Swallowfield House, Station Road, Wellington, Somerset, TA21 8NL
My Swallowfield shares have trod water over the last two years so let’s see what is going on.
Swallowfield manufacture cosmetics and aerosols to brands and supermarket own labels. They have manufacturing plants in the UK and the Czech Republic and sell their products in in UK, continental Europe and some other parts of the world.
This industry has not been very badly affected by the international financial problems, but Swallowfield is susceptible to increasing raw material costs, particularly Aluminium and Oil.
This looks like a fairly good, if rather unexciting set of results. revenue is up somewhat across all regions, while wages increased by only £223K. Other cost of sales increased by nearly £5M to £35.9M. I am not sure what these costs are exactly but they have pretty much wiped out the increase of income to make Gross profit close to that of last year, at £6.8M. Looking at other costs, we see that there was £100K paid out for a special GM. The purpose of this was to vote on and depose the existing Chairwoman (more of this rather sordid episode later on). Foreign exchange changes swung to be slightly beneficial for the group operations. Finally, here we see £5.2M in other admin costs. Again, I’m not too sure what they relate to but they remained fairly constant.
There aren’t any other major gains or costs here, the headline figure of £1.2M for the total income is a respectable £300K over the figure last year.
EPS and P/E Ratio
Something linked with the income statement and the performance of the company is the Earnings Per Share (EPS). This can be a good way of comparing performance on a like for like basis, taking into account acquisitions etc . Related to this is the P/E Ratio. This is calculated by dividing the share value by the EPS, thereby giving an indication of how much the market is willing to pay for the earnings. Apparently a value of 15-20 is about average, and one lower than this can indicate that a stock is undervalued or that the market does not expect future earnings to improve. The figures for Swallowfield are below:
| EPS | 2011 | 2010 | |
| PROFIT AFTER TAX | 1,082,000 | 161,000 | 921,000 |
| NUMBER OF SHARES | 11,306,416 | 15,616 | 11,290,800 |
| EPS | 9.6 | 8.2 | |
| SP | 110.0 | -13 | 123.0 |
| P/E | 11.5 | -4 | 15.1 |
Taking the share price for today, the P/E is 12.3 which is fairly undemanding.
Now to look at the Balance Sheet:
So, again this looks fairly good – with only the cost of software licences as an intangible and no Goodwill to get in the way, we see that net tangible assets are up slightly to £13.3M, and net debt is only £4.3M so there is a respectable gearing of 38%. Also, in the asset segment we see an increase in Trade Receivables which either suggests more customer orders or a lengthening of customer credit terms. I suspect the former, given increases in revenues. In fact, out of those trade receivables, only £707K is overdue, and out of that only £2K is over 90 days old, so they are doing quite a good job of keeping on top of customer payments. The £167K of property for sale relates to a warehouse in North Devon that the group is trying to offload. The group expect to be able to sell it this year. Also, cash(my favourite asset) has doubled to £1.2M. Looking at liabilities, we see that Trade payables increased by £1.5M but bank loans have reduced considerably. On this list the new secured debt facility of £4.9M is listed under “other payables” for some reason, this caused net debt to increase slightly over last year. Finally, I think that the pension liability of £2.4M is quite large for a company of this size, so hopefully an eye is being kept on this.
Next, I will look at the cash flow, which is another important indicator of the health of a company. No company will survive long term with a negative cash flow.
So, much like a lot of the other indicators, the cashflow statement seems rather subdued. We see that overall cash has increased by £2.5M over the year, but this is accounted for by the £4.9M new debt facility, which we saw earlier on the liability statement. Both trade receivables and payables are up, showing an increase in trade levels and quite a substantial (relatively) purchase of property plant and equipment also suggests an increase in production levels. The £98K purchase of financial assets relates to an increase in a stake in the Chinese associate SCCTC, which the company now owns 19% of.
Finally I will have a quick look at the shareholder make up
Largest Shareholders
Peter Gyllenhammar 29.6%
Western Selection 16.5%
R&A Persey 9.2%
J&L Wardell 6.7%
AP & TM Dowsett 3.5%
MA Wardell 3.2%
The shareholders here have a very direct bearing on Swallowfield. Peter Gyllenhammer is a Swedish “activist” investor who invests in companies which he considers undervalued or badly run and instigates changes. He tends to want to have a representative on the board to represent his interests (Stephen Boyd has been appointed for this role) and has so far managed to oust the Chairwoman. The performance of Swallowfield was not actually that bad and I think the company has been involved in this rather than expending its efforts elsewhere to increase performance. Western Selection is an investment company that also has links to Gyllenhammer. I am not sure who the other individuals are but I believe they are ex-directors. Overall a lot of the equity is tied up between these shareholders.
So, what have we learned about Swallowfield? Profit is fairly flat (and has been pretty much for the last 5 years), net debt is up slightly and there is a slightly negative cash flow (taking out the new debt facilities) and a large shareholder making trouble so this is a company going nowhere fast at the moment. Conversely there is a very attractive dividend yield to be had here but the board has suggested they will strengthen the 1.5 times cover in future to allow for more investment and less debt and there is nothing in the results to suggest any nasty problems in the short term future.
One issue that may be of concern is that Swallowfield relies heavily on two customers which between them account for 46% of revenues. If there were any problems with these clients then clearly Swallowfield would be in a spot of bother.
The group is not especially exposed to exchange rate changes – about 14% of revenues are invoiced in Euros and 6% in USD. Conversely most of the raw materials are purchased in USD so I’m not sure whether GBP weakness or strength would be favourable.
Trading conditions have been described as tough in developed countries but more robust in developing markets. The products that Swallowfield make are relatively inexpensive luxury items or everyday consumer products so they are not expecting sales to be adversely effected by changes in consumer confidence. The bigger risk is other round of customer destocking and consolidation. Also, the increasing oil and aluminium costs have been hard to pass on to customers so margins are being squeezed.
The board have stated that the NY sales office has achieved its first new business sale (about time), the first shipments have been made to South Africa (more opportunities there are being evaluated) and the group is looking to enter the South American market through Colombia so there are plans for more international sales.
Overall then, the shares are moderately valued at a P/E ratio of 12.3 and there is a dividend yield of over 9%. Earnings are starting to pick up slowly but there is not yet any indication of cash generation and I suspect the yield will be cut to allow for more investment. There is value to be had here, I think but so far I would rate this share as a HOLD, with a view to perhaps buy should there be more evidence of progress.
On the 12th Jan 2012, Swallowfield announced that Stephen Boyd had been promoted to the position of chairman and Martin Hagan had been demoted to senior independent director. At the same time, Roger McDowell has been forced to resign, angering Western Development who suggested him in the first place. This sideshow is now becoming the main show for this company as the current board try to resist the will of the largest two shareholders. This must be taking time away from other duties and I am wondering if it would be prudent to sell these shares before this drags on any further.