NMCN Investment Analysis: Quick Informative Notes

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Disclaimer: This NMCN Investment Analysis is for information only. If you have anything to add, do let me know in the comments section below.

Stock Ticker: LON:NMCN

Company Activities: North Midland Construction (formerly known as), produce critical infrastructure projects in the UK. Generally very large projects for blue-chip companies.

Brand Names Traded As: NMCN

Position In Market: Approved contractors for telco companies such as BT and water utilities. Some barriers to entry for smaller firms due to the size of projects.

Who are their competiton? Very competitive markets depending on contracts with many large firms: Costain, Kier, Severfield, Nexus Infrastructure.

Recent Trading Updates: Last communication was 7th October, an acquisition of Lintott who specialise in water treatment for industry. Some potential synergies with current business, particularly Severn Trent. Good pricing structure: only £1 on acquisition, then no payment if profits below £1m/year. Maximum consideration is £3.7m approx. May be optimistic as last accounts showed a loss of £1m. This may have been a factor in the initial £1 price.

Broker Updates: Progressive Equity Research issued same day as acquisition. There is not much extra detail added from the trading update issued by the company, and there is no change made to estimates.

CEO and Background: John Homer: Has been in charge since 2016. Vastly experienced in the construction field. Previously at Morgan Sindall and Galliford Try.

CFO and Background: Dan Taylor: Previous Group Financial Director, appointed CFO in 2019. Chartered accountant, previous experience in auditing the company.

Salaries and details of options: Base salary of CEO, £310,000; CFO £185,000. Large bonus payments vested in this year. Pay policy achieved 99.88% acceptance. Bonuses for 2019 changed a little: maximum 50% based on adjusted profits, and 10% on strategic targets. In real terms the remuneration committee has discretionary power to change the vesting rules.

NMCN FUNDAMENTALS:

Recent Company Trading: No more recent comment than August 2019 when the company delivered its half-year report. Here the mood was favourable, with the order book up to £356m from £320m. There was some caution as to the political landscape and public expenditure, but the subsequent election seems to favour more public spending.

Balance Sheet: Overall positive. Increase in revenues has been all organic up to this point and there are no goodwill/intangibles sitting on the balance sheet. Cashflow has been strong (although the current year seems to be a negative net cash flow, may be anomalous). Capex costs are not large, in recent years being 10-20% of operating cash flow. Borrowings have been stable at £7.6m and the company has had a net cash position for some time, although it is only in the last two years where the cash pile has really started to mount up.

Distributions to shareholders: Started paying dividends in 2016. The large jump in cash has seen these increase rapidly, and a total of 21p in the last year. This cost the company £2.1m and is well covered by profits. Shareholders have seen virtually no dilution.

NMCN SWOT ANALYSIS:

Strengths: Long-standing company with trading relationships with major companies (ie Severn Trent) going back 40 years. Approved bidders on projects with defined spend (Asset Management plan). Through the group a wide range of products offers. Balance sheet is good with net cash.

Opportunities: Recent flooding may provide more urgent funding. Integrated acquisition of water treatment may be highly relevant. Excess capital being diverted to investment side on lower-risk residential projects, which should be quicker to liquidate if funds required.

Weaknesses: As with many companies in the contracting sector there are weak margins. Even on the specialised water side, margins currently around 2%, for the build environment, 1%. The losses on legacy contracts illustrate the pitfalls of this. It seems to be difficult to increase fees as there will then be competition that is cheaper. Company has lumpy contracts, and a problem in one of the big ones could affect the whole business.

Threats: Large competition. Advantages could be said to lie within the staff, which may threaten the long-standing relationships if key personnel are lost. Much spend is decided at governmental level which could be dialled up or down depending on the times. There may be other legal aspects to comply with such as changing standards.

NMCN TECHNICALS

Share Price and movement: Sharp rise and fall between 2018-2020: price went from 300p-750p. Profit warning killed it back to 500p (April 2019). Since then it has been in quite a tight range, showing support at 500p several times.

Shares outstanding/free float: 10.4m shares outstanding, 2.29m free float (Yahoo Finance)

Recent Director trades: Small purchases in 2019 at around the current level, nothing major.

NMCN ADVFN Chat/LSE Share Chat Sentiment: Not that busy.

Feelings: Probably will never deserve a large earnings multiple, along with other contractors. But seems to be performing well enough and dividends covered. Happy to wait for better value. No position at time of writing.

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