Fiberweb – With the turnaround almost complete, are the good times about to begin?

There are lots of different ways to be a value investor.  When I’m investing in large companies, I look for stability and strength above all, followed by the potential for growth and a low price, of course; but with small caps, I’m looking for something else entirely.

The very fact that these businesses are small means that they are less likely to have a decades-long history of inflation-beating growth – it’s hard to grow and stay small at the same time.

So why invest in small-caps at all if they’re not bastions of strength and stability, unlikely to be classed as a fortress fit for anyone’s retirement fund?

Big potential (and big risks) for small-cap investors

The answer is that they can be very volatile, both the businesses and their stock prices.  Taking advantage of this volatility has proven to be one of the best ways to consistently beat the market over the long term (IF you have the stomach for it).

Take Fiberweb, for example.  It specialises in industrial fabrics for all sorts of applications, from roofing to road building and pool filtration.  The company is, by all accounts, a leading global supplier of such hi-tech fabrics.

However, instead of stability, the company is surrounded by uncertainty.  It had a lot of debt, not a lot of profit and about 40% of the company was in the non-woven hygiene fabrics sector, which is apparently a capital-intensive commodity business.

If you want to know why capital-intensive commodity businesses are generally bad investments, read some of the early letters that Buffett wrote to the Berkshire Hathaway shareholders because Berkshire was exactly that sort of business.

The turnaround that may have already turned

The uncertainty stems from the fact that Fiberweb is undergoing a transformational turnaround effort, including recently selling off the 40% that was in non-woven hygiene fabrics, and there was a recent rights issue as well, just to make things worse.

So where does that leave the company now?

The latest annual report says that the group is now smaller and more tightly focused on higher-value niche areas.  That all sounds very nice, and the opportunity to buy into a company after the turnaround but still at depressed prices is attractive, so what do the numbers look like?

Regular readers will know that I am not particularly fond of investment stories like the one above.  Instead, I prefer to rely on the numbers and in this case, they are good enough for me to back Fiberweb.  At a mid-price of 61p, the numbers are (rounded):

  • Price to book ratio = 0.6
  • Price to tangible book = 0.8
  • Price to sales = 0.4
  • Net cash = £22m

I’ve added Fiberweb to the 21st century net-net portfolio at today’s asking price of 61.75p, but instead of the usual 1/60th position, I’ve apportioned 1/36th of the fund to this company.  Why would I do that?

It’s because I may have overestimated the number of net-net-like opportunities in the UK.

It’s a pretty small pond to fish in, and if I have too big a net, then I’ll catch all the fish; the good, the bad and the ugly.  With a smaller net, I can concentrate on the best opportunities, and I think a target of 36 holdings isn’t overly concentrated, with each holding being just 2.8% initially and with a target holding period of 3 years (36 months for a once-a-month trading rate).

Author: John Kingham

I cover both the theory and practice of investing in high-quality UK dividend stocks for long-term income and growth.

3 thoughts on “Fiberweb – With the turnaround almost complete, are the good times about to begin?”

  1. John

    The story sounds interesting, I will have a look at it.

    So you are going to run a more concentrated portfolio. It gets harder but more rewarding. Good luck.

    Personaly I like the idea of a concentrating portfolio with no more than 20-25 stocks. Going back to another of your posts, in my case I am looking for at least 7% outperformance. With 35 stocks you should look for 4%+.

    I do believe that the market will go sideways for at least 5 years or more from now on, it is what I name – balance sheet recession. So investing in a tracker, will give the investor 2-3% return, probably mainly dividends, not enough to cover for inflation.

  2. Hi Eugen. The point about the market going sideways for 5 years (which is an entirely reasonable forecast) is that at the end of the 5 years you’ll be holding an asset that is that much more valuable. Corporate earnings generally go up in line with inflation, so the earnings may well be up by 10-20% in that time, yet with the index at the same level you’re getting that much more earnings for the same price.

    Once this recession is behind us the market might really take off towards 10,000, but of course such comments are highly speculative!

    1. The problem we don’t knwo when recession will end, do we? W. Buffet is not concerned by this as he is never going to sell his holdings. His timescale is infinite as he is very rich and not only that, he is bloody capable of beating the market.

      That is not the situation of my clients, some they are withdrawing money now. Not getting the right return (critical yield) on time may mean they have to withdraw lower amounts in nominal terms in the future and I haven’t said the INFLATION word yet. And there is the permanent damage left by reverse pound cost averaging, selling stock to pay income for less than you bought it.

      In my opinion and it is only my opinion, a balance sheet recession takes longer than we may think. There are only two historical examples: the Great Recession from 1929-1933 when markets needed until 1953 to return to the same level and the Japanesse balance sheet recession which has not ended yet.

      So far the governments and central banks have printed fiat money distorting the market. Governement bonds yields are lower than ever although there is more risk (US downgrade). I don’t think flogging money from helicopter it is a good idea. The expectation was firms and people will go to the banks to borrow them to restart the soending process but all this stuff ends in the gilt market distorting it even further.

      When you see helicopter money, the shopkeeper will close his shop, because he is not sure of the value of that paper. Other countries sell us valuable stuff (oil, clothes etc) in exchange of our printed money, one little mistake and they won’t accept Sterling Pounds and US Dollars and will ask for Remimbi Yuan in place.

      This equilibre is very fragile and it can be broken at any time. Hopefully we will be OK.

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