Airmotive deal gives BBA focus

The Investment Column

Since failing to snap up Lucas, a rival twice its size, for pounds 2.4bn in the summer BBA has bent over backwards to reassure investors it is not another clapped-out industrial conglomerate desperately seeking a mega-deal to drive sluggish earnings forward.

Soothing words from aggressive chief executive Roberto "Give No" Quarta about bolt-on acquisitions and organic growth have proved to be more than just talk. First a strong set of interim results in September underlined Mr Quarta's ability to grow businesses rather than to just buy them. Now Mr Quarta has moved to allay concerns that BBA lacks focus.

While enjoying critical mass in friction materials (brake pads and linings) and non-woven fabrics (as used in nappies and filters), questions marks have hung over the future and strategic fit of its aviation and specialised electricals activities.

Yesterday BBA addressed one of these concerns by paying $185m (pounds 113m) for International Airmotive Holding, a Dallas-based specialist in corporate jet maintenance.

In servicing both fixed-wing and helicopter turbine engines, as well as distributing parts for the business aviation market, Airmotive should complement Signature, BBA's flight support division. Both serve a similar customer base and are recognised as leaders in their US markets.

In the nine and a half month period from March to December 1995, the last period for which audited accounts are available, Airmotive made pre- tax profits $5m on sales of $150m.

The deal, which awaits regulatory approval, also means 40 per cent of BBA's business is driven by lucrative after-market business - whether for car brake pads or aircraft overhaul and repair.

BBA is assuming $104m (pounds 63.4m) of debt, but the Airmotive deal is still expected to boost earnings in the first full year before any one-off restructuring costs. Although the purchase is being funded out of existing resources, cash flow is strong, so bringing debt back on to the balance sheet should not prove too much of a strain.

Evidence of BBA's greater strategic focus also came yesterday with the completion of its DM92m (pounds 36m) purchase of Corovin, a leading German producer of polypropylene-based non-woven fabrics. This deal, the first since the abortive Lucas takeover, brings with it consolidated debts of up to DM86m.

All this wheeler-dealing leaves the specialist electricals division as the only existing business area where BBA still needs to do a deal. As one analyst put it: "It is either double or bust."

But with the shares closing 9p higher at 353.5p, it seems the City can live with that uncertainty for the time being at least. Even assuming an unfavourable sterling rate of $1.65, broker UBS has raised its full- year forecast by pounds 3m to pounds 166m, putting the shares on a multiple of less than 14. Undemanding.

Ideal nets a dream position

Ideal Hardware has been an ideal investment since it came to the market two years ago at just 225p. Earlier this year the shares peaked at 683p, and after better-than-expected figures for the six months to November yesterday they closed 5p better at 642.5p.

To have a strong share of a fast growing market is any company's, and investor's, dream.

Ideal, with about 14 per cent of the distribution market for computer memory devices, is in just that fortunate position. Sales of hard disks and the like are expected to grow twice as fast as any other part of the computer market in the next few years as new applications continue to make ever bigger demands on data storage capacities.

After a 24 per cent rise in turnover to pounds 75.6m (pounds 60.9m) in the first half, profits grew by 28 per cent to pounds 3.75m (pounds 2.93m). Earnings per share rising at the same rate to 11.7p allowed a 24 per cent dividend hike to 5.2p.

Operating in a cut-throat business like computer distribution, Ideal has had to work hard to stand out from the crowd and it has not been afraid to adopt some pretty radical marketing ploys.

Its catalogue is available on the Internet and it broadcasts a weekly television programme to 500 of its biggest customers to keep them abreast of the rapid changes in a business which churns out 200 new products a week.

Analysts focused yesterday not just on the numbers, which have impressed ever since flotation, but on the way Ideal appears to be investing in the future in order to maintain its current explosive growth rate. A new 70,000 square foot warehouse will be fully operational next month, but more importantly the company is spending heavily on training its own staff to keep service levels high.

Two years ago the shares were obviously cheap; now, despite the quality of the company, Ideal is a harder investment call. On the basis of forecast profits of pounds 9.5m in the 12 months to the next year's new July year end and pounds 12m the following year, the shares stand on a prospective price-earnings ratio of 22 falling to 17. That is a pretty punchy rating, but compared with a sustainable growth rate in the mid-20s, not demanding. Good value.

Carclo sags as steel prices fall

Carclo Engineering is a world leader in card clothing, a vital component in the manufacture of textiles, while its wires are used to support almost everything from colliery lifting equipment to the Gossard Wonderbra. Sadly, since a pounds 55m acquisition in 1993, it is also heavily involved in precision stainless steel strip, where overproduction has seen prices crash by 40 per cent or more this year. Orders for Carclo's Lee steel division sank by 10 per cent in the first half and the company warned yesterday that it faced a further shortfall of between 5 and 10 per cent in the second half. With management unable to see any light at the end of the tunnel and the strengthening pound set to hammer European sales, it was little wonder the shares slumped 48.5p to 202.5p.

The company warned in July that flat order books would hit the first half, so pre-tax profits down from pounds 8.2m to pounds 7.12m in the six months to September came as little surprise. Things have clearly got worse at Lee since, but there are signs that the rest of the group is responding to treatment.

Card clothing, which makes the wires used to comb fibre in textile mills, has filled in gaps in its coverage with acquisitions in the US and Germany over the past year. Much of the 29 per cent jump in half-year operating profits to pounds 1.74m was due to a pounds 300,000 contribution from Ashworth Card Clothing of the US, acquired in October 1995. The loss-making Peter Wolters of Germany, picked up in March, should start to chip in next year, and the Far East, where the textile industry is increasingly moving, is growing in importance.

The outlook in wires is also looking better, despite a 10 per cent fall to pounds 2.16m. Rationalisation should produce benefits next year. Meanwhile, the automotive to packaging-related general engineering division is proving the star of the group, lifting profits 40 per cent to pounds 2.8m on sharply higher margins.

Full-year profits of around pounds 14m would put the shares on a forward p/e ratio of 13. Unexciting, given the continuing uncertainty at Lee.

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