It’s time I got back to the task of building up my portfolio of small-cap, low debt, deep value investments. This week the target is Promethean World, a company which makes interactive and collaborative technologies for education and business; think of white boards that you can write on and then move around what you’ve just written by touch. If you’re a bit of a technical luddite like me then click on this link and watch the video (click the orange button labelled ‘video’).
I think my jaw literally dropped when I say those kids moving things around on screen and drawing objects which then become movable. Amazing. When I was in school the interaction was mostly between a piece of chalk and a blackboard.
Some background
The company started life in 1997, selling software for meetings and presentations. Over time it moved into hardware and in 2005 Graham Howe (ex co-founding director of Orange) became chairman. It now operates globally and has a market cap of over £100 million, although this is down somewhat from the £200 million plus after the IPO back in 2010.
The good, the bad and the intangible
As always I’m following a checklist approach to investing, this time using my 21st century net-net checklist.
The first check is for net cash, in other words more cash than there are borrowings. In this case there’s a rather healthy £21.8 million cash balance in the bank, and no borrowings whatsoever. That’s a nice position to be in.
The second check is that the current market cap is below the annual revenue. This rules out companies that are not generating enough sales to really be considered ‘cheap’. In this case sales are over £200 million while the market cap is around £140 million.
Finally, the company needs to have a price to book ratio below 1, although the aim is to have this ratio as low as possible. With book value standing at about £220 million the market cap is well below that amount and so the ratio is 0.6.
At this point, some deep value investors will point out that the company is actually trading at about twice the tangible book value, which takes account only of hard physical assets and ignores patents, brand names and economic goodwill (the amount paid in an acquisition above the acquiree’s tangible book value).
It’s quite reasonable to be suspicious of intangible assets, after all they are intangible so nobody can actually see them or measure them definitively. Ben Graham would almost certainly only have look at tangible assets. However, I’m more lenient and I’m willing to give intangibles the benefit of the doubt. If a company has intangibles I assume that they can generate earnings at some point to justify their existence.
Time to man-up and invest
I don’t like to drag out these small-cap analyses. Deep analysis is not the point. The point is that the process of stock selection and portfolio management is sound, hopefully to such an extent that deep analysis of each stock is not important – or at least that deep analysis won’t improve results.
So here we have a company that’s been around since 1997, which went public in 2010, is a globally active small-cap but not micro-cap. It makes money, pays a dividend (with a yield of almost 4% at the current price of 68p) and has a zero debt balance sheet.
I think it’s more than worthy of a spot in my 21st century net-net portfolio, so I’ve put £1,350 of the original £50,000 virtual pot of cash into it. That’s about 1/36th of the total as I’m now aiming for 36 holdings. The results of the portfolio so far are below:
Further reading
Nice spot, I haven’t looked at Promethean for a while after getting burned when US sales fell off a cliff about 18 months ago. If I recall correctly it had some big contract wins in Italy and Spain that were going to be its salvation. Hmm. Anyway, that’s for me to look into, I know it’s not your bag here.
Totally agree with you regarding intangibles in this day and age. I’ve seen traditional deep value shares with ‘tangible’ rubbish lying in a tangible warehouse that didn’t stop a wipeout since nobody wanted any of it and they probably had to pay someone to haul it away.
Some of the intangibles here will probably be worth a little more than nothing, I’ll wager.
Nice point about tangibles. I think I said as much in the original thought piece on this ‘modern’ approach to net-nets, that tangible book is not a useful guide to liquidation value because it’s worthless and gets hoovered up for next to nothing in the break up.
The same can also be true of intangibles! I think the important point from both Graham’s net-net approach and mine is that there is virtually no debt and lots of quick assets; that’s much more important to the survival of the company and very few net-nets go bust for that reason, so liquidation value rarely gets realised anyway.
This tangible or not tangible assets are worth the discounted value of the free cashflow they produce. The better you can itemize these assets and their free cash cashflow the better you can value the company.
And you don’t need to ‘assume’ the intangibles generate earnings you need to make sure.
Saying that, I need to report that my favorite investment manager Anthony Cross has had another very good month in February, the FTTE All Shares delivered 4.3% and his fund, Liontrust Special Situation was up by 7.4%.