Here’s the latest Pittards (LSE: PTD) balance sheet from their final results up to 31 December 2014 published on 23 March 2015:
With net tangible assets of £18,121,000 and 14,104,000 shares in issue net tangible asset value per share comes out at 128p.
Pittards’ shares closed today at 128p.
Downing LLP recently increased their stake in Pittards to a massive 16% for it’s PFS Downing UK Micro-Cap Growth Fund and obviously see value in the leather manufacturer.
What is not reflected on the balance sheet is that Pittards as a business started in 1826 and has throughout it’s history been characterised by innovation and just plain smart decision making.
For example, the acquisition in December 2009 of Ethopian’s largest tannery was smart because not only is Ethiopia a low cost producing nation, the tannery itself had already been operated by Pittards since August 2005 during which time production quality, efficiencies and methods were significantly enhanced.
This acquisition allowed Pittards to transfer production from their UK site to Ethiopia freeing up additional resource in the UK for more technologically advanced, higher value added goods.
This at a time when a prohibitively high tariff of 150% on the export of crust (unfinished) leather goods was introduced by the Ethiopian government threatening to scupper the reasons for the tannery acquisition in the first place.
The the major contributor to squeezed margins over the years has been the high price of raw materials:
A disappointing profit of £0.9m (2011: £3.1m) was achieved before restructuring costs. There was a significant global increase in hide and skin prices over the previous year, including Ethiopian sheepskins as highlighted in our interim statement, and this adversely impacted gross margins. Prices did however progressively ease back in the second half which therefore yielded an improved performance compared to the first half.
CEO Stephen Boyd has also stated that due to the high level of dollar denominated export sales a weak dollar can adversely impact turnover (72% of the Group’s revenue in 2014 is in US dollars):
The second half of 2014 was significantly more profitable than the first half leading to a full year result in line with expectations. Sterling strength, principally against the dollar in which a significant proportion of our sales are invoiced, was a major issue for the business until July when it peaked and then rapidly moved back to more acceptable levels.
From the notes to the accounts, management state that up to a 10% increase in pounds sterling against the US dollar is considered to be ‘reasonable’.
Pittards is a commodity business susceptible to currency fluctuations and the price of raw materials.
But what is Pittards intrinsic value?
Stating the obvious, Pittards is an established profit making business in the leather goods trade.
The fact that Pittards has made such a strategic investment in Ethiopia and continues to add new lines for export as the workforce becomes more skilled at finished goods means that it will add value to the business over time by simply being able to be a low cost producer of high quality finished leather goods.
Handily towards the end of the 2014 annual report, Pittards provide a five year review reproduced below:
The average of five years’ earnings comes out at 22.94p used to calculate PE ratio of 5.49 as opposed to a PE from the last twelve months earnings of 10.44. In both instances the shares are cheap.
In terms of earnings and their correlation with currency fluctuations the price of USDGBP has virtually gone sideways over the last five years although as stated in the annual report the peak in July 2014 was a turning point both for sterling strength and Pittards’ profitability:
Courtesy of Yahoo! Finance
Whichever way you look at it earnings certainly are at the lower end of the past five year record. One wonders what would have happened and what could happen in the future if sterling has continued to gain strength against the dollar but such thoughts are mere speculation.
What is nice is that earnings have been positive and seem to have stabilised over the previous two years and the investment in Ethiopia should strengthen and enhance earnings going forward.
And this is exactly where the value of Pittards is to be found: in it’s ability to remain a low cost producer whilst successfully navigating a the vagaries of the GBPUSD and the price of raw goods through it’s acquisition.
The thing is as Pittards goes to work on all this it will inevitably increase the value of the balance sheet slowly over time and if it can do so whilst showing an improvement on earnings without loading up on debt then at today’s price Pittards is simply undervalued.
An optimum entry price would be at recent lows around 100p which would give you a 23% margin of safety from tangible book, not bad for well run and profitable business.