The Investment Column: No room for error as Invensys steers through dangerous waters

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The Independent Online

A supertanker can take a very long time to sink, especially if the crew are bailing as furiously as they are at the good ship Invensys.

Hammered together from the merger of two engineering conglomerates, BTR and Siebe, in 1999, Invensys has never looked particularly fit for the high seas. Listing under the weight of an enormous debt and an almost equally enormous pension fund deficit, the improvement in cash profits may be too gradual to prevent calamity when the next major chunk of repayments are due in 2009.

The plucky new captain is Ulf Henriksson (his former boss, Rick Haythornthwaite, was helicoptered to safety earlier this year) who so far exudes a calm and determined demeanour on the bridge. He put in an impressive performance for his maiden quarterly results presentation yesterday. The figures themselves were mixed. The controls business (which makes the heating or cooling components for air conditioning and white goods) suffered from manufacturing problems and the need to recall 170,000 faulty gas valves. The process systems division (software for the control rooms of factories and oil and gas industry facilities) did well, with new orders from the Chinese power generation market. Rail systems (signalling equipment and other products) suffered because Network Rail in the UK deferred orders. APV (pumps and valves for the food and drink industry) continued its profit recovery after cutting costs.

Captain Haythornthwaite threw dozens of Invensys's other divisions overboard during his time, trying to keep the group from being submerged. Yet, despite this disposal programme, Invensys's net debt is still £874m, and increased in the quarter because even the remaining divisions did not generate cash. The pension fund deficit is another £585m on top.

Captain Henriksson says a period of strategic stability and tough target-setting for managers will be enough to turn the business round. But he also says Invensys's poor state is largely down to under-investment, a situation that can hardly be put right when debts are so high. He has no room for error. An economic squall, or an unseen iceberg of another kind, could be enough to sink the company.

That would leave shareholders under water, and debt-holders moving in to plunder the wreck.

Shake-up makes Slough a buy

Slough Estates has been reshaped in the two years that Ian Coull has been in charge as chief executive. The property group's main asset is the Slough Trading Estate, Europe's largest industrial park, worth around £1.2bn.

Rather than continuing to own its old rag-bag of office and retail space in the UK and beyond, Slough has sold or swapped all but the industrial property. The stock market likes "focus", of course, so it has been broadly welcomed by existing investors. But there ought to be an even more important benefit when property companies are allowed to become investment trusts (the Government has such plans in the pipeline). The experience from other countries with these trusts, known as Reits, is that focused plays are valued more highly than broader property groups. Slough is playing the long game.

Conditions in the UK (still about 70 per cent of the portfolio) continue to be difficult for industrial property, but a higher level of inquiries reported by Slough yesterday raises the hope of rent increases from next year. Mr Coull is also shaking up the group to ensure Slough stops losing tenants at fast as it finds new ones.

A compelling story. Buy.

The vision thing keeps Rexam worth holding

The humble drinks can. Can't be much money in making those, you might think. Well, Rexam, the world's largest manufacturer of aluminium cans (50 billion of them in a year) has just posted a pre-tax profit of £114m for the first six months of the year. That means it is making a margin of 12.6 per cent on its cans, which looks pretty good for such a commodity product.

Rexam is an efficiently run company, always finding ways to cut costs and enjoying increasing benefits of scale. And, to be fair, there are other bits in the mix as well as cans. Glass bottles and plastic containers account for 11 per cent of operating profit, packaging for the health and beauty markets, 15 per cent.

It is also proving good on the strategic vision thing, too. That is why management is trusted to spend cash wisely on acquisitions and factory building plans, rather than be expected to hand it back to shareholders. For example, it is building a new factory in Brazil - just the sort of country in which Rexam wants to grow, since a burgeoning middle class will mean more consumption of canned drinks. Another example is China. In the packaging business, it has followed its customers to the East, setting up next to the likes of l'Oréal, to ensure the relationships forged in the West can continue.

Western drinks markets are tougher, but a recovery in Germany next year could help. At 500p, the shares have a dividend yield of 3.6 per cent. Hold.

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