The Investment Column: Ill wind blows FKI some good

Farming fears will grind down Carr's Milling - Cautious optimism makes VTR one to buy
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The Independent Online

Gone with DeWind? It is hard to resist the pun, particularly when FKI bought the DeWind business just two years ago and yesterday said the wind turbine maker must be closed, at a cost of up to £90m.

Gone with DeWind? It is hard to resist the pun, particularly when FKI bought the DeWind business just two years ago and yesterday said the wind turbine maker must be closed, at a cost of up to £90m.

However, there are reasons for believing that some of the engineering group's other interests - it has 23 businesses altogether - are rather more promising.

You'd have thought, as FKI did in summer 2002, that wind power is a great business to get into. DeWind was a designer of wind turbines and FKI figured, with its manufacturing capability, a good business could be created. It bought DeWind for £12m cash, plus £10 of debt. In the year to March 2004, DeWind made a loss of £6.3m.

The problem is that, according to chief executive Paul Heiden, the sector has radically changed over the last couple of years. Five big players now account for 80 per cent of the global market. While DeWind makes 50 wind turbines a year, the market leader cranks out 3,000. Size has become crucial, both in manufacturing and at the customer end. There was a time when a farmer would order one or two turbines. Now it is big developers.

Although as recently as January, FKI stated that DeWind was one of its businesses with the most potential, the group was facing up to reality yesterday. The City believes it is the right move.

The company has identified five key businesses in its portfolio - high-tech ropes, lifting products, turbo generators (within Energy Technology), materials handling (conveyor belts etc) with its Logistex arm, and window hardware (locks, handles etc). All the rest could potentially to be sold off.

Of the key five, it believes that two have growth potential, turbo generators - as a result of ever rising demand for power equipment - and the materials handling venture - demand from airports, postal sorting operations etc is on the increase.

Arbuthnot Securities reckons FKI will make 10.1p a share this year, putting the stock, at 125.75p, on a forward multiple of 12.5. Given the recovery potential in some markets, FKI is worth holding.

Farming fears will grind down Carr's Milling

Whether you need Wellington boots, pig feed or a combine harvester, Carr's Milling Industries is a one-stop-shop for all your farming supplies.

During the foot and mouth outbreak in 2001, Carr's business was all but wiped out. Its Cumbrian heartland was the worst affected. But strong annual profits from the group yesterday show that its core agricultural business, animal feed and fertiliser, are once again driving growth. Turnover was up nearly 5 per cent and underlying pre-tax profits were up an 12 per cent at £5.1m, beating expectations.

Not all the business is doing as well, however. Its flourmilling roots have recently been a drag on the group and operating profits halved over the year while wheat prices soared more than 60 per cent. Rather than divest its original business, however, it is trying to beef up its food division. It has recently bought two new flourmills, which are expected to drive up earnings.

Its engineering division, which repairs tractors and develops energy systems, has also struggled, but this year managed to break even, thanks to cost-cutting initiatives.

At 390p, the shares have had a strong run on expectations that performance is improving. Yet they are only trading on about nine times 2005 earnings, with the real boost due in 2006 when its food division should pick up. Despite being obviously cheap, concerns over the cyclical and low margin agricultural sector is always going to suppress the shares. Avoid.

Cautious optimism makes VTR one to buy

The media services company VTR took a well-calculated gamble when it embarked on a major reorganisation of the group, combining its post-production and other businesses into a single operation - which resulted in a £1.15m charge and an annual loss.

The restructuring is expected to save £1.75m annually but the benefits will not be fully felt until next year.

The reorganisation cost has led to a pre-tax loss of £251,830 for the year through August, meeting analysts' expectations but compared with a profit of £525,070 last year.

There are grounds for cautious optimism, though, as the company's Clipstream business won a major grant from the European Union last year to develop its eTitle subtitling software. Analysts say the software could turn out to be a real winner, raising the prospect of future higher earnings. A first version is set to be released next year, but benefits from sales will not feed through until the following year.

VTR is forecast to deliver pre-tax profits of about £1.7m in its current financial year, with earnings per share of 10p, rising to £2.1m next year, with EPS of 13p. Dividends could well be resumed at the end of the current fiscal year.

The shares closed up 2p at 76p yesterday. Buy.