The Week In Review: CRH profits soar 71 per cent as they scoop up rivals
Saturday 04 September 2004
Dicom has developed a handy niche supplying both software and electronic products which help clients put paper-based information onto digital databases. But the Anglo-Swiss group is constantly on the look-out to extend its expertise.
Hence this week's €40.5m (£27.2m) purchase of Topcall, an Austrian supplier of software which allows a range of communications like data, SMS or e-mail to be routed to the right party. The acquisition is also expected to be earnings enhancing, even if operating profits were to fall this year.
There lies the crux of the deal, for Topcall has been through the wars and profits have been declining steadily from a peak in 1999. Dicom management is confident it can turn that around. Nonetheless, the Swiss company has a somewhat mixed record on acquisitions.
This should not detract from the underlying quality of Dicom's core business. As the dream of the paperless office moves ever further into the distance, it is little wonder that Dicom's Ascent product is now used by over half the world's largest 500 companies. Unfortunately, its growth is currently obscured by the weak dollar and the continued decline of the group's Swiss distributor of Samsung screens. Until that is finally sold, the shares, which are up 19p at 692.5p, look fairly valued on 14 times expected earnings of 51p for this year.
CRH has a formidable reputation as an acquisition machine, scooping up quantities of small and not-so-small building products rivals. But the hefty bounce-back in the Irish group's first half was as much about the weather as bolt-on buys.
Pre-tax profits soared 71 per cent to €275m (£186m) in the six months to June, with the return to "normal" weather in Finland, Poland and the US providing rebounds in overseas figures. It will be harder going in the second half, given the absence of the poor weather-related comparatives, increasing energy costs and adverse currencies.
Even so, on 12 times Dresdner Kleinwort Wasserstein's full-year expectation of €1.62 per share, the shares look good value at present.
Bunzl is another company where strong underlying growth is being hidden by the weak dollar. With over half the business in North America, it was little wonder that this week's reported interim profits were broadly flat at £91.8m.
The picture looks much better once exchange effects are stripped out. With the group's US supermarket customers being squeezed, Bunzl is pushing further into the convenience sector with the acquisition of TSN, a leading distributor to the sector. There should be a lot more to go for in Europe, which is even further behind on outsourcing than the US.
Unfortunately, the dollar will continue to flatten earnings, so a forward price-earnings multiple of 14 looks high enough.
Costain has been a stunning success since it was rescued by a multinational coalition of Malaysians, Kuwaitis and Americans in the late 1990s. There was more of the same this week, as interim profits leapt by a third to £8.1m.
The group's push into the water is bearing fruit. It is well placed to scoop up work for five of the seven water utilities currently putting out tenders for the next five-year regulatory period starting in March. The nasty provisions which so often tripped up construction companies in the past tend to be avoided in such deals.
Costain looks more assured than rivals, but the shares are high enough on a prospective price-earnings ratio of 11.
OCEAN POWER TECHNOLOGIES
As technology companies go, Ocean Power Technologies may have more going for it than most. That may not be immediately apparent to investors nursing big losses since the loss-making US company's debut on the Alternative Investment Market at 125p last October. Then too, the company has given warning that sales expectations are too high.
Nonetheless, trials of OPT's first power-generating buoy have been given the environmental all-clear and the mighty Lockheed Martin of the US appears to be on the verge of validating the buoy for commercial use.
Potentially even bigger is a power station deal with the Spanish electricity group Iberdrola. Even so, this is one to watch from the shoreline for now.
Roberto Quarta's 11 years at the helm of BBA have seen the group slimmed down to aviation services & systems and non-woven fibres.
Unfortunately, the impact on the bottom line has been minimal. Even half-time results showing an apparently healthy 10 per cent increase in earnings was all the result of last year's share buy-backs and a lower interest charge.
In mitigation, BBA pleads the impact of exchange rates and higher raw material costs, but for companies like BBA neither are really exceptional.
Shareholders might be best served a bit more generosity with the dividend. The interim payment gives a running yield of 4.2 per cent, but with a flat outlook for earnings, that is still not sufficient reason to buy the shares.
RMC Group, the aggregates, asphalt and cement business, has come unstuck in the past few years. The group has reported a 53 per cent drop in pre-tax profits for the latest six months. However, stripping out the costs of restructuring and downsizing the German business, underlying pre-tax profits were up 23 per cent.
But the road ahead for the UK, which accounts for around 20 per cent of the group's earnings, looks bumpy. RMC is trading at around 11 times earnings and has a healthy dividend of around 5 per cent. Although it is confident of meeting expectations, the group's turnaround is far from cemented. Avoid.
Tikit is a small group that is showing its much larger rivals a thing or two about how to run a software business. The group has developed an excellent niche in selling specialist IT programs for the nation's top law firms.
It is this simple formula which has helped Tikit raise underlying profits by 49 per cent to £696,000 in its latest six months.
Even though it boasts 71 of the nation's top 100 law firms as customers, Tikit has barely scratched the surface of the £180m-odd they spend annually on IT staff and software. Upgraded full-year forecasts of £1.5m before tax for the full year would make the shares good value on a forward multiple of 17.
Cost-effective and diverse - is Serco the new Rentokil?
Nemesis usually follows hubris, as Rentokil well knows. Its former boss, Sir Clive Thompson, lost his title of "Mr Twenty Per Cent" after faltering in his quest to squeeze extraordinary growth from a decidedly ordinary set of businesses.
So is Serco the new Rentokil? It has expanded from running the UK's four-minute nuclear attack warning system to a huge range of outsourced services from running schools in Walsall to supporting sub-atomic particle research.
This week it unveiled another 18 per cent rise in half-way earnings per share to 6.09p. And the clarity of its prospects is probably unparalleled in the stock market.
The order book stood at £10.3bn at the end of June, with another £2.6bn of "preferred bidder" business still to come. That means that not only most of this year's and next year's sales are in the bag, but three-quarters of those for 2006 as well.
The continued financial squeeze on governments is the perfect background for Serco. Its ability to offer cost savings puts it in prime position to take an ever-increasing slug of the £300bn or more spent annually on public services.
In these circumstances, it is hard to see where Nemesis will come for Serco. Even so, with mid-teens growth expected to take earnings per share to 12p in the full year, the shares look about right.
The above is a selection from the daily Investment Column
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