Billington Holdings – One last tangible asset play

(billington-holdings.plc.uk)

I bought Billington back in November at 85 pence but haven’t got round to analysing in writing yet, so I thought I’d nail this one before moving on to my recent turnaround purchases. 

I liked this company because of its strong balance sheet, low price to book and price to earnings ratios, but in this review I’ll look at it from a defensive Ben Graham view, with some Buffett-like projections thrown in.

Starting with the company as at now:

Large companies can be more consistent in their results and more robust in the face of hardship, but not always.  Billington is an AIM listed micro-cap (~£12M), so it is not large in any sense.

Yes, they have net cash.

Profit, free cash and dividends are all good signs of a healthy company.  For Billington the answer is yes, no and no.  Free cash does seem to be a slight problem with Billington, with three in eleven years having no free cash and in fact negative cash flows in total.  This may be a consequence of heavy capital expenditure requirements.

Looking back into the company’s past:

Increasing earnings, at least in line with inflation over the long term, is a minimum requirement for a Ben Graham defensive company.  For Billington it seems that the answer is sadly no.  EPS has been quite volatile with positive and negative results, but no clear upward trend.  Turnover is down by about 50%, book value per share is slightly lower and dividends have only been paid in seven of eleven years with the most recent one cut drastically.

Again no; dividends, free cash and earnings have all been negative in multiple years.

It is usually in double digits in the 20-40% range, but it has been negative and in single digits in a few years.

Again it’s quite lumpy.  The good times were 2004-2008, which is what you’d expect for a company in the building business.

Since 1999 Billington has retained 64.35p per share of its basic earnings.  In that time there has been no clear increase in EPS or in the book value of the company, so it could be argued that no real return has been produced from those retained earnings, which is not brilliant.

Billington isn’t really suitable to long term projections as its earnings are so variable.  However, the average earnings per share over the last decade are 19 pence and at the average price earnings ratio of 6.1 that gives a price of 116 pence, which isn’t far above where we are now. 

Taking it a step further, if I say next year their earnings normalise from the current 8p back to 19p (which isn’t hard to believe since the 2009 earnings were 33p) and then grow at the historic average of 6% (although that 6% isn’t smooth by any means as the earnings jump all over the place), then the earnings might be 25p in five years, giving a share price of 155p, which plus dividends paid out at the historic average cover of 3.2 gives a total return of 124%.  Do the same math over 10 years and you get 240%.  A 100% return in 5 years is about 15% annualised which is right on target.

Billington does not have a durable competitive advantage so the projections are no more than a guess that at some point in the next few years the earnings will be about average as will the price to earnings ratio.

This company scores pretty badly on this kind of analysis, which is fair enough given that I bought it under different criteria; but I’m getting interested in this kind of work, of looking for good companies rather than just cheap ones, so I need the practice.  In fact I really need the practice when you see some of the other things I’ve bought lately.

For Billington my conclusion is that it’s a hold, since I think it’s a fair bet that the return on an 85p purchase price could be over 100% within 5 years.  Now the trick is to be patient enough to hold it for that long.