James Latham Research Report
A centuries old family business, positioned for a period of exceptional growth not reflected in the share price.
Contents
- Executive summary
- Company overview
- Product ranges
- Customers
- Competition
- Financials
- Management
- Ownership
- Investment outlook
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.
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