Is there a value play in Machinery-maker Molins?

Anyone how has been following Molins knows the business is slowing, if not in decline. Take Molins’s sales of £80m last year, that is 33% smaller than 2004’s number of £123m. In the majority of cases, when you get declining revenue, the market valuation adjusted lower.

In Molins case, today’s market valuation is £13m, but the valuation in 2003 was £67m or £3.34/share. (the average share price for that year) That is an 80% decline!  

Now, the shares trade on £0.67/share, given the disproportional decline, does Molins represents value for your portfolio?

First, an illustration of the change in market value from Molins.

 

GRAPH 1

MOLINS's market value changes

Source: Finance.Yahoo.co.uk.

As you can depict, Molins market value resembles a rollercoaster ride. What can you spot from this pattern?

Using basic fundamental analysis, back in 2002-03, Molins operating profits were £13m and £11.4m, respectively. The next big uptick in business cycle was in 2011-12. That operating profits came in at £5.5m and £4.6m respectively.

Notice the difference in these two cycles? Yes, the operating profits came in lower than the previous peak. (much like in technical analysis when you see lower highs if that make sense)

 

Now, for the rest of this article, there is only one question on everyone lips. Is there value on Molins shares and can I trade it? (Sorry, that was two questions)

 

MOLINS MAIN CONTENT

 

Business Operations

Molins has two divisions; one is tobacco-making machinery. The other is packaging machinery for the pharma, beverages, nutrition and healthcare sectors.

The packaging machinery is the bigger division with 52% of total sales but employs less staff. Last year this division accounted for 59% of sales and contributed £3.9m in profits. Now, it is making a loss.

 

REVENUE HASN’T CAUGHT UP WITH STAFF COSTS

Despite, Molins cutting staff numbers, the costs per employee has risen from £24k to £37k, a 55% increase, which is perfectly fine. But, the problems lie in the productivity per staff, that went from £94k to £120.5k, a 24% increase.

P.S. Data from 2000 to 2015.

It is imperative for staff salaries to go up to keep talent, but this must be supported by sales. Although Molins saw staff costs decline, it is less than sales. Meaning staff costs ARE becoming a bigger expense component.

 

 

MOLINS PENSION ADVANTAGE

One saving grace is Molins pension situation with the latest number of net pension asset of £10.6m. We don’t know 2016’s results until the annual report comes out, but 2017 should be a good year for company’s pensions.

Why?

Because the UK 10-year bonds rates have risen meaning the pension assets are paying more in interest. Secondly, MOLINS doesn’t have to invest more in assets or pay out from current operations.

In 2015, MOLINS pension assets totalled £361.8m, while liabilities stand at £357.8m.

 

IS MOLINS AGING ASSETS A CONCERN?

 

GRAPH 2

MOLINS PLC CAPEX SPENDING

In the past, Molins would spend money to maintain and replace its assets. It’s over a decade that Molins has spent big. That is causing the company’s assets age to get old. At the same time, more of its assets are in the average age bracket. That is 14 years and is a record for the company. As the title of the graph shows, do we expect significant capex spending in the future? Probably, yes.

Because if it doesn’t, then the competition would take advantage and steal Molins business.

How much will Molins spend?

That’s the million-pound question. But, since the financial crisis in 2009, Molins average capital expenditure is £4m. Whereas, average depreciation is £3.1m. The last time it spends big was 2003 (£13.6m). Taking into account a smaller Molins and don’t be surprised if the company spend £10m in capex.    

 

 

MOLINS RATIO METRICS

TABLE 1

 MOLINS RATIOS METRICS TABLE

(P.S. When the word “average” is used, it represents 16 years of historical data.)

Not your ideal table, but it has a variety of everything. Starting with Molins probability ratios are negative because of losses incurred. Looking at the historical average, Molins return on equity averages 1.27%!

On the issue of debt, Molins manages to shrink it in proportion to its business. Currently, net debt is £1m.

On Molins cash flow, it generates more in cash earnings than it does in accounting earnings. The historical average for cash earnings is £6m (2016: £6.2m), compared with net earnings of £2m (2016: £0.6m loss). The market has ignored cash flow by valuing it under two times. The historical average is four to six times.

 

Sticking with cash, Molins cash earnings is yielding 54.8%, compared with an average of 28%. Cash alone covers 32% on short-term obligations. So, a liquidity issue is unlikely. When it comes to assets, sales and equity, the market is undervaluing it by 50% to 60%. Maybe they expect further reduction in sales, which cause further impairment charges on the assets. Then, the equity value declines.

 

No one metric should be used to value Molins, and with 14 metrics the company has an undervaluation of 9% to current share price.

 

MOLINS Technical Chart

Molins share price chart

If you can see this screenshot, you can see both the RSI and MACD are at the wrong side. Meaning any share price rally is weak. As soon as the RSI crosses 50 and MACD cross above zero, Molins shares will take off. (See 2011 to 2014)  

 

FINAL THOUGHTS

Molins is a maturing business and has been for more than a decade. This means earnings are volatile (from profits to losses and back).

But, with the company’s shares trading at a low valuation.

The chances of it rising is higher than the expectation of a decline. (I give it 60% chance of rising) That is because a trading update from last year suggested the order books been pushed forward in 2017. This would boost revenue and profits.

Secondly, pay attention to the RSI and MACD on Molins monthly chart. Because a rise above 50 and zero, could mean a share price rally.

Third, the pension assets will turn positive due to higher 10-year UK gilts (known as bonds).

What about the drawbacks?

Molins need to spend money on capex because assets are becoming old. (I predict £10m) And two, this would lead to a dividend cut.

Share price forecast

Over the 18 months’ period, Molins could average 80 pence/share (could peak at £1-£1.20/share). On the downside, you shouldn’t rule out Molins shares dropping to 40 pence per share or lower. It could represent a good buying opportunity. (Unless management says the order book is collapsing and so forth)

Remember I give it a 60% probability of the share price rising!

 

Call to Action

What do you think of my analysis of Molins?

-Is the business going bust?

-Are the shares too cheap?

-Will Molins spent big on capex?

Please comment below, I would love to hear your thoughts.

Thanks

 

Disclosure

The opinions are expressed independently by the writer. It is for entertainment and research purposes and not taken as investment advice. Data is correct on available information at the time.

Finally, the writer does not own the company’s stock, unless stated otherwise.