Caught In A Fiberweb

Published in Company Comment on 24 May 2012

Stephen Bland picks out a share that may be worth a look.

Fiberweb (LSE: FWEB) is involved in the manufacturing of non-woven products, but I'm not too concerned with that. Here's what matters above all in a value play -- the numbers:

Share price58p
52w high/low68/39p
Cap£101m
Net tangibles 31/12/11£133.6m
Net cash 31/12/11£22m
Earnings per share (eps) 31/12/11 (loss)(1.8)p
Forecast eps 31/12/125.37p
Dividend 31/12/113.00p
Forecast div 31/12/122.67p
Price-to-tangible-book-value (P/TB) ratio0.76
Forward price-to-earnings (P/E) ratio10.8
Forward yield4.6%
Directors own1%
Other majors48%

The company was reorganised last year involving the disposal of about 40% of their business and a rights issue following a period of poor performance exacerbated by excessive debt. The substantial disposal and the rights money served to turn round what was an onerous £151m net debt burden last year into £22m cash by December 2011. So this is very much a turnaround situation, but that alone is not the hook upon which I'm hanging my selection -- this one exhibits a lot of classic value features to shore up the downside, one of the key points behind value investing.

As shown in my table above, it trades well below tangible book and has net cash, these being the two most powerful elements of value for my style, especially with smaller caps like this. The lesser elements of yield aren't too bad at 4.6% forecast but the P/E is not at a value level right now. I mean at 10.8 forecast it's not outrageously high but it's not at the value player's salivatory level of, say, 7 or less with the market as it is.

As a turnaround, though, the hope is for steeply rising profits in the near term of say three years or so -- but clearly that involves some risk. The eps forecast for 2012 is for 5.37p, with 6.21p seen for 2013, but as usual with smaller caps there are very few analysts reporting here. Consequently, I don't put that much faith in these figures. Anyone buying the shares has in my view to put more faith in the general idea that the revamping of the business will deliver strongly in future, rather than in specific amounts like these.

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As a turnaround, the directorspeak should be given more than the usual cursory glance at the clichés, but unfortunately there isn't too much guidance and it's all rather nebulous with talk of expecting to make significant progress in 2012 and of seeing the benefits of the recent changes for years beyond, etc. I guess though it's understandable not to want to stick your neck out too far... in case you get your head knocked off if things don't pan out as expected.

The nature of the assets is always worth considering in a value play. Of the £133.6m tangible assets I show, net current assets including the net cash of £22m amounted to £59.2m. Fixed assets were £104.7m including £22.3m of land and buildings, £14.4m of deferred tax and £68.0m of equipment so no significant property element here, especially as they comment that market value does not differ significantly from book. The balance was non-current liabilities of £30.3m, most of which was a pension scheme deficit.

Final Foolish thoughts

I conclude that the asset situation is not as strong a value case as it might be where there is a really meaty property or cash element relative to the company's market value. Here, the property and cash are both by coincidence around £22m each so, with the cap at £101m, even combined they don't overwhelm it. But they are not irrelevant either, and trading below book is always attractive -- it's just that it's even more so when the assets have a very large property and/or cash element or anything else that is very liquid and likely to be worth book at least on disposal.

Worth a scroot then, I'd say, but this is one for a value portfolio, not for farmers. Incidentally, farming is currently under discussion on the value board.

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Further investment opportunities:

> Stephen does not own shares in Fiberweb.

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Comments

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Rotation96 25 May 2012 , 12:55pm

That was very interesting, thanks. You seem to almost have a 'hierarchy' of assets, with intangibles at the bottom and cash then property at the top. I can see the logic behind this, but do you ever think its worth mixing it up. For instance (I've not looked into it but its possible that this could apply to Fibreweb), I would suggest that certain intelectual property within the intangibles could be a more saleable asset than some tangibles, like production equipment. I'm thinking of either big brand names or patents that would be of interest to a competitor (say Densitron's IP on display screens could be of interest to one of the big electrical goods manufacturers, or had Premier Foods gone into administration then I still think we'd be buying Hovis from somebody). Could it be worth creating a Price/useful BV ratio to take these things into account if the value case is otherwise very strong?

pickepics 28 May 2012 , 9:47pm

Thank you, Stephen. This could turn out to be very interesting. It is now on my watch list with a view to downloading the financial statements and searching for more in-depth information. Just the kind of small cap I am interested in. It's in a sector, materials science, within which well managed companies will be very profitable once the economy begins to feed above catfish level. Its activities also cover a wide enough geographical area - the world, just about - for it to take advantage of variations in economic activity levels over time.

Dozey1 29 May 2012 , 10:10pm

FWEB had a non-woven fabrics division addressing the hygiene (female and baby) market, together with a partnership with a South American outfit with huge promise. Their other fabrics used in building and agriculture seemed to me to come a long way down the value chain. Sure, they flogged their hygiene division to get rid of debt, which effectively threw the baby away and left only the bathwater. Would be interesting to see how directors pay compares with what it was when they had real growth prospects.

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