James Latham Research Report
A centuries old family business, positioned for a period of exceptional growth not reflected in the share price.
Hello Readers,
Below you'll find my latest research report on James Latham.
I have done my usual level of due diligence: travelling down to Hemel Hempstead to speak with management and other shareholders at the AGM; going through more than 10 years of financial statements, extracting and interrogating the relevant figures contained within; compiling data on 7 competitors and performing a comparative analysis; studying the company's product ranges and customers; and looking at the management and ownership structure, with a focus on the alignment of incentives.
However, responding to Reader feedback, I've made the report more concise (a little over 5,000 words), focused the competition section on a comparative analysis rather than a detailed case study of each competitor, and provided some hard numbers on potential return expectations in the investment outlook. If you agree that these changes are an improvement, please let me know by replying to this email or commenting on the website.
Regards
James
Executive summary
James Latham (Lathams; LTHM) is an independent distributor of timber, panels and decorative surfaces, operating in the United Kingdom and Republic of Ireland, and listed on the Alternative Investment Market (AIM) of the London Stock Exchange with a market capitalisation of £221m.
The founding Latham family has run the company for more than two and a half centuries, and the alignment between management and shareholders could hardly be better: remuneration is relatively modest, there's minimal share dilution, and very substantial insider ownership.
As you'd expect for a commodity business, there's a healthy amount of competition from companies of varying sizes; smaller regional businesses - some more than a century old - coexist with mid-sized national (e.g. Lathams), and large international corporations.
Despite the competition, Lathams has built itself a considerable moat and outperforms its competitors on many key metrics. These include: efficiency, where Lathams had the highest revenue per employee and best operating margins in a study of 7 direct competitors, with revenues ranging from £10m to £2bn; product range, including a very wide variety of both commodity and specialist products from highly sought after suppliers; reputation, built over literally centuries; and service, such as next day delivery on pretty well all products from its network of depot's operating 24/5.
After a period of unprecedented profits in 2021 and 2022, the company has around £50m of excess cash on its balance sheet, which has now been allocated for the construction of a national distribution centre costing £45m over two years. If by 2030 (once the excess cash has been fully deployed), the company is able to generate a return on capital employed/equity around its historical level of 14-15%, the return for investors would be 18-21% per annum - assuming it continues to trade at its current multiple of earnings.
If, however, we don't see this boost to growth or a return of excess capital to shareholders, a conservative projection would put the annual return for the next 5 years at around 10% (from the current share price). You've therefore got an opportunity with attractive upside and pretty minimal downside.