A safe home at Williams

Blue Chip: When the share price of a former conglomerate slides south, should investors dodge or buy?
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The Independent Online
SUCCESSFUL stock-picking is partly about investing in unfashionable companies which are about to turn. Williams Holdings is unfashionable twice over. It is still seen as that most loathed of corporate species, the conglomerate, and sits in the share listings pages in that most despised of sectors, "Diversified Industrials".

Worse, it is heavily exposed to that most moribund of industries - construction and housebuilding. On the surface then Williams is deeply unattractive twice over. Its share price over the last 18 months has performed accordingly, heading ineluctably south.

The interesting question is this: is Williams permanently out of favour, or is it one step ahead of stockmarket fashion and therefore due for a re-rating?

Williams is little known outside the City. But it makes its presence felt in every home. It makes Yale locks, Swish curtain rails, Polyfilla fillers, Rawlplug fixings, Aqualisa showers, Valor gas fires and Hammerite paint. It rocketed into the Footsie club of one hundred biggest quoted companies in the 1980s by snapping up manufacturers of all kinds. Led by Nigel Rudd and Brian McGowan, it was the classic conglomerate, exploiting the 1980s takeover boom with a never-ending run of acquisitions, flattered by creative accounting.

But things have changed. McGowan has left to chair House of Fraser. Williams now sees itself as tightly devoted to three core product areas: building products, security products and fire protection.

Acquisitions are still made, but they tend to be smallish and infills within its three divisions. And the accounting nowadays is conservative: redundancy and other reorganisation costs of acquisitions are charged against profits. Borrowings are minimal.

The company reported a solid set of interim figures last week. Sales were up 18 per cent, operating profits up 15 per cent and adjusted earnings up 9 per cent.

The performance was doubly impressive, given the problems in building products. Two vivid examples last week: Caradon issued a profits warning and Kingfisher reported a slump in profits at its B & Q home improvements chain.

Yet Williams keeps on churning out the sales growth in building products: Cuprinol coatings up 5 per cent, Swish curtain rails up 5 per cent, Hammerite paint up 8 per cent. Its other two divisions, which are also exposed to the downturn in building, also delivered creditable growth.

Mike Murphy, an analyst with SBC Warburg, the company broker, argues that if Williams can deliver this solid performance in the teeth of a building recession, what might it achieve when recovery comes, as it eventually will. Last week he upgraded the shares from "hold" to "buy". "This is not a stock that is going to double overnight," he says, but the downside risk is minimal.

The day-to-day running of the group is now in the hands of chief executive Roger Carr, who has been at Williams throughout its spectacular growth from lossmaking foundry company.

He argues that Williams still has considerable headroom to continue making acquisitions in its three chosen industrial areas. And he stresses that future acquisitions will be financed out of borrowings. More rights issues - which tend to weaken the share price - are highly unlikely, he says.

These infill acquisitions can be surprisingly fruitful. Take Corbin Russwin, a US lockmaker bought from Black & Decker in December 1994. The plant was so dispersed that workers had to move about on tricycles. By concentrating workers in a smaller space, transport costs and downtime were sharply reduced and supervision became easier. Carr pledged at the time of the purchase to lift Corbin's pedestrian 7 per cent return on sales to 13 per cent by 1995. He has done more than that already. And there is more to come when the company's distribution channels and product development arm are harmonised with Yale's. Yale, Carr gleefully claims, is the sixteenth best- known brand name in the world.

Carr and his colleagues cashed in share options earlier this year, so their personal finances are less linked to the fortunes of the company than they were. Even so they still have a personal stake in the business through direct shareholdings, and a long-term bonus scheme. To trigger this, earnings per share growth has to exceed inflation plus 2 per cent.

Williams is well managed. It picks good acquisitions and absorbs them efficiently. It is geographically well spread. Its balance sheet is strong. It may be a little unexciting, but it is unlikely to keep the private investor awake at nights. Unless you have a cataclysmic view about the future of building and construction, this looks a good time to invest.

Activities Manufacture of building, security equipment and fire protection products in Britain, continental Europe and the US.

Share price 327p Prospective yield 5.5% Prospective price-earnings ratio 14.3 Debt gearing 21%

1992 1993 1994

Sales pounds 1.04bn pounds 1.21bn pounds 1.39bn Pre-tax profits pounds 151.3m pounds 170.3m pounds 200.3m Adjusted eps 21.3p 17.0p 19.3p Dividend per share 12.3p 12.54p 13.5p