The Investment Column: Take profits on ABP after dull results

Morgan Crucible; SDL
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The Independent Online

Life in the normally staid world of ports has rarely been this exciting. Take-over bids, political bust-ups and the lurking fear that ports are likely terrorist targets at least means that City analysts are occupied enough to keep awake during results presentations.

So it's a shame to have to report that the numbers from Associated British Ports yesterday were dull. Solid but dull.Profits at Britain's biggest ports group were up for the sixth year running, but only by 2 per cent, at £132.3m.

The shares have rallied by 20 per cent since November thanks to the take-over battle for P&O that rippled through the sector. It is hard to see them going any higher, however. The chief executive Bo Lerenius, a steady hand for sure, all but ruled out any serious acquisitions yesterday, insisting there is growth potential in the 21 properties it already owns.

The ports at Hull, Ipswich, Southampton, Cardiff and elsewhere do look expandable, but not at a rate that is likely to do much for the shares.

Mr Lerenius, who joined ABP in 2000, was pleased by the P&O deal, which he sees as indicating that there is good value in the ports sector. He was open about not having had any takeover approaches himself, however. He admits that possible terrorist activity is a constant concern but claims that, so far, cost increases arising from the need to more carefully check shipments have been passed on to customers rather than absorbed by the business.

Yesterday's full-year results were slightly ahead of expectations, leaving earnings per share at 31.6p and a price-earnings ratio that tops 20. Two new port facilities at Immingham in north-east England become operational in the second half of this year.

This is the best hope for growth that outstrips the market, unless there are suitors with fat wallets lurking offshore.

This is not a risky stock but the shares are already above many analysts' price targets, making it hard to recommend a buy. In fact, investors would do well to take profits.

Morgan Crucible

It is no exaggeration to say that the recovery at Morgan Crucible over the past three years has been staggering. At the start of 2003 the ceramics maker looked to be about to go to the wall. It was heavily loss-making, it struggled under a mountain of debt, had a pension fund deficit three times its market capitalisation and its bankers were threatening to withdraw their support.

Yesterday, Morgan Crucible posted a 33 per cent rise in annual profits to £53m. The group also said it plans to pay its first dividend in five years. Since the dark days of early 2003, Morgan Crucible has gone from having net debt of £350m to cash in the bank of £50m. Meanwhile, its pension deficit has shrunk from £170m to £90m. That is quite a transformation.

Behind this renaissance has been a series of disposals . These not only cut debt but have also helped focus the company on a core enterprise which provides ceramics and carbon products to medical, aerospace, chemicals and railway industries.

Also, Morgan Crucible has been busy transferring production to lower-cost countries which has helped cut its labour costs from 40 per cent of sales three years ago to 35 per cent today.

The company's shares have responded to the revival by soaring from their February 2003 nadir of 30p to close at 228.5p yesterday. But where they go from here very much depends on the performance of the global economy. Although during the restructuring process management has tried to focus the company on less cyclical sectors, it remains sensitive to fluctuations in the wider economy.

Morgan Crucible shares trade at 14.5 times forecast earnings for 2006, which is a slight discount to the wider UK engineering sector. Nevertheless, any investor who bought into the stock back in 2003 should now take profits.

SDL

The translation software and back-up services provided by SDL are fast becoming a must have for multinational companies. The group's offering allows any international company to quickly and at very low cost translate any given text into whatever language it wants.

And business is booming at SDL. Yesterday, it reported an 18 per cent jump in annual pre-tax profits to £5.2m. The group has few direct competitors and therefore boasts a 47 per cent gross profit margin. It makes money by selling a licence for its software to users.

SDL's sales trend is clearly on the up. Last year, it registered a 25 per cent rise to £78m. By the end of 2006, this should have soared to £93m. More than 50 multinationals already use the company's software, including GlaxoSmithKline, Merrill Lynch, Canon, Philips and Honda. Once it has secured a contract from a major player in one industry - for example, GSK in the pharmaceuticals sector - it finds it relatively easy to persuade others to acquire its product.

At yesterday's close of 220p, SDL trades at 22 times forecast earnings. Given the group's growth potential - and the limited competition it faces - this is not expensive. Buy.

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