Those investors who are searching out “defensive” companies in current economic climate will likely overlook a small business intimately involved with the UK commercial construction industry. However, one such company deserves attention. Wiltshire-based Latchways (LTC) is capitalised at £64m and is by definition a tiny set up. The company’s size and its partial reliance on clients among the construction companies do not deter the management from growing revenues and staying debt-free. Achievements such as these would qualify as fairly mighty in the year 2009.
Latchways call itself a world leader in design, manufacture and supply of fall protection systems. These are designed for individuals working at height. The systems are used to secure worker safety on applications such as roof-tops, industrial plants, aircraft wings, electricity transmission towers and even wind power turbines. Having developed a wide geographical market for itself Latchways now supply its products to customers in the UK, Europe and North America. The systems are sold direct as well as via trained installers.
The company declares on its web site that it has been in business since 1974; considering the company’s current capitalisation the growth has obviously not been spectacular. In financial ’09 Latchways clocked up just under £37m in revenue. The yearly growth in revenue over the last five years has been 11%. For a company this size, annual growth of 11% seems somewhat pedestrian. Nevertheless, the company has grown revenues in each year since 2002.
Latchways have a solid net income margin floating between 15-17%, well in excess of 7% industry average. This allows for strong cash generation. The management does not fail to remind you of the fact more than once in the company’s books. Although the margin is clearly enviable the actual income has slipped somewhat on financial ’08. The reasons: higher administrative expenses resulting from investments in sales personnel as well as an exceptional charge of £519k attributable to losses on foreign exchange contracts. Net income per share has therefore come in at 51.47 pence, a reduction of 5.6% on previous financial period.
Moving over to balance sheet a large increase in goodwill catches attention, from £2.6m in ’08 to £4.3m in ‘09. This increase comes from a recent acquisition. The acquired company is a Slovenia-based Sigma 6 taken over by Latchways in April ’08 for EUR1.6m. Sigma makes guardrail systems; these are complimentary to Latchway’s fall protection systems. The acquisition may well prove a successful one over the longer term; the Latchway’s management has been able to squeeze out EUR1.8m in revenues this year from its acquisition, a great effort, considering Sigma had EUR300k in revenues when Latchway’s did the original buy out deal.
Because of Sigma’s acquisition the cash balance at end of financial ’09 is flat on previous year, at £4.8m. The cash balance covers all of current liabilities rendering the company highly liquid. Latchways have zero debt; the company’s Return on Equity is therefore its Return on Capital and equals 27.7% (adjusted for reported exceptional charge). With return on capital at almost double the industry average this is the company that really does generate plenty of excess returns.
With cash from operations at £5.3m for financial ’09 (£4.6m in financial ’08) and very modest re-investment needs Latchways can afford to pay dividends. This is precisely what the management did in financial ’09; the dividends paid out by the company to its share-holders were 89% of its Free Cash Flow to Equity, a comparatively high payout ratio. The total dividend for the year was almost £2.5m or 22 pence a share yielding just over 4%.
Pondering over all of the above the risks are not so obvious. The revenue is slowly increasing, the margins are healthy and are being maintained, the cash is at comfortable level, there is no leverage, the returns on capital and liquidity are at very acceptable levels, cash generation is strong and the dividend seems sustainable. However, there is a flaw which can ruin profitability. This flaw is the company’s dependence on the world steel prices for the manufacture of its gear. And this is something that is unpredictable at best. But then again, you are not likely to be assessing Latchways in absolute terms, but rather in comparison to competition, which will also likely have a similar dependence. Unless some-one, possibly even Latchways themselves, will not invent or use existing industrial-strength material to do away with steel in its systems. I will leave the odds of this one to you to figure out.
If you are a long term investor this company must be worthy of your consideration.
Alec Hajinoff is a full time investor, freelance writer and operates www.onlyprofitable.co.uk