Holders Technology in 2 minutes 8 seconds

Up for the challenge

Holders Technology sees the current year as “one of both significant challenge and great opportunity”, a fair assessment considering the stress on the distributor’s finances as it repositions itself in a growth market.

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The source of Solid State’s success

Expertise lends distributor competitive advantage

Last week’s examination of Solid State’s business performance since 2005 bolstered its credentials as a growth stock. The distributor of specialist electronic components, battery packs and rugged computers has grown profit margins while keeping leverage level. The result: shareholder wealth compounding at 13% a year.

The doubling of its share price since it’s been in the Thrifty 30 portfolio has extinguished its value credentials though. Its earnings yield is about 7.5%, significantly less than the 10% I usually require for a new investment. Since I’m a value investor, not a growth investor, the loss of value caused by the increasing cost of the shares, is more worrying than the validation of its growth credentials.

Of course Solid State may well continue to grow, and if it does, the company will be worth more. I’d prefer to take the money and put it in another company, though, one that doesn’t need to grow to justify its inclusion in the portfolio.

By keeping my expectations so low, it makes it easier for companies to meet them.

But before I decide to keep Solid Sate, or eject it from the Thrifty 30, a short homage.

It’s in a competitive business, distributing IT, and it’s profiting, something that fellow Thrifty 30 member Northamber, also a distributor, finds it very hard to achieve. Perhaps there are lessons in Solid State’s success for other companies in competitive businesses, during hard economic times.

Unlike Northamber, which sells computers and peripherals to small businesses, Solid State, has invested, restructuring and relocating its businesses, and acquiring new, specialised businesses.
Solid State has a much deeper capability to customise, design and manufacture products according to the bespoke needs of its customers, which are typically complex, because its computers, batteries and components are used in harsh industrial environments.

The company’s technical know-how probably gives it a competitive advantage that makes customers and suppliers want to do business with it, and allows it to charge a premium. Time will tell, but it could be a micro-hidden champion.

Solid State has evolved since its flotation on the Alternative Investment Market in 1996  from component distributor to niche ‘value-added’ distributor and manufacturer and there may be parallels with recent developments at Holders Technology and its shift into lighting. For decades Holders has distributed components for Printed Circuit Boards to manufacturers but during the credit crunch it used its knowledge of Light Emitting Diodes (one of the industries its PCB business serves) to acquire a small distributor and enter what might become a more lucrative business. Holders is also serving the portfolio very well.

There are parallels with XP Power too, a distributor that turned itself into a manufacturer of power supplies and has enjoyed a tremendous run on the stock market. XP Power had the briefest of sojourns in the Thrifty 30, but it may well be the portfolios best ever investment on an annualised basis.

These situations present me with a huge dilemma. As a value investor I seek out stable businesses, whose past records are likely to be indicative of their future performance. Change is risky. Yet change is sometimes needed if a company is to get out of the mire that has driven its share price so low.

Sometimes I find myself in the apparently ludicrous position of assuming no growth, which is the implication of using the earnings yield or price earnings ratio as a rigid yardstick, and at the same time expecting that something will happen to enable the company to grow, because that’s where the really big returns will come from.

In fact, the no-growth assumption is protection. I’m saying I don’t know if the company is going to grow or not and therefore, because the return on investment is inversely linked to the price you pay, it makes no sense to pay a price that assumes a company will grow.

And so I come to the bittersweet moment, sad but triumphant, when Solid State leaves the portfolio.

Solid State’s price is just touching the all time highs it reached in 2000, the shares cost the portfolio £999.75 and after two years I sold them for £2,281.25 after costs. Along the way Solid State paid the portfolio an additional £175.50 in dividends. All these amounts are notional, as the Thrifty 30 is a model portfolio.

Holding Holders (again)

When I originally discovered Holders Technology (HDT) I said it was a buy and sell company, not a buy and hold. Since then I’ve done a pretty good job of holding it.

Even last week, when I looked at its annual report (for the year ending November 2010) and subsequent updates, I felt like I was preparing to remove it from the portfolio.

But here I am, resolving to hold it in the Thrifty 30 for another year, despite the fact that the shares have risen strongly and it’s no longer the clear-cut bargain it was.

Since the market values the company about the same as its net working capital (current assets minus all liabilities) it’s no longer unambiguously cheap in comparison to the value of what it owns. To stay invested in Holders I need to be confident it’s cheap in comparison to what it might earn from what it owns.

Having plucked the numbers from Holders’ annual reports going back as far as 2003, calculated the company’s average profitability over that period, and derived its earnings yield, I reckon the shares are still cheap. Assuming no growth, the return investors might reasonably expect in terms of profit in a typical year at the current share price is 11%.

Despite its tiny size, and neglected status, the distributor of printed circuit board (PCB) materials has been a reasonably profitable company (green lines) that has steadily and totally unspectacularly grown shareholder wealth (orange bars).

Holders made a loss in 2009 during the depths of a recession, but that is hardly surprising for supplier of commodities that end up in stuff lots of people stopped buying (German cars in particular). It made a cash loss in 2010, which might also be expected, as it spent money swelling its inventory as the PCB business recovered and it reinvigorated the newly acquired Light Emitting Diode (LED) business.

The expectation of losses, and perhaps the shortsightedness of investors who cannot see beyond the last piece of news they hear about a company, are what gave me the opportunity to add the shares so cheaply in the first place. I’m not about to get rid of them now I know that all Holders has to do to make the portfolio 11% a year is perform about as well as it has over the past eight years.

That’s not to say I’m as confident as I was in 2009. Then Holders was cheap by the most exacting of standards. Now its value is open to conjecture.

There are two ways of looking at recent developments.

The pessimistic view is that its diversification into LEDs is risky. Holders bought loss-making JK Components and must now invest in the business, which of course it is less familiar with than PCBs.

The optimistic view is Holders is still under the same conservative management it has been since it was founded and Executive Chairman Rudi Weinreich (standing in picture) is not about to gamble his company (he owns 45%) on a speculative venture. LED lighting systems use the PCBs Holders supplies so the company is not expanding into a completely new market, and it made its move in the midst of a recession when it was likely to have got a very favourable price (£1 in fact, plus deferred consideration based on JK’s profit over the following three years).

But I think the company is worth investing in even if the growth its expecting doesn’t materialise. If it does that’s a bonus, and The Thrifty 30 will get more than the 11% per annum I’m anticipating.

If the LED business never makes a profit, then I’ve underestimated Weinreich and his new managing director Victoria Blaisdell.

That’s a risk I’m going to take.

Holders lights up T30

Holders Technology (HDT) was one of the inaugural members of the Thrifty 30, and my interest in the company goes back to April 2009 when I noticed it was in classic Ben Graham territory. Then, at 64p, the shares cost less than half Holders’ current assets minus all its liabilities, a rough and ready calculation of its liquidation value. Adding the company to the portfolio was a no-brainer as it didn’t seem likely we’d find out its true liquidation value. It had a long history of profitability and owed nothing.

At the last portfolio valuation the shares cost £1.22, 75% higher then the price of the shares when I added them in September 2009. Holders Technology has served the Thrifty 30 well, a fact that mustn’t cloud my judgement as I look at it for a third time.

Holders supplies materials used to manufacture the printed circuit boards that become components in mobile phone transmitters and antennae and pacemakers, for example. It diversified in December 2009 when it bought JK Components, now Holders Components, a distributor of light emitting diodes. Since then it’s established Opteon, which markets finished lights.

My limited knowledge of LEDs gained studying lighting company FW Thorpe and LED manufacturer Dialight suggests they might be a growth market. With much of the world still in recession in January 2010, Holders may have stepped into it when it could acquire businesses at their cheapest, and the LED business seems to compliment Holders’ PCB business. Holders Components uses Holders Technology’s plants in India and China to put together sub-assemblies for lighting products.

The 2010 annual report reveals the two businesses compliment each other in another way. Holders had already been sourcing and distributing the materials required for the circuits that power LEDs so its decision to enter the market for the LEDs themselves was presumably based on the demand Holders had experienced. At least Holders moved into a market it new something about.

I like Holders’ ‘softly softly’ strategy as articulated by its finance director:

The board is committed to enhancing shareholder value over the medium to long term, whilst maintaining a conservative financial framework. Where an opportunity to increase market share or to lower operating costs is identified, this is addressed within the bounds of internally generated cash flow and bank facilities.

And although the company didn’t make a profit from LEDs in 2010 (it made a tiny loss) it did return to profit overall as its PCB business in Germany, which supplies motor vehicle manufacturers, recovered strongly from the recession.

Holders’ F_Score of five out of nine, though, betrays a more mixed year than the headlines suggest. While it made an accounting profit, it made a cash loss. Cash flowed out of the business as it bought more inventory. This, I think, is to be expected as it responds to greater demand for PCBs, demand that is persisting according to founder, chairman, chief executive and major shareholder Rudi Weinreich at April’s AGM:

The current year is performing in line with our expectations. The PCB part of our business is benefiting from strong trading on the part of our customers, particularly in Europe. The LED activities, whilst still in their development phase, are showing encouraging growth in turnover.

All being well Holders should be able to convert its swollen inventories into cash profit, and develop a profitable business in LEDs. However I don’t like investments that depend on events working out as the company, or I, expect, because they don’t always.

If I eject Holders from the portfolio, it will be as a proud graduate. I bought the company because it was cheap by the most exacting of benchmarks. Now the market, at least, says the company is worth as much as its liquid assets so it’s no longer a bargain by that measure.

It must justify its place in the portfolio on the basis of how much it might earn. And as always to establish that I need to look back over the past ten years.

Holding on to Holders

When I looked at Holders Technologies’ 2008 annual report a year ago, I said:

Although Holders was profitable, in both cash and accounting terms, in 2008, the global economy was relatively strong at the beginning of the year. For all we know 2009 could be worse, perhaps grim throughout.

Actually, 2009 was grim, although Holders’ markets, it supplies materials used to manufacture printed circuit boards, stabilised in the second half of the year, which ended on 30 November 2009.

So, when I included the company in the inaugural six members of Thrifty 30 portfolio in September last year, it was with my eyes wide open, and more firmly fixed on the company’s balance sheet than its profit and loss account.

Chairman, chief executive and owner of 47% of the shares R W Weinreich had made no promises about profits, but he did say the company would end the year financially strong.

I backed Holders because the shares were eye wateringly cheap, yet it could survive a grim year, or two, and probably emerge profitable again, as it has done through the economic cycles of its 36 year history.

Now that the company has published its report and accounts for 2009, it’s time to check the investment case.

Here’s Holders’ ten year chart:

You can see that it made a loss (blue line), its second of the decade, but you can also see that Mr Weinreich has been true to his word and prudently squirreled away profit in the good times, increasing shareholders’ equity (see bar chart below), and the ratio of shareholders’ equity to total assets (red line).

The line chart measures % change since 2000, when Holders was a beneficiary of the technology boom, so although its profit record since looks poor, that’s relative to an atypical year.

Holders is a tiny company, and in absolute terms it made a tiny loss of £399,000, £176,000 of which was one-off restructuring costs, on turnover of nearly £13m. In cash terms, it was profitable.

At the end of the financial year, the company had no debt, £2m in cash, and it was 80% funded by shareholders’ equity. Liabilities, therefore, almost entirely trade payables, only funded 20% of total assets.

Holders Technology supplies materials used to make printed circuit boards that end up as components in mobile phone transmitters and antennae, auto electronics and satellite navigation systems, hearing aids pacemakers, military computers and instrumentation.

So far the company’s shares have risen, probably helped by the buying of the mysterious Mrs Andre Marcou who owns nearly 10% of the company now, and largely defies my attempts to find out more about her on Google.

Including dividends, The Thrifty 30 has made about 40% on its shareholding, but although I said last year these are shares to buy and sell, rather than buy and hold, I aim to keep them in the Thrifty 30 a while longer.

The £1m acquisition of J K Components in January, complicates things a bit, but the shares look cheap, costing just 78% of pre-acquisition net current assets (current assets minus all the company’s liabilities).

JKC is a loss-making distributor of light emitting diodes, so Holders’ is broadening its product range. Although this may belie a lack of opportunity in its existing PCB business, the best time to diversify is surely when the market is depressed and the price is low.

Although Holders has routinely threatened to make acquisitions, the last time it did was during the dot.com meltdown, when it bought assets of bankrupt Climatec, now its German subsidiary, Screen Circuit, a Dutch company that failed to live up to expectations, and increased its holding in Hong-Kong based Topgrow Technologies to 60%.

Hopefully Holders, which shows every sign of being a conservative company, spies an opportunity.

Thrifty 30 updates

The current Thrifty 30 portfolio

Games Workshop provides the tersest of updates.

I’m a bit disappointed to see no recovery in the US for Haynes, its biggest market.