The Investment Column: Hold on to growing Travis Perkins

Slimmer and stronger Stadium is good value - Restructuring is paying rising dividends at IMI
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The Independent Online

You have probably seen a Travis Perkins outlet on an industrial park near you. The company, which runs several chains of builders' supplies merchants, has 740 warehouses across the country, catering for the jobbing builder and the (experienced) do-it-yourselfer.

TP has enjoyed pretty spectacular growth, doubling earnings per share in the last five years. This is not because of any huge surge in building and maintenance work, but because the company has acquired lots of smaller players and is enjoying the benefits of scale that come from being able to buy supplies such as timber, bricks, tools and everything else in bulk.

Results yesterday showed turnover up 12 per cent in the six months to 30 June, and pre-tax profits up 18 per cent.

The story continues: TP says there is scope to keep growing the estate by 60 sites a year, a mixture of new openings and acquisitions. There is also £800m available in debt finance for a much bigger acquisition.

Those of a nervous disposition will note that TP says, "Having refined our analysis of target locations, we see clear potential for a significant increase in the number of branches". The worry is that, as growth is so dependent on acquisitions, TP will be willing to compromise on the profitability of new sites, even opening close to existing outlets. TP counters that builders simply don't travel, needing to get their supplies as close to home and as quickly as possible.

With 60 per cent of its business related to home improvements, and with rising interest rates likely to crimp consumer confidence, there is a risk that sales from TP's existing outlets will be hit. Less than a third of sales relate to new housebuilding, which is set to increase in the UK in the coming years due to demographic changes.

The management has proved it can deliver growth through acquisition, but new investors need a dividend yield of more than the current 2 per cent to be tempted in. Hold.

Slimmer and stronger Stadium is good value

Stadium Group makes plastic potties for Mothercare, but has done a good job of stopping its business going down the toilet.

This UK plastics and electronics manufacturing group has a history of making acquisitions and accruing pension liabilities that it was insufficiently profitable to deal with. But it has a much better future riding the wave of outsourcing to low-cost Asia. Having slimmed down its UK factory base, it is now mainly a contract manufacturer and service provider to UK electronics makers that want to ship their products from China.

Interims yesterday showed the order book is strong and profit margins improving sufficiently to allow the house broker, Brewin Dolphin, to upgrade its earnings forecasts.

Investors need to be very wary here - there are big pension liabilities still and the plastics business, which accounts for over a quarter of turnover, could be hit if relations with Mothercare deteriorate - but at 72p the stock is worth a punt.

Restructuring is paying rising dividends at IMI

The price of PVC has risen by 25 per cent over the past year, which might not deter the average fetishist but could well be a turn-off for potential buyers of IMI's building products business. This division has been described as "non-core" for a few years now but the group must be ruing not having sold it earlier. It looks decidedly less attractive now, when it is posting disappointing results and the raw materials for its ranges of windows and doors are costing so much more. The price tag must be heading south from the previously mooted £180m.

Investors were a little harsh yesterday, sending IMI shares 2p lower to 360.5p. Yet this isn't the most important issue for IMI. The company is financially robust and could afford to wait for a more opportune moment to make the disposal.

There is progress in most of the rest of this sprawling engineering group, whose products include valves and pumps for industry, and drinks dispensers. It has pushed a lot of manufacturing out to Asia and has been able to invest in new products throughout the economic downturn. All of this is paying off, with rising raw materials costs and the decline of the dollar taking the shine off the results only a little.

There was confidence in the outlook with yesterday's interim results, which included the first dividend rise for four years. It is a little more than a year since we advised holding IMI shares, and they have risen to reflect the restructuring and product innovation achievements since. With a 4.4 per cent dividend yield, they are still good value.

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