The Investment Column: Morgan Crucible boosts its defensive qualities

Mondi; Dowgate Capital
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Our view: Buy

Current price: 299.5p

Body armour has come a long way since chain mail and bronze shin pads, and is now all about hi-tech advanced ceramics. Morgan Crucible is looking to tap into this market via yesterday's £41m acquisition of a 49 per cent stake in NP Aerospace, a company with a 90-year history but which no longer has anything to do with aerospace.

The deal will give Morgan Crucible, which has a six-year option to buy the rest of the company, a much stronger position in the market and access to customers with deep pockets. At this very early stage, it looks like it has got itself a bargain. The valuation is just 6.5 times earnings, a substantial discount to other deals done in the sector.

Morgan Crucible itself has almost been going since the days of bronze armour - it is now past its 150th year of operation. It has three main units: carbon, which includes body armour; technical ceramics, which makes ceramic mechanical parts; and insulating ceramics, which still makes the industrial crucibles from which the company gets its name.

Yesterday's interim numbers were solid, with analysts particularly impressed by the margins, now running at more than 11 per cent across the entire group. Pre-tax profits for the first half were 7 per cent better at £36.5m. The management review that was completed two years ago now looks to be bearing fruit, and even the Insulating Ceramics division, a long-term underperformer, is producing margins and growth in double digits.

Although Morgan Crucible may not exactly be the most exciting stock in the market, building a portfolio consisting of flashy supercharged growth stocks and nothing else is never a good idea. On just over 13.5 times forecast 2008 earnings yielding just under 3 per cent, the stock is good value - unlikely to make you rich overnight, but worth tucking away for the long term. Buy.


Our view: Buy

Current price: 433.5p

Private investors often sell shares that come as an unexpected windfall, preferring to cash in or invest in stocks that they know better. Private investors in Mondi have certainly been doing just that since it demerged from the mining giant Anglo American a month ago, sending the stock down 15 per cent.

However, yesterday's debut interim results show that for investors with an eye on the longer term there is some value in the Johannesburg and London-listed business paper and packaging producer. The results were highly creditable, particularly considering the very tough cost environment the company has operated in for the last year. Recycled paper costs rose by 26 per cent, while wood costs rose by 27 per cent.

Despite that, first half pre-tax operating profits came in at €243m, up from €166m in the corresponding period of 2006. The company has been able to pass costs on to customers due to demand continuing to outstrip supply.

Some of the outstanding issues regarding the South African arm of the business appear to have been ironed out. Mondi is also in a strong position in comparison to its peers when it comes to sourcing raw materials thanks to its extensive wood pulping reserves in Russia, Poland and South Africa.

Recent market falls and the sharp decline in Mondi's share price since listing have created a good buying opportunity for a company that is trading on just under 12 times forecast 2008 earnings. While it is far from risk-free - particularly with its exposure to energy costs, raw material costs and emerging markets - management's tight control and strong performance in tough markets is worth backing. Buy.

Dowgate Capital

Our view: Risky buy

Current price: 17.25p

Recommending investors put their hard-earned into a stockbroking business sounds like madness - but Dowgate Capital is looking so cheap that even if the rest of the market is having a bad week, or month, this one looks like it's being given away.

The company provides corporate finance advice and acts as nominated adviser to a handful of "micro-cap" listed companies via its City Financial Associates unit, and through Ellis Partners, acquired last October, private client and corporate stockbroking services.

Although turnover and profit declined at City Financial, the Ellis acquisition delivered pre-tax profits for the first half of £697,000, up from £512,000 on the same period last year, while turnover leapt more than 85 per cent to £3.2m. The company also announced a maiden interim dividend.

It may be stating the obvious that Dowgate is a risky investment, particularly in these markets, but management changes have led to drastically improved performance and, stripping out the £2.3m of cash and £1.2m of debtors, the shares are ridiculously cheap, with a total market capitalisation of just £6.4m. That puts the stock on less than five times forecast 2008 earnings.

Provided the current market malaise does not turn into a longer-term bear market, and provided small cap companies continue to list, for high-risk investors Dowgate looks well worth a punt.