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Dewhurst Non-Voting LON:DWHA

DWHA is a manufacturer of electrical components and control equipment for industrial and commercial capital goods and maints its position as a specialist supplier of lift equipments to the industry. The company is HQ’ed in the UK but operates globablly in the US, Austrailia, Europe and Asia. The current market cap is around £25m. I am analysing the non-voting ordinary (“A” shares) which are pari passu with the voting shares.

Asset value: The most interesting facet of DWHA’s assets is the PPE. In the last annual report this was valued, net of depreciation as £4.6m. However, looking through the disclosure the property was last valued in 1977 (they started there in 1921) and this seems to be the amount taken onto the book. There is some arcane details surrounding the combination of IFRS and UK GAAP however, there is also the note “The directors believe that the market value of the property is in excess of the “deemed” cost. This is perhaps made more interesting as DWHA is moving into new premisis and so planning to dispose of the old property. There is some mention of obselete stock however, it appears this has been disposed effectively. I believe though that the property represents some untapped value that will be realized in late 2011.

Earnings Value: Net income was about £3.5m in FY10, FCF (defined Operating cash flow – Maintanence Capex) was £4.2m and EBITDA was £5.5m. The current valuation at 7.6x earnings and 6.2x FCF is pretty reasonable offering yields of 13% and 16%.

With a discount rate of 10% and 12% with no growth these earnings are worth about 501p and 417p. This technique is one I sometimes use however; this is usually only as a starting point as I tend to intuitively feel that the valuations are a bit excessive.

More informative is a 3yr DCF. Using a 2% growth rate (less than half the forecast growth and declining yearly) we get a valuation of 348p with a 7x multiple at the terminal period. The problem here is that terminal value is responsible for most of the value and this is highly sensitive to the multiple used.

Either way, we are starting to get an idea of the valuation somewhere above the market price. In terms of the sustainability of earnings, we could argue that FY10’s operating margins were slightly wider than trend. Indeed, if margins were around the average of 14% EBITDA would have been closer to £5m and net income would have been around £3.3m, lowering EPS by about 2p. There is also perhaps a similar finding in terms of operating asset turnover however; we find that this didn’t come from an improvement in working capital turnover. Efficiency in WC actually fell as a result of a fall in trade payables. Instead, the improvement in operating asset turnover seems to have largely come from an improvement in revenues. So there are definetly some concerns over the sustainability of earnings however, these aren’t serious and the earnings record (helpfully back to the early 90s) is fairly stable.

DWHA is clearly undervalued. Inverting the process slightly I would say that DWHA would start to look overvalued around 400p however, even then I would say you would be getting a quality company for a low value.

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