A high price for AEA's appliance of science

Investment Column
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The Independent Online
WHAT HAS possessed British fund managers? A few years ago, they could not be persuaded to go near anything that looked vaguely scientific. Now just the mention of the word "technology" is enough to have them chomping at the bit.

Just ask AEA Technology. The company, which started life as the bits of the Atomic Energy Authority the last government deemed safe to flog off, was floated late in 1996 at a share price of 280p in an issue billed as the last privatisation. Since then, the shares have trebled in price, adding another 9p to 860p yesterday.

That seems fair enough for a company which is involved in exciting businesses ranging from long-life rechargeable batteries to satellite systems that spot leaves on train tracks. But a glance at the figures shows AEA's growth is less impressive.

True, turnover jumped 17 per cent to pounds 308.4m, but this growth was largely fuelled by acquisitions. In the underlying businesses, turnover was flat at best. And although AEA managed to produce organic profit growth of 10 per cent by cutting costs, the scope for further efficiency gains seems limited.

Not that AEA is necessarily to blame. Work from the old Atomic Energy Authority, which is still in public hands, is declining because the contracts are now put out to tender. And AEA has done well to replace most of the work with sales to the private sector - up 43 per cent last year - and overseas customers, which rose 36 per cent.

AEA has some promising growth businesses. Its environmental division and rail unit - which is eyeing up opportunities in newly privatised sectors overseas - look especially well placed. But a rating of 31 times stockbroker Merrill Lynch's forecast for this year's earnings looks hard to justify. The shares are high enough.

DBS brushes aside problems

DBS MANAGEMENT, the support network for independent financial advisers, has had a terrible year. So why do shareholders still like the stock?

In September, DBS was fined pounds 425,000 by the Personal Investment Authority for failures in reviewing thousands of cases of potential pension misselling. The company then alienated some of its members by trying to charge bank- manager-style rates for sending out letters on their behalf. Members rebelled and DBS had to climb down.

Yet the market is unperturbed. DBS shares have boomed since, hitting 330p at their peak earlier this year. Yesterday they slipped 17p to 234p. Even so, they have risen four times as fast as the market since their debut three years ago.

DBS has tackled its problems in two ways. First, it set aside almost pounds 7m to complete its review, prompting a 58 per cent drop in pre-tax profits to pounds 2.6m. Second, it has had a management shake-up, appointing Tony Kempster, formerly of Prudential, to head its IFA business.

The market appears to think DBS will ride the boom in financial services, while IFAs will take an ever-growing share of the market. Analysts think earnings will bounce back to pounds 10m next year, putting the shares on a forward p/e ratio of 17.

But DBS is a compliance business, and the arrival of statutory regulation may increase costs. Meanwhile sales - which drive the commissions that are DBS's main source of income - are very cyclical. Only for the brave.

Save shares leap on takeover talks

JAMES FROST has wanted out of the Save Group for some time. So speculation that the petrol retailer, formerly known as the Frost Group, was about to be sold always had some credence.

This time it is serious. Mr Frost, Save's chairman and founder, admits takeover talks are under way but says it is still early days. Kuwait Petroleum Corporation, which trades on the forecourt as Q8, denies it is the predator.

Save's share price leapt 22.5p to 136.5p yesterday, valuing Save, in which Mr Frost has a 4.5 per cent stake, at pounds 127m. That is a decent price for a company which reported pre-tax profits of only pounds 9m in the 12 months to December.

Keeping Save's independence always looked difficult. Save has seen most of its fellow independents either consumed by the oil majors or driven out of business by a vicious petrol price war which has led to a significant reduction in the number of outlets.

This should help Save, which owns 407 facilities and operates another 100 which are owned by dealers. Analysts expect profits of pounds 13m this year.

If the mystery bidder is going to pay anything close to the pounds 150m-pounds 180m implied by the price Shell paid Gulf for its forecourt business last year then Save shares look cheap. But this deal is far from done, and shareholders should be braced for disappointment.