A Small Cap Offering Value, Growth and Income

Published in Company Comment on 23 June 2011

This Foolish favourite continues to offer a bit of everything.

There are a few small companies around whose results don't fill you with trepidation before you open the document on finals day. AIM-listed timber merchant James Latham (LSE: LTHM) is such a company and its latest results are no different.

The company's usual modus operandi is to beat expectations whilst simultaneously sounding a sensible note of caution -- and the latest offerings stick to that winning formula.

Against a difficult backdrop the company had an excellent year, increasing operating profit by 25% to over £8m, on sales up almost 13% of £130m. Net tangible assets amount to £46m, the cash pile is over £7m whilst the market capitalization at the current mid price of 250p values the wood importer at £48m.

The price-to-earnings ratio for the year just gone is just over eight (falling to less than seven against enterprise value) and the yield is 3.7% -- a refreshing change from most AIM-listed small caps -- with the dividend covered 3.3 times by earnings.

Steady progress

True, the cash balance is down by £4m from the previous count, but this is due to investment in a recent acquisition and the company has an enviable track record in making steady progress with shrewd buys.

The shares have made excellent progress since I last looked at the company in January with the share price at 197p. At that time, I thought the previous high of around 280p per share four years ago to be more like a realistic valuation in the not too distant future.

Such price targets, though, are a dangerous game. The big picture changes constantly and I wouldn't like to be held to the 280p valuation as I now believe it to be too pessimistic.

Good news -- price falls

Despite the excellent topline results, the shares have taken a hit. This isn't the usual short-term profit-taking though. It seems the company has to reach down into its coffers to do a little refurbishment here and there.

Latham sees the need to invest in its older sites to mirror the success which the investment in new facilities has delivered elsewhere. Specifically, the company plans to relocate its largest business in Ossett, near Leeds, to another site in the same area and this will hit the bottom-line contribution from the site.

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In many ways, it's a pity this news hasn't knocked the price even further into bargain territory. Because this is what you get with a family-controlled business; a feet on the ground approach.

The company could have decided not to tell us just yet, that the improvements were being planned, and the share price would be climbing into clear blue sky today. But that would have been disingenuous, short term and a far bitterer pill to swallow later on. More to the point, that just isn't Latham's style and long may that remain the case.

In the family way

With Latham, investors are aligning their interests with those of the owners; people with the surname Latham make up almost 12% of shareholders with a declarable interest (greater than 3%) and I believe this figure to be much higher if we include those under the declarable threshold -- whilst the Chairman is the eponymous Peter Latham with a near 6% holding.

My Foolish colleague G A Chester has expounded the virtues of investing in family firms and I believe Latham to be an excellent example. Family ownership and control can be something of a double-edged sword; it means the company is more difficult for predators to get hold of, but if they do, the price is usually at a big premium.

The bottom line is you know your money is in the hands of people with a vested interest in making a real success of the business; unequivocally a good thing as long as there are no plans to de-list.

Overall, Latham remains a small cap offering the best of all worlds for me; sensible growth at a reasonable price, fundamental value and a good yield which is amply covered by earnings. Hold on and sleep well.

More from David Holding:

> David owns shares in James Latham.

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The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

Andrew2409 24 Jun 2011 , 5:41pm

Why are there no broker forecasts?

gibbinsjohn 25 Jun 2011 , 7:19pm

Northland capital 23 6 11 2012 forecast PTP 6.6m EPS 25p Div 9.3p

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