The Investment Column: Fiberweb disposal will take toll on BBA

Kiln is a buy as insurers reap hurricane benefit; Bluetooth can transmit risks for CSR
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The Independent Online

Every toddler grows out of nappies in the end, but it can get embarrassing if it takes too many years.

So BBA, a mid-cap conglomerate, is finally separating off its "non-woven materials" business, Fiberweb, which makes the top sheets for disposable nappies and panty liners, agricultural sheeting and protective clothing among hundreds of products. That leaves the company to focus on its aviation business, refuelling and repairing executive jets, where there are more opportunities for growth and higher margins.

The City has viewed the separation as inevitable for a long time, and has priced the shares with a "conglomerate discount" to reflect its frustration that the management, under Roy McGlone, has kept these quite unconnected parts together for so long.

"BBA believes that, as independent entities, Aviation Services and Fiberweb will be better placed to pursue their individual strategies and operational development and to maximise value for shareholders," Mr McGlone said yesterday.

So why now? The trigger appears to have been a handful of serious expressions of interest in the Fiberweb business, from private equity and trade buyers. While BBA will run the numbers on a straightforward demerger of Fiberweb, the odds, in the current frenzy of merger and acquisition activity, have to be on a sale, with the bidding set to start at £700m.

That could deliver something upwards of £500m in cash to return to shareholders, with the rest being invested in expansion for the airports business.

BBA shares jumped as the market salivated over such returns, and in the additional hope that the airports business, shorn of Fiberweb, would attract a bidder in due course. BBA shareholders sitting on a profit should consider their position in the light of yesterday's spike. Despite sales growth of 15 per cent in the first half of this year, Fiberweb's profitability is actually going backwards, because the oil price is feeding through into higher raw materials costs. Factories are having to be closed, so there is a risk that the sale proceeds could be disappointing. The disposal will also dilute earnings per share, dulling some of the benefit of the re-rating a focused business should enjoy. Take profits.

Kiln is a buy as insurers reap hurricane benefit

They were ill winds but they blew the insurance industry a load of good. The devastation wrought by the US hurricane season has been one big advert for insurance, and premiums for catastrophe reinsurance are expected to rise 23 per cent next year, and for oil rig insurance by 46 per cent.

For the second time in as many days, a Lloyd's of London-based insurer announced a rights issue yesterday to allow it to capitalise on the upturn. Kiln is raising £72.8m, which it will use to back new insurance contracts next year. The much bigger Amlin said on Tuesday that it was raising £224m for expansion.

Kiln's fund raising was not without its critics. Only £40m has been specifically earmarked for underwriting purpose s at Lloyd's next year, with the remainder going to provide "flexibility", so it looks opportunistic. Also, in an analysis of the last time the premium cycle turned up, after 11 September 2001, Bridgewell Securities showed yesterday that the insurers who raised most from shareholders have tended to make the worst returns on capital since then. Kiln's additional underwriting will have to be extra profitable to make up the 16 per cent discount to the prevailing share price at which the rights issue has been priced.

No matter, this is the right time to be in insurance shares. Kiln - which we tipped at 86.5p in April and which was 101p yesterday - is a buy, and the rights, at 87p, are very attractive.

Bluetooth can transmit risks for CSR

CSR designs and markets the microchips behind Bluetooth, the short-range radio link that transmits information between computers, mobile phones and other electrical devices, thereby avoiding the need for wires. Shipments of Bluetooth devices are expected to grow by 90 per cent this year and by 62 per cent in 2006. Given CSR boasts a 56 per cent market share, it is no surprise that the group unveiled a 151 per cent jump in third-quarter profits yesterday and a doubling in revenues.

The group is forecast to generate earnings per share of 36p this year, and 46p in 2006. This leaves its shares trading at just 18 times this year's earnings, falling to 15 times. For a fast-growing company such as CSR, which dominates an ultra-fast growing industry such as Bluetooth, that looks as cheap as, er, chips.

Bear in mind, though, that in the quarter, CSR got 60 per cent of its sales from just five customers. To lose one would lead to serious profit downgrades. So the stock will be only for investors with appetite for risk.

The wireless technology industry is in its infancy and there is no guarantee CSR will be a market leader in a few years. Further down the line, Bluetooth technology may end up as a mere commodity, as common and cheap as a DVD. But CSR says its intellectual property is robust, it has a technological lead that rivals will find hard to overturn, and it is ploughing back all its profit into new product development. Speculative buy.

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