Metalrax joins the Thrifty 30

Metalrax’s 2010 annual report is out and I can finally decide whether to add this company to the Thrifty 30. Since this is my fifth post I’m sure most readers will be relieved. If you need a recap, start with my previous post and work backwards!

My decision hinged on filling in the blanks in the chart on the right.

It’s not as conclusive as I’d hoped. Borrowings are down by £4.9m, but operating lease commitments are up by £2.5m, so in absolute terms half of the debt repayment came from financial engineering, which I described last week as shifting from one kind of debt to another. The situation looks worse if we scale what I have called significant liabilities against total assets because the company shrank slightly and its pension obligation grew very slightly, so overall the company is only 1% less leveraged (by this measure).

Nevertheless I’m going to give Metalrax the benefit of the doubt. As I said last week I like its prosaic engineering businesses, its straight talking chief executive and the focus on repaying debt through profitable sales growth. I even like the share price although it has tripled since last September when three directors including the chief executive each bought over 2m shares. The price is higher, but the recovery is better established now Metalrax is paying off debt and profitable again.

Metalrax claims with plenty of justification to be moving from survival mode to growth but there are a few more steps it needs to take before recovery is complete. It must improve profit margins, pay off more debt (preferably not by resorting to lease-backs), and reinstate the dividend. If it does, the Thrifty 30 should be in the money.

I added Metalrax at 11.9p, the actual price quoted by a broker this morning, investing one thirtieth of the virtual portfolio and deducting fees and stamp duty.