Diary: SHFT

Very insightful post written about Shaft Sinkers on the Motley Fool for those thinking about grabbing the falling knife:

Without knowing the contract terms in detail it is impossible to know how much protection they offer. When this thread first appeared I nearly responded on the basis of many years working in the civils industry, but didn't as I knew little about the company in question.

However, the RNS fits the pattern of my expectations very well, so I would now make those points.
During the last 4 decades I've never known a specialist tunnelling / shaft sinking contractor that has survived more than a few years.
It is almost inevitable that such a company will hit unbelievably bad ground conditions, not anticipated by the contract, at some stage. The norm then has always been that they run out of money, regardless of their eventual contractual entitlements.
The end game is then usually receivership, with the contractor being bought from the receiver by a big contractor with plenty of cash, for almost nothing. When the contractual issues are eventually settled, the large contractor makes perhaps a 10,000% return on his purchase cost, and retains a small core tunnelling division of a size which doesn't ever threaten his survival.

Much the same situation has always prevailed with muckshift companies, for much the same reasons.

Diary: SHFT

Sheesh, value investing is tough. On 08-Oct-2011 I mentioned SHFT (Shaft Sinkers), which sinks shafts for the mining sector. It was picked up originally by Stephen Bland (aka Pyad) on The Motley Fool at 139p. It had a PTBV of 1.4 and a historical PE of 4.7. His conclusion:

Shaft looks interesting, but it's not without particular risk from a value viewpoint, arising from both to its geographical operational areas and on the numbers, a lack of trading below tangible book. If you can live with that and, as always with value have the patience to hang on for as long as it takes, this share may have some worthwhile mileage in it.

When I picked up the story in October, I had noticed that  the share price had slumped 23%, putting it on a PER of 5.1 (rolling basis) and ROE of 26%. I noted it was a potential "magic formula" company, and cautioned against potentially buying at a cyclical high, and that I had no plans to buy the share.

I mention this now because I have just seen that the stock slumped 32% today, alone. The share price now stands at 57.50p. That's a drop of 59% since Mr. Bland first highlighted it. Ouch! It just goes to show how risky the value game can be. There is, of course, a reason behind the decline. It reported:

Shaft Sinkers Holdings, the international shaft sinking and underground construction group, has confirmed that due to the continued slow progress resulting from extremely difficult ground conditions, it has entered into discussions with its client EuroChem with a view to amend or terminate the contract. Sinking works have now been suspended and the parties are in negotiation on the way forward.

There was no great insight into my scepticism on the share at the time, just a sense that there was something "up". My caution on the possible cyclicity of earnings was not the cause of further downfall, for instance. So I was right, but for the wrong reason. So it doesn't count.

Just goes to show - the magic formula is no panacea. What is very interesting to note is that the share has been in steady decline late April. It's one of those cases where the market "knew" that there were going to be problems. Whilst we did experience market turbulence - a lot of turbulence! - over that period, the markets had staged something of a recovery. This one kept going down.

It'll be interesting to see how this one fares 6 months down the line.

In the meantime, "but for the grace go God go I", and a happy and a prosperous new year to you all. Be careful out there!

Diary: shft, cms

Dear Diary
I was asked to provide some reflection on my diary, so here goes ... I originally decided to try commiting to it after reading Geoff Gannon's article (grrr, can't find the link just now) on writing your thoughts for 10 minutes every day. So far, the diary seems to take rather longer than 10 minutes. Looking back on some of my posts, I realise that I hadn't quite conveyed my thinking that I had intended. Sometimes I was more bullish than I appeared, and sometimes it's the other way around. I think another problem is that when you talk about a stock or theme, you also appear to be recommending it implicitly, which is not necessarily the case. In expressing one's views, it can be quite a raw experience, because one's often exposing one's naivety. Looking at the writings of some other bloggers and investors, one often feels like a Salieri in the presence of Mozart: a kind of curse in which one is able to recognise genius, but not replicate it. I am but a monkey rubbing the sticks together. Or, my personal favourite: otters banging rocks. I also think that if I say something, then there is some moral burden to saying it. I can't help thinking that putting a rider "DYOR" is a bit of a copout. I see that some journalists have no such problems.

SHFT - Shaft Sinkers - Support Services - 112.6p/£54m
SHFT operates in the mining sector: shaft sinking, contract mining, mine operation, tunneling and large underground excavations. It was picked up in an article on Motley Fool on 08-Sep-2011, where it was noted for its value characteristics. Since then, the share price has declined 23%, compared with the Footsie, which has remained about flat. Ah, value shares, don't you just love them? The company has net cash of 11m, PER of 5.1, and ROE of 26%.  The company seems to have floated earlier this year, so beware at potentially buying at a cyclical high point if you're looking at this from a "magic formula" angle. It's trading at price to free cash flow of 6.3, and has an EV/EBITDA of 2.4. Those are very low values. I don't own the stock myself, nor have I any plans to, so DYOR. Oh wait!

CMS - Communisis - Support Services - 26.3p/£37m
This one crossed my path via an article posted by ExpectingValue on 18-Agu-2011. Kudos to you, EV! According to Google Finance:

The Company is engaged in the provision of products and services to assist its clients with customer communications. It services include the delivery of data and analysis services to help clients with their customer strategies, as well as risk analytics

Huh? Reading the rest of its description is a bit confusing, too. Why is it that consultants, presumably requiring very high levels of communication skills, resort to these kind of gobbledegook explanations of their business activities? Grr. OK, minor venting finished. It looks like it is mostly involved in direct mail (which to you and me means junk mail), whether delivered as postal mail, or electronically. Its ROE10 (median ROE over the last decade) is 7.4%, against a current of 3.5%. This thing is clearly no great business, but it might give good returns if you believe in a reversion-to-mean scenario. It is on a PER of 6, and analyst forecasts look quite robust. Read EV's article for a more in-depth discussion.