Chamberlin – get ready for the profits from this ‘penny stock’ and follow the ‘insiders’
Identifying and then investing in companies just before they break into profitability can be very lucrative for patient investors who are prepared to take a view and then sit back and wait for it to happen.
Just such a situation could well be how investors should be looking at this tiny £5m company.
Although its overall sales revenues have been falling for the last few years, I now see it as having turned the corner.
This company has also seen its shares falling in price over the last five years, from 132p in August 2017 to 10.75p in August last year.
However, they continued to ease back to as low as 4.0p in early March this year, but they are now showing signs of life again.
Trading currently at 4.7p, I see them more than doubling in the next year or so.
On the face of it most investors would consider that the business of Chamberlin (LON:CMH) was none too interesting.
In fact, it could well be described as boring and ‘bog standard’ but I suggest that it is one that has a very basic importance as the UK’s economy revives.
This is not one of the newcomer ‘whizz-bang’ members of the British commerce sector, instead it can trace its history back over 130 years.
Getting a ‘buzz’ out of a factory visit
It is an example of one of the many companies that I would enjoy visiting, as part of my investment research process, ahead of investment stakebuilding.
To witness raw materials going in one end of a factory, being passed through several processes before coming out of the other end as a finished product, totally fascinated me.
Unfortunately, I have not visited this group’s premises or workshops but, even so, I really like the look of this little company.
Operating from four locations in the UK, the Walsall, West Midlands-based company has two main divisions – Castings, and Engineering.
On the Castings side it produces high-quality iron castings, in various metal grades, ranging in weight from 0.1kg to 5,000kg. Its products are supplied to the automotive, construction, power generation, rail, steel and a wide variety of industrial product sectors.
Chamberlin supplies critical turbocharger components to the automotive sector. This is an emissions legislation-driven market with high growth prospects.
The Engineering side’s main operation produces certified lighting products for use in hazardous areas, such as petrochemical production facilities, in the distilling sector, as well as a range of control gear and electrical installation products.
The group supplies a very broad range of sectors within the overall engineering economy. Its customer base is predominantly blue-chip engineering groups operating across the world.
The oil and gas industry, as well as other sectors involving hazardous environments, is a key market for the group.
Chamberlin has been embarking on a process of diversification away from traditional automotive markets into e-commerce markets, where it can sell direct to the consumer.
Two new brands have been established, namely Iron Foundry Weights, serving the fitness equipment market, and Emba, providing cast iron cookware.
The company and its shareholders
The Chamberlin & Hill company was founded in 1890, went public in 1946, moved from the Main market to AIM in 2006 and shortened its name to Chamberlin a year later.
The group has around 105.6m shares in issue.
Its Board owns over 30% of the company’s equity.
On the day of the latest Trading Update, Trevor Brown, one of the group’s Directors, acquired another 1.25m shares, at an average 4.98p, taking his holding up to 30.77m shares (29.14%).
Just a few days ago Keith Butler-Wheelhouse, the group’s non-executive Chairman, acquired 426,500 shares, at 4.69p each taking his holding up to 1.05m shares (0.99%).
Professional investors within its lists take in Henderson Global Investors (9.50%), Miton Asset Management (5.80%), Chelverton Asset Management (5.68%), and AXA Investment Managers (4.24%).
Also on the shareholder's roll are Rights & Issues Investment Trust, Schroder Investment Management and Mi Discretionary Unit Fund Managers, with each owning just under 1.0% of the group’s shares.
Latest Trading Update
Ahead of announcing its end May 2022 final results in September, the company issued a Trading Update on 8 July.
The group expects to report revenues of around £16.5m (14 months ended 31 May 2021: £22.7m), which will be in line with market expectations.
Its expected adjusted EBITDA of £0.2m, will be up 112% on the prior period (14 months ended 31 May 2021: £1.7m loss).
The company also expects to report a profit after tax of some £0.1m, in line with market expectations.
Returning to profits
The Update went on to cover the group’s view of its outlook.
“Whilst the overall economic climate remains uncertain, in particular rising inflation impacting consumer spending, the Board is pleased to report that all three operating divisions have made a strong start to FY2023 with higher-than-expected levels of orders for Q1 2023 and strong ongoing order books.
The group is well positioned to continue its recovery and expects to return to a more sustainable level of profitability, having taken the appropriate steps to reduce its cost base and invest in new growth strategies for each business.”
Cenkos Securities, the group’s NOMAD and joint broker, rates the shares as a Buy.
Its estimates for the current year to end May 2023 look for £18.4m of sales and an EBITDA of £1.4m, which is seven times its 2022 prediction, that could well see the group generating 0.7p per share of earnings.
Analyst Daniel Casey points out that will be the company’s first profit in over five years.
Furthermore, he was very positive about the company having fixed its price for electricity on a five-year contract.
It is always worth following what the ‘insiders’ do in any company’s equity – so take heed that the group’s biggest shareholder, executive director Trevor Brown, paid an average 4.98p when adding to his holding directly after the Update.
Then earlier this week the Chairman jacked his holding up by another 68%.
Follow the leading ‘insiders’ and get aboard before the market realises the profits are coming.
We should get more confirmation of the group’s current year trading prospects when the 2022 finals are published in September.
The small market capitalisation, combined with strong hopes of a return to profitability in the current year, makes these shares at only 4.7p a very interesting recovery investment.
Although I see the shares more than doubling in price in due course, I am more cautiously only setting a Target Price of 7p, which still offers considerable upside.