Interactive Investor

Richard Beddard: this top 10 company is too cheap

A solid, conservatively run business, apparently taking calculated risks to grow revenue faster, will not be trading on such a low valuation for long, believes our columnist.

26th January 2024 15:02

Richard Beddard from interactive investor

Emerging from the pandemic with new leadership, this year’s Dewhurst Group (LSE:DWHT) annual report gives the impression the company is moving on to the front foot.

Foremost of Dewhurst’s ambitions is to energise its 300-plus employees.

Small and imperfectly formed

Dewhurst is a relatively small but quite complex business. Mostly it is involved in the lift (as in elevator) business.

The company invented the archetypal push-button, and still manufactures push-buttons today. It assembles lift operating panels and hall lanterns from a combination of manufactured and bought-in components. It distributes lift components through A&A, a business it acquired in 2018.

Subsidiaries in the US and Canada manufacture lift components, and in Australia Dewhurst companies distribute lift components and design and fit out lift cars.

Two side hustles manufacture street furniture such as bollards, and keypads for ATMs.

In the year to September 2023, the Lift business earned Dewhurst 87% of total revenue. Transport brought in 7%, and Keypads the remaining 6%.

With revenue of £58 million, the group is a relatively small but somewhat sprawling enterprise spanning three continents and supplying others.

Adapting to change

Like most things, modern lifts contain more electronics than they used to.

Push-buttons still have advantages. They are an easily understood interface that can be operated by people with disabilities. They resist vandalism.

Most lifts require push-buttons, even if it is just the alarm, but the ways we interact with lifts have proliferated to touchscreens and voice.

Staying relevant has required Dewhurst to become an assembler, distributor and fitter as well as a manufacturer.

Geographical diversification has probably helped with another challenge for the lift industry, the fact that demand fluctuates with the construction cycle.

Dewhurst has a good track record even when the economy is subdued, which is partly because construction activity around the world rarely moves in lockstep.

The company’s profits are also smoothed by the repair and maintenance projects it supplies.

Growth challenge

Dewhurst’s growth, though, has been pedestrian in recent times, and opportunistic. It has acquired more businesses in Australia than it has in the US and the UK, because they were available more cheaply, for example.

The company has also thrown in the towel when it cannot compete in the technological arms race.

In 2019, Dewhurst sold Thames Valley Controls to a rival because it could no longer fund the development of the next generation of lift controllers. These are the brains of the system, the computers that control the movement of the cars.

Failure to grow has for the first time made it into the principal risks section of Dewhurst’s annual report.

I think this is a positive development. It implies the company is cognisant of the risk, and perhaps facing up to it.

Dewhurst says it maintains a register of growth opportunities.

Perhaps the E-motive brand of lift display was on that register. When owner Avire announced it was exiting the business last year, Dewhurst bought the brand and its intellectual property. The displays will be manufactured at Dewhurst’s newest subsidiary in Singapore.

Touchscreens have been around for a long time now and it is probably a good thing Dewhurst has gained control of the technology at a modest sounding price of £750,000.

Other developments in 2023 include the 3 XR push-button, which is made from a chemically resistant polymer that can withstand stringent cleaning regimes and comes in a weatherproof version for use outdoors.

Reassuringly, the increased emphasis on growth starts with the company’s staff...

People first aspiration

Dewhurst’s Annual Report is more forthcoming on the company’s culture than previously, probably because it conducted its first group employee engagement survey in the year to September 2023.

The company reports an employee engagement score of 79%, which it wants to increase to 85%. Employee turnover is 13%, below the company’s target of 15%.

Dewhurst says it needs to do “all we can” to improve employee satisfaction, starting with more regular staff meetings and a new HR system.

There are signs of imagination, too. In Australia ALC, a lift component distributor, has instituted a four-day working week, and Dewhurst is going to trial a similar setup at TMP, its UK bollard business.

While we are talking bollards, TMP has invented a bio-polymer bollard that contains only 2% of the embedded carbon in a cast iron bollard. This may play well with its customers, local authorities and their contractors, who are themselves trying to reduce their environmental impact.

Two years of contraction

For the second year running, revenue at Dewhurst flatlined and profit fell. Revenue increased 1% and adjusted profit declined 12% in the year to September 2023.

Over the long term, a 3% compound annual growth rate (CAGR) in revenue, and a 4% growth rate in adjusted profit is unremarkable.

Perhaps this measure is a little unfair on Dewhurst. We are judging the company’s long-term record after a period in which inflation has eaten into profit. In 2023, the emphasis merely switched from materials and components to wages and energy.

There was a slight decline in profitability in the UK and North America, and a bigger decline on slightly reduced sales in Asia & Australia. In Europe, revenue halved to 4% of total revenue and the company lost a small amount of money.

But Dewhurst regularly earns high returns, around 20% return on capital, and it only slightly underachieved in 2023. It is choosing to salt decent cash flow into its coffers rather than pay a bigger dividend. Perhaps it has more opportunities in its register.

Since the year end, the company reports demand is holding up at most of its Lift businesses.

The Keypad division, which manufactures in Hungary and mostly supplies one customer (almost certainly NCR), is in decline as we all use less cash. The subsidiary has been restructured with a view to finding “other manufacturing opportunities”.

Business is looking good in the Transport division.

Scoring Dewhurst

Brothers Richard and David Dewhurst have stepped down from the day-to-day running of the family business but they remain on the board as non-executive directors (Richard is chair).

Between them, they have clocked up more than 75 years of service. They also own substantial shareholdings.

John Bailey, David’s replacement as chief executive, is well known to them. He has been with the group since 2008.

Lack of income and growth may explain investor indifference to Dewhurst, a company that trades on a normalised earnings multiple of just 5 times adjusted profit.

I think that is too cheap. Dewhurst is not setting the world on fire, but it is a solid, conservatively run business, apparently taking calculated risks to grow revenue faster.

The reshuffled board has beefed up the next level of management and are energising employees in pursuit of more growth.

If they find it, I do not think Dewhurst will be trading on that 5 times earnings multiple for long.

The Past (dependable) [2.5]
●    Profitable growth: Yes, but pedestrian [0.5]
●    Strong finances: Big cash surplus [1]
●    Through thick and thin: Yes [1]

The Present (distinctive) [2.5]
●    Discernible business: Sprawling [0.5]
●    With experienced people: Yes [1]
●    That creates value for customers: Quality, service [1]

The Future (directed) [2.5]
●    Addressing challenges: Diversifying, enhancing IP [1]
●    With coherent actions: Opportunistic [0.5]
●    That reward all stakeholders fairly: People first [1]

The price (discounted?) [1]
●    Yes. A share price of 750p values the enterprise at £35 million, about 5 times normalised profit.

A score of 8.5 out of 10 indicates Dewhurst is a good long-term investment.

It is ranked 9 out of 40 stocks in my Decision Engine.

Richard Beddard is a freelance contributor and not a direct employee of interactive investor.  

Richard owns shares in Dewhurst.

See our guide to the Decision Engine and the Share Sleuth Portfolio for more information.

Contact Richard Beddard by email: richard@beddard.net or on Twitter: @RichardBeddard

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