The story of three war legends and a wanted man

Since coming onto Britain’s small-cap exchange, the shares in this defence stock have taken a hammering. But the company is well-placed for a comeback, says Tom Bulford. Here’s why.

Today’s Penny Sleuth begins with three legends of World War II. First off we have Douglas Bader, famous not only for his exploits as a fighter pilot, but for the fact that he did so despite having lost both legs in a crash in 1931. Johnnie Johnson and Norman Angel were two other flying aces who between them shot down so many Messerschmitts and Focke-Wulfs that they virtually kept German aircraft makers in business.

Fast forward to the 1970s, when Roy Swainbank and his wife Madeleine started to make guns for the Ministry of Defence.

And then, come right up to the present day with a man called Guy Savage. He’s hit the headlines because the US government is attempting to extradite him from the UK and bring him back to the USA to face a charge of weapons smuggling.

So, what do all these characters have to do with a penny share company?

A disappointing early run on AIM

Well, these chaps have all played a part in the history of one penny share company called Manroy (AIM: MAN), now the UK’s only manufacturer of heavy machine guns. I met Glyn Bottomley – the final member of our cast, and Manroy’s chief executive – last week. He had the bemused look of a man who does not understand the ways of the City. Since coming onto AIM at the end of 2010 at a price of 75p, the shares have sunk to 49p and Bottomley, who owns 11% of them, thinks they should be worth more.

Let me fill in the backstory of this unusual business. Our three fighter pilots – Douglas Bader, Johnny Johnson and Norman Angel – were all involved in the foundation in the 1960s of AEI Systems, a defence equipment firm based at Ascot.

Bottomley ultimately took control of the business and in 2008, he also took over the Rye gun-making business whose name, Manroy, was derived from the Christian names of Roy and Madeleine Swainbank. This enterprising couple had prospered in first the Falklands and then the Gulf War but they were running a small operation almost single handed and were reluctant to take the business up to the next level.


Domestic supplier and a foothold in the US

Then we come to Guy Savage. He had a business in Nashville, Tennessee, called Sabre Defence Industries, which was “federally licensed to manufacture, distribute, and import firearms and firearms components for military, law enforcement and civilian use worldwide”. Manroy knew of this business because it had launched its own US operation in 2009. When the US authorities withdrew Sabre’s licence, its $10.7m worth of assets were put up for sale.

In March 2011, Manroy fought off competition from the US firearms maker Colt Industries to buy Sabre’s assets for $6m, and then transferred them along with its existing US business into a new facility in Spindale, North Carolina. That looks like it was a smart move, because it gives Manroy economies of scale and favourable tax treatment for locating in a deprived area.

Today, Manroy’s product range features machine guns, armoured turrets, weapon tripods and mounting systems, ammunition, and a quick-change barrel kit. Bottomley explained to me that when machine guns are firing bullets at a rate of 1,500 a minute, the barrel understandably gets hot. Previously they were cooled by water but this added weight. So Manroy has come up with a second barrel that can quickly be fitted to replace the overheating barrel and give it time to cool down.

As one of the few domestic suppliers to the UK Ministry of Defence, and with a foothold in the USA, Manroy should be well placed. The credibility bestowed by MoD contracts has allowed Manroy to sell into 30 countries overseas, while the USA spends more on defence than the next 14 countries combined.

And yet the shares have disappointed.

Can this interesting share pull off £14m revenue?

For this, Bottomley blames delayed confirmation of an important export order, and more importantly the time taken for the US Department of Defense to approve the transfer of contracts originally awarded to Sabre. As ever this type of business is ‘lumpy’, relying on one-off contracts that can be subject to delay.

But Bottomley seems confident that Manroy can achieve the forecasts of broker Allenby Capital, which is predicting revenue of £14m and earnings per share of 7.7p for the year to this September.

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