Laird looking promising

Encouraging results from Laird yesterday. It sounds like they have not seen any further deterioration in their end markets since the profit warning back in November. The handset business (55% of sales) is tracking down slightly more than 10% in volume terms, roughly in line with the OEM handset market. The CFO produced an interesting slide, showing just how far away they actually are from their debt covenants. Adjusting for the currency mismatch between the balance sheet reporting date and the average rate used for the EBITDA suggests they can see a £60m fall in their EBITDA before hitting their covenant. So the current £100m of EBITDA is 250% above the floor. The main risk is pricing, especially in handsets. Their key customers are Nokia, Samsung, Mororola etc., all of whom are facing double digit declines in their end markets. If the overcapacity in the handset market is not corrected quickly enough, Laird’s gross margin (currently, c20-25% in handsets) could get hit. A lot of costs have already been taken out, so the hit to profit if there is another big leg down in trading could be severe. Against this, Nokia has no interest in busting one of their major suppliers, and it also sounds like a lot of Laird’s (unlisted) competitors are in even more trouble that they are.

These shares have fallen over 85% now from their peak. Even after yesterday’s move in the share price, they are trading on just over 4X 7-year average trailing p/e (4.3X on next year’s consensus estimates), and around 30% of reported 2008 book value. If you are prepared to accept that trading is not going to be so bad that the covenants are hit, then the market is basically saying Laird is an ex-growth, low return on capital business. The historical 7 year median CFROI has been over 15%, and the return on capital is over 10%. For sure returns are unlikely to return to their historic level, but it certainly seems like there is a decent margin of safety to the Laird shares. If I put all the intangible assets (mostly acquisitions) and the PPE and inventory at 50% of reported value, then the adjusted book value per share is 100p, 20% up from today’s 80p.