MS International is a good company, managed for the long term that seems to be undervalued by the market. But controlling management is a double-edged sword.

Creator / Landlord / Distributor / Broker

MS International manufactures forged steel parts, forks for fork lifts, defence systems (naval gun systems, plotting tables, and tactical shelters), and filling station forecourt structures. MSI Defence is its largest business, accounting for just over half of revenues.

Bargain / Turnaround / Cyclical / Stalwart / Growth

Although Defence Systems depended on one undisclosed customer for over half its revenues last year, it claims to supply over 40 navies, and the other businesses provide more diversification. Profitability dipped by about a quarter in 2009 and 2010 but it has since recovered to record levels. Despite government budget constraints and project delays, MSI Defence does not expect revenues to shrink next year thanks to increasing orders and maintenance and support work on its expanding fleet of naval gun systems. Forgings is in recovery mode, and MSI-Global, the forecourt business, is growing in eastern and western Europe, giving the impression that MSI products are in demand in their niches.

Expectations

Executive chairman Michael Bell explains in the MSI annual report how he and his finance director and company secretary, who between them own 49% of the company, intend to maintain their “prudent approach to managing and steering the Group for the long-term interests of shareholders and not just for the immediate future.” Bearing in mind MSI’s strong finances, profitable record through recession, and Bell’s expectation that pent-up demand will produce a surge of orders as delayed defence projects start up, growth seems likely, although it may not be smooth.

Threats

competitive position – weak / neutral / strong
Although forging is a competitive business that only broke even in 2011 MSI’s niche businesses look like mini-hidden champions, meaning customers around the world are prepared to pay for superior quality and service made possible by an ethos cultivated over many years of stability.

finances - weak / neutral / strong
With no debt and cash reserves even after capitalising operating leases, a situation the company has sustained through two recessions, MSI has funds to invest in equipment and research and development to maintain and improve its competitive position.

management – weak / neutral / strong
A successful company where the management responsible own a large interest is normally very positive for minority shareholders, but management’s control of MSI is almost absolute. The only non-executive director took up his post in 1983, so he’s not independent. The directors have significant voting power, and evaluate their own performance and remuneration. Unsurprisingly they’re well paid, but they have generated good returns for shareholders including themselves. MSI’s decades long and successful history on the stockmarket, for which the directors deserve credit, doesn’t eradicate the risk they might one day act against the interests of other shareholders though.

valuation – cheap / neutral / expensive

Growing companies usually present value investors with a conundrum, because future growth is inherently speculative and so its value is very uncertain. Fortunately even valuing future growth at zero, based on current after-tax operating earnings MSI’s historic earnings yield is 15%, which is cheap. Investor’s aren’t apathetic because this is a bad business, it’s a good one, but management’s grip might explain some of their reluctance to invest. So might the backdrop of defence cuts and eurozone weakness.

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