only 56%, which provide adequate margin of safety. Especially when tangible net asset value is increasing. The company’s PE ratio is 4.5, PB ratio is 0.45 and EV/EBIT is 6.1. Debt level is a little bit higher than ideal, but under the control. All indicators signal that the stock is undervalued. The same applies if we compare the company to industry averages. It does not seem reasonable that mostly profitable company should be trading at any discount to its book value and so much under its peers’ valuation. It provides about 100% upside potential and good downside protection.
Although Safeland has been mainly profitable during the last five years, latest couple of quarters have been more challenging. The reason for this, the company blamed its decision to be more selective on transactions until the outlook on the economy and property sector showed signs of strengthening. “I repeat the statement in the most recent interims and 2016’s full-year results, that the market appears to us to be constrained by an economic outlook which in turn is affected by political conditions in the UK, in the EU, and worldwide, which I believe have combined to create a more cautious environment,” said managing director Larry Lipman.
Overall economic and political unsure outlook in UK affect to company. Brexit may affect tax rates that exist at present, which would erode the margins. Also, possible increases in interest rates will increase expenses for Safeland as it uses bank loans to buy new property. Last but not the least, Safeland is micro-cap company and very thinly traded. The bid/ask spread can be at worst about 10% (but fortunately not always).
Revenues and profits have not been steady. Safeland operates in the property market, which over the years has always been liable to price fluctuations – even quarter to quarter. It is difficult for a small company in the real estate sector to consistently grow earnings as trading opportunities in the property market are not always present. When there is a drop in the value of property throughout the country, this would obviously affect the value of properties held by Safeland at that time. But then, it would also present an opportunity for buying at distinctly lower levels than exist at present. So, it is difficult to forecast earnings and cashflow data, but on an asset base, the stock looks considerably undervalued.
Safeland has redistributed profits to shareholders by share repurchases and paying dividends. In better times management of Safeland would have retained a higher portion of its earnings instead of repurchasing shares. Recently, buying back shares the company has signalled management’s belief that the shares are undervalued.
Safeland’s growth opportunities are limited, but because the company still have the same prospects it once had, reversion to the mean might be the most likely catalyst. Another catalyst could be that many deep value investors or small institutional investors without high liquidity requirements discover company’s undervaluation.
The story of Bell Equipment began when Irvine Bell and his new bride and Company Co-Founder Eunice, settled in Zululand a few years after the Second World War. Bell Equipment was founded in 1954 and is headquartered in Richards Bay, South Africa. Bell Equipment Ltd. engages in the manufacturing and distribution of materials handling equipment for the mining, construction, forestry, sugar and related industries. Its products include articulated dump trucks, haulage tractors, tractor loader backhoes, front-end loaders, sugar cane and timber-loading equipment and construction equipment such as graders, dozers and excavators. Biggest shareholders are Bell family (37.49%) and John Deer Company (31.48%)%), so they have a skin in the game. The group found new CEO Leon Goosen last year inside the company which ensure continuity for the business.
Bell Equipment is another profitable net-net. While Safeland was very tiny company, Bell Equipment is larger with business nearly across the globe. The stock price of Bell is €0.83 in Germany (also listed in South Africa and US). Company’s NCAV is €1.17 and tangible book value €1.76. Price to NCAV is 71% and price to tangible book value is 47%. It is easy to say again that profitable company should not trade under its tangible book value, but Bell Equipment has done it all the time after 2012.
There are certainly many reasons for this. Bell Equipment is in many ways a difficult company to analyze. First, the company is very wide expanded. The UK and USA remain key markets with relatively stable sales. Instead in Africa (South Africa 45% and rest of Africa 14% of revenue) or in South America you can never be absolutely sure what’s going on. There have been losses due to fraud and mismanagement. The company has also been downsizing and rightsizing its financial data for a number of years. Mainly this had been due to the sharp downturn in minerals commodities until recently. The stronger Rand (monetary unit of South Africa) in the first half of 2017 affected turnover and margin in both Bell’s domestic and export sales, while increased costs from essential products have also proved difficult to pass on to the market prices due to significant competitive pressure. It competes in an extremely competitive global sector against some of the world’s well known and largest firms (Volvo Group and Caterpillar are some of the main competitors).
Against the hard competition good partnership and world-wide strategic distribution alliances are important. A good example is the strong relationship between Bell Equipment and John Deere dates back to 1996. Bell continues to be amongst the largest Deere forestry and construction dealers outside of the USA. Bell also understands that business is about more than just supplying strong, reliable machines and that providing strong, reliable support is equally important. With this in mind, Bell is determined to provide customers with the good, old fashioned assurance that all their aftermarket requirements are covered.
Strong near-term catalyst is the rebound of mining activities from the low base in 2016. Bell Equipment has enjoyed more positive trading conditions from most of its global markets recently. Even in the worst case company’s net current asset value and tangible book value are increasing and the stock price will most likely follow this trend. Maybe it’s too early to promise sure turnaround before full year results are released, but then it can be already too late to buy a real bargain.
Cofidur SA provides electronic sub-contracting services. The Company is engaged in equipping, assembling, and integrating of electronic cards and also engaged in the design and manufacture of printed circuits. Cofidur EMS has been active in the electronic subcontracting business for over 30 years. Cofidur has a majority shareholder in EMS Finance, which holds a stake of more than 50% of the capital. The CEO of Cofidur is Henri Tranduc, and he is also a president of EMS Finance.
Cofidur too is profitable net-net company. Stock price is in France €370, net current asset value is €410 and tangible book value is €540. Company’s PE ratio is 6.4, PB ratio is 0.7 and EV/EBIT 5.1. Price to NCAV is 90%, which doesn’t offer great margin of safety, but Cofidur has been profitable for many years, generated substantial free cash flows and paid a steady dividend of 8 EUR (dividend yield 2.2%). Company’s debt level is a little bit high, on the other hand it has reduced it in recent years.
The stock is neglected by the market. Probably because it is only reporting in French and it has a low market cap and illiquid trading. Biggest sources of trouble in electronics subcontracting are customer and product concentration. These especially in case of fast products cycle products like consumer electronics. Cofidur does not disclose its customer concentration. As well, the order book offers limited visibility (from 3 to 12 months depending on the business). But since the company has been in business decades, perhaps the conclusion is that the company knows how to manage product and customer risk.
82% of the sales of Cofidur were made to customers in France, and 14% to customers in other EU countries. The company has four business sectors: Industrial and professional 41%, aviation and defense 24%, after-sales service 18% and LED 17%. you can speculate that the aerospace and defense related products are more complex and longer product life cycles and thus that the customer relationships are more deep and longer term in nature than probably simpler and shorter product cycle products in the industrial and professional sector.
The company has used its FCF during the last ten years to pay down its debt and strengthening its balance sheet. These activities certainly have been justified. As there is no clear trend up or down in the business, the last five year’s average profit might be good predictor of the next five year’s average profit. During that time Cofidur has traded mostly under its NCAV. Although it might be hard to figure out what would change the situation quickly and dramatically, bargain price and profitability can together act as a good catalyst. The company has bought back about 10% of its outstanding shares over the last ten years and a share repurchase program is in place, which should at least reduce the down-side risk. It is quite realistic to assume that the stock will trade somewhere between its net current asset value and tangible book value in the near future.