Bold investors may wish to consider a position in technically advanced leather and luxury leather goods producer Pittards (PTD:AIM) at 93.5p.

Depressed demand for leather and the risks associated with an early stage recovery story weigh on the valuation, yet Pittards’ turnaround strategy is making progress and a return to sustainable profits growth should drive up the share price.

Yeovil-headquartered Pittards specialises in engineering high performance leathers across an array of gloves and footwear sectors; such as sports, fashion, military, outdoor performance, for sale to retailers, manufacturers and distributors.

The £13.1 million cap’s rich history dates back to its founding by Charles Pittard in Somerset in 1826, since when it has helped outfit everyone from famous footballers to yacht racers and even provided leather for Spitfire pilots’ gloves.

Making bags, small leathergoods and clothing in the UK, Pittards also owns a tannery and glove factories in low-cost Ethiopia. The Pittards brand remains synonymous with innovation and advances in the manufacture of technically complex leathers and the company is emerging from a tough period with a restructured board and strengthened balance sheet.

June 2015’s £5.3 million raise enabled Pittards to purchase of the freehold of the Yeovil site, thereby securing the future of its UK manufacturing operations, while also removing previous investment constraints. Further investments have subsequently been made to strengthen its Ethiopian operations and help modernise the UK Leather Division.

Half year results (20 Sep) to June revealed lower sales and pre-tax profit of £13.4 million (2015: £15.6 million) and £300,000 (2015: £600,000) respectively due to subdued leather industry volumes, though gross margin did improve to 22.7%, benefiting from US dollar strength and favourable raw material prices.

Demand for leather from China and Russia has reduced and inventories are high following mild winters, yet this backdrop will become more benign over time and Pittards has opportunities in a $85 billion-plus global leather market. To illustrate, the golf markets (gloves and shoes) of the US and Rest of the World regions alone are each worth a bumper $500 million.

Though Pittards carried £8.2 million of half-time net debt, net assets stood at £24.8 million, equivalent to 173p per share, highlighting the hidden value in the business.

Pittards’ steep 47% discount to book value may pique the interest of value investors who seek a wide margin of safety in their micro cap trades.

STRENGTHS

• Heritage brand

• Know-how in high performance leathers

• Solid balance sheet

WEAKNESSES

• Early stage turnaround

• Depressed leather industry volumes

• No forecasts in market (WH Ireland’s numbers under review)

OPPORTUNITIES

• US$85 billion global market

• Grow number of stockists

• Drive e-commerce business

THREATS

• Weak Chinese and Russian demand persists

• Reversal of favourable raw material prices and currency rates

• Emergence of cheap competition