Interactive Investor

Share Watch: Patisserie Valerie, Murgitroyd, RWS, Victrex, Zytronic

16th March 2017 10:25

Richard Beddard from interactive investor

Each month Richard Beddard trawls through annual corporate results for his Watchlist and the Share Sleuth portfolio of companies that satisfy key valuation metrics such as earnings yield and return on capital - and profiles the most interesting candidates.

Watch: Patisserie Valerie (CAKE)

As if Patisserie Valerie's name weren't descriptive enough, its stock exchange code, CAKE, is probably the most apt on the market.

Well known for its fast-growing string of Patisserie Valerie cafés, the company also operates Druckers, a Viennese cake shop chain, Philpotts gourmet sandwich stores, Bakers & Spice delis and Flour Power City Bakery, a bakery and wholesaler in Lewisham.

All of these brands were acquired in the last decade or so, and all of them were profitable in the year to September 2016, but the growth engine has been Patisserie Valerie itself, which has 134 stores today, up from eight in 2006.

That was the year that executive chairman and serial restaurant entrepreneur Luke Johnson took charge, with chief executive Paul May and finance director Chris Marsh.

After 10 successive years of profitable revenue growth, Patisserie Valerie breached £100 million in 2016. A share price of 340p values the enterprise at £429 million, 25 times adjusted profit in 2016. The earnings yield is just 4%.

While the price appears high, with proven management, a winning format, and the ability to fund new stores out of cash flow, it may not be.

With 180 stores in total, Patisserie Valerie could still be relatively early in its roll-out across the country. It opened 21 new stores across all its brands in 2016, surpassing its annual target by one.

Watch: Murgitroyd (MUR)

Unlike the other companies in this month's watchlist, Murgitroyd, a legal firm supplying patent services, earns its place not because the company has published its annual report, but because a recent trading update warned that profits for the first half of the financial year, and most probably the full year ending in May, would be lower than they were last year.

The warning provoked a sell-off, and the share price has fallen to levels last witnessed in 2012.

At 380p, it values the enterprise at just £35 million, about 10 times average profit in 2016 - a very attractive valuation if Murgitroyd's long track record of profitable growth isn't permanently halted. Murgitroyd's earnings yield is 10%.

Profit for the first six months fell 30%, though. The company expected to be winded by the acquisition of a loss-making firm based in the US and Nicaragua, and by an increase in investment, which has consolidated disparate UK offices to two sites in Glasgow and Croydon, but it was surprised by a slowdown in revenue growth.

Taking out the beneficial impact of the depreciated pound, revenues were flat. Taking out the beneficial impact of the acquisition, they actually fell modestly in the first half.

The acquisition should strengthen Murgitroyd's offering to US firms filing patents in Europe, already central to its strategy, but that strategy puts Murgitroyd in a storm of political and economic uncertainty caused by the UK's vote to leave the European Union and the election of a protectionist president in the US.

To add to the uncertainty, the new EU Unitary Patent system could come into being by the end of the year. It would allow companies to file one Unitary Patent instead of individual patents in each of the countries in the scheme.

While the Unitary Patent is, ostensibly, a threat to the business, the company's chairman and majority shareholder says only that it brings 'new challenges and opportunities'.

Watch: RWS (RWS)

Maybe investors in patent translator RWS should be concerned about the outlook for international trade and the European Unitary Patent as well, but they're not, judging by the relentless decade-long march of the share price.

This is underpinned by 13 unbroken years of revenue, profit and dividend increases.

Although RWS earns 65% of its revenue from patent translations and filing, incoming chief executive Richard Thompson is sanguine.


Currently, he's finance director, and in the annual report he repeats RWS's counsel of previous years - that patent filers are sceptical about the Unitary Patent's benefits, and that since the new system will run alongside the current one they will have the option to ignore it.

Filers will be slow to take up the untried Unitary Patent, he says, especially as they may experience no financial benefit if they only need protection in a few key jurisdictions.

Management bats away other potential threats too. Machine translation will undermine general translators, RWS says, but as a specialist it's incorporating neural machine translation engines into its workflow.

RWS is a much bigger firm than Murgitroyd, providing translation services to most of the world's top patent filers, and it's taken steps to diversify in recent years, principally through the acquisition of Corporate Translations Inc in 2015.

Corporate Translations is itself a market leader providing technical translation services to major multinational drug companies, particularly in the US, which RWS describes as its major growth opportunity.

Acquisitions often destroy value, but CTi has increased RWS's formidable level of profitability in the short term. While it appears the company can do no wrong, the share price reflects that judgement.

At 350p it values RWS at £765 million, or about 38 times adjusted profit in the year to September 2016. The earnings yield is just 3%.

Add: Victrex (VCT)

Perhaps the most significant item in Victrex's annual report was the revelation that it earned over £1 million in revenue from m-pipe in the financial year to September 2016.

M-pipe is a brand of subsea oil pipeline made from a composite of carbon fibre and PEEK, a supertough polymer manufactured by Victrex. The product is the result of one of six 'mega programmes', each expected to earn revenues of over £50 million a year in their peak years.

The significance of m-pipe is not the £1 million revenue Victrex earned in 2016 - £1 million is a tiny fraction of total revenues of £250 million - but the potential of m-pipe and the mega programmes to deliver more, by replacing metal not just in oil pipelines but also in aircraft and medical prosthetics.

M-pipe is an improvement on steel pipe because it's more resistant to corrosion, but PEEK has other qualities that make it useful: it doesn't interact with the human body, for example, and it's lightweight.

Although only one other mega-programme has reached the £1 million revenue mark, Victrex's medical business, Invibio, is already a £50 million business, mostly earned from implants used in spinal fusion.

Like the mega-programmes, the difference between Invibio and the bulk of Victrex's current business is that Victrex is manufacturing components or partly finished components, and not just the polymer or composite.

This strategic shift is a reaction to the commoditisation of PEEK as Victrex's patents have expired and other polymer manufacturers have entered the market, and to the necessity of developing new applications in order to continue growing the market for PEEK.

While heavy investment in manufacturing capacity has weighed on still high levels of profitability in recent years, profitability should improve again as the mega-programmes come on stream.

A share price of £19 values the enterprise at £1.6 billion, about 20 times adjusted profit in 2016. The earnings yield is 5%.

Watch: Zytronic (ZYT)

Touch sensor manufacturer Zytronic's results can be unpredictable. The company's big weakness is that it relies on three major customers for 58% of its revenues.

If a big customer stocks up in one year, it orders less for the following year; and there's always the risk Zytronic will lose the business of a significant customer altogether.

Having stocked up on displays for its vending units in 2015, Coca-Cola ordered far fewer in 2016, sending vending into third place behind the gaming and banking industries in terms of revenues earned by Zytronic.

Although the company managed to lift profit marginally in the year to September 2016, in previous years when it has experienced de-stocking that hasn't always been the case.

In mitigation, Zytronic's sensors and screens are designed into its customers' products, so it tends to remain a supplier for the product lifespan. Zytronic's patented sensors sit beneath glass up to a centimeter thick, enabling the screens to withstand vandalism and harsh environments.

As well as vending machines, it supplies screens for slot machines and ATMs. One of the glitzier applications for the sensors showcased in its annual report is a digital roulette table housing an 84-inch screen.

Though profitability undulates, over the last decade Zytronic's return on capital has never fallen below 8%, and strong cash flows in recent years have allowed it to pay down debt.

The company's cash balance net of very modest borrowings stood at over £11 million at the year end. A share price of 390p values the enterprise at £40 million, about 15 times adjusted profit in 2016. For long-term investors, the shares could make a good investment.

This article was originally published in our sister magazine Money Observer. Click here to subscribe.

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