The Investment Column: Halma's too healthy and safe for any more upside

ITE Group; Universal Salvage
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The Independent Online

Our view: Fully valued

Share price: 147.5p (+6.75p)

The typical Halma division makes a gross profit margin that even drug traffickers would be happy with. According to a recent government study, importers of heroin into the UK enjoy a 58 per cent margin while many Halma units boast a figure of around 60 per cent.

Of course, the FTSE-250 group is involved in a totally legitimate line of work. It makes fire and smoke detectors, lift sensors, devices that detect leaks in pipes and gas installations and theatre lighting. The common thread that runs through all its operations is safety for people in buildings and places of work.

Andrew Williams, Halma's chief executive, says the company makes great returns because most of its products are a must in many organisations due to health and safety regulations. Yesterday, he unveiled a 17 per cent rise in underlying first half profits at the group to £30.6m. As a result of this solid performance, the group's dividend rose by 5 per cent to 2.85p a share.

Halma is enjoying strong trading across all three of its key business segments and not even the plummeting dollar was able to spoil things. The company makes around 35 per cent of its profits across the Atlantic, however management are confident that even if dollar headwinds get worse during the second half Halma can absorb them and still deliver strong results.

The company has made three acquisitions this year and will intensify its search for new deals - it is particularly keen to expand into healthcare sectors. Although making acquisitions can be risky, investors need not worry too much about Halma. Its management have a great track record of buying businesses which enhance earnings from day one.

Trading at nearly 18 times forward earnings, the stock stands at a 30 per cent premium to peers, so its star quality is already more than priced in. Wise investors will look elsewhere in the industry for better value

ITE Group

Our view: Hold

Share price: 159.75p (+4.75p)

The City is now pretty used to seeing results from ITE Group exceed forecasts. The exhibitions organiser repeated the trick yesterday with its annual figures which beat estimates on all key metrics.

Headline pre-tax profits rose to £26m from £25.3m last time amid booming business conditions in its core and Eastern Europe and former Soviet Union markets. Russia accounts for the lion's share and it is no surprise ITE is doing well there. The economy is growing at around 6 per cent a year thanks to soaring commodity prices.

There was, however, one piece of unsettling news from the group yesterday.

Ian Tomkins is to step down as chief executive next year citing personal reasons. He has been a key player in the revivial of the group's fortunes in recent years. His departure is likely to cause some uncertainty in the short term. In fact, some analysts believe it could leave ITE vulnerable to a takeover bid. Give its strong cashflows it would certain attract the interest of private equity.

In the long-term, the company should continue to enjoy growth give the buoyancy of the markets on which it is focused.

Universal Salvage

Our view: Hold

Share price: 147.5p (+6.75p)

Since taking the helm at Uni- versal Salvage 18 months ago, Avril Palmer-Baunack has done a terrific job returning the business to health.

The company manages the collection and disposal of vehicles, typically ones damaged in an accident or of low value, for a broad range of clients including motor insurers, car dealers and local authorities. It generates sales through weekly auctions.

Yesterday's interim results showed further progress at Universal.

It reported a pre-tax profit of £900,000, compared with a loss of £700,000 a year earlier, helped by strong auction results, the high price of scrap metal and lower costs. Net debt fell to £2.2m from £5.5m a year ago. Going forward, the group expects good trading conditions and predicted new contracts to help increase profitability.

Universal has found that growing numbers of East Europeans are attending its auctions following the entry of countries like Lithuania, Poland and the Czech Republic to the European Union. They tend to then re-sell the cars in their home country and this trend has made the company's auctions more competitive and therefore more successful.

Things have not always been so rosy. In 2002 Universal shares lost over two-thirds of their value after the company lost a key contract with the insurer Direct Line.

The contract had accounted for nearly 40 per cent of group volumes. These days Universal is not so dependent on one client - its biggest customer today, Royal & Sun Alliance, accounts for just 17 per cent of volumes.

By the full year, analysts expect pre-tax profits at Universal to have reached around £2.1m. Although this leaves the stock trading at 27 times forward earnings, it is very possible these forecasts will end up being too conservative. .

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