Holders lights up T30

Holders Technology (HDT) was one of the inaugural members of the Thrifty 30, and my interest in the company goes back to April 2009 when I noticed it was in classic Ben Graham territory. Then, at 64p, the shares cost less than half Holders’ current assets minus all its liabilities, a rough and ready calculation of its liquidation value. Adding the company to the portfolio was a no-brainer as it didn’t seem likely we’d find out its true liquidation value. It had a long history of profitability and owed nothing. At the last portfolio valuation the shares cost £1.22, 75% higher then the price of the shares when I added them in September 2009. Holders Technology has served the Thrifty 30 well, a fact that mustn’t cloud my judgement as I look at it for a third time. Holders supplies materials used to manufacture the printed circuit boards that become components in mobile phone transmitters and antennae and pacemakers, for example. It diversified in December 2009 when it bought JK Components, now Holders Components, a distributor of light emitting diodes. Since then it’s established Opteon, which markets finished lights. My limited knowledge of LEDs gained studying lighting company FW Thorpe and LED manufacturer Dialight suggests they might be a growth market. With much of the world still in recession in January 2010, Holders may have stepped into it when it could acquire businesses at their cheapest, and the LED business seems to compliment Holders’ PCB business. Holders Components uses Holders Technology’s plants in India and China to put together sub-assemblies for lighting products. The 2010 annual report reveals the two businesses compliment each other in another way. Holders had already been sourcing and distributing the materials required for the circuits that power LEDs so its decision to enter the market for the LEDs themselves was presumably based on the demand Holders had experienced. At least Holders moved into a market it new something about. I like Holders’ ‘softly softly’ strategy as articulated by its finance director: The board is committed to enhancing shareholder value over the medium to long term, whilst maintaining a conservative financial framework. Where an opportunity to increase market share or to lower operating costs is identified, this is addressed within the bounds of internally generated cash flow and bank facilities. And although the company didn’t make a profit from LEDs in 2010 (it made a tiny loss) it did return to profit overall as its PCB business in Germany, which supplies motor vehicle manufacturers, recovered strongly from the recession. Holders’ F_Score of five out of nine, though, betrays a more mixed year than the headlines suggest. While it made an accounting profit, it made a cash loss. Cash flowed out of the business as it bought more inventory. This, I think, is to be expected as it responds to greater demand for PCBs, demand that is persisting according to founder, chairman, chief executive and major shareholder Rudi Weinreich at April’s AGM: The current year is performing in line with our expectations. The PCB part of our business is benefiting from strong trading on the part of our customers, particularly in Europe. The LED activities, whilst still in their development phase, are showing encouraging growth in turnover. All being well Holders should be able to convert its swollen inventories into cash profit, and develop a profitable business in LEDs. However I don’t like investments that depend on events working out as the company, or I, expect, because they don’t always. If I eject Holders from the portfolio, it will be as a proud graduate. I bought the company because it was cheap by the most exacting of benchmarks. Now the market, at least, says the company is worth as much as its liquid assets so it’s no longer a bargain by that measure. It must justify its place in the portfolio on the basis of how much it might earn. And as always to establish that I need to look back over the past ten years.