The Investment Column: US problems will continue to weigh on Tomkins

Numis; TTP Comms
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The Independent Online

Our view: Fairly priced

Share price: 321.25p (-17p)

The City was clearly unimpressed by yesterday's first-quarter figures from Tomkins. Although the industrial conglomerate, which makes parts and building materials, posted a 21 per cent jump in first-quarter pre-tax profits to £68m, investors were unnerved by a fall in margins.

For the three months to the end of March, Tomkins' operating margin fell to 8.6 per cent from 9.1 per cent a year ago. As a result, cashflows also disappointed. Among a number of factors, management blamed one-off disruptions for this - the company had to close down old facilities and open new ones - and promised that margins would soon recover.

But this might be easier said than done. A sizeable chunk of Tomkins' business comes from selling parts - belts, hoses and windscreen wipers - to the US car makers General Motors and Ford. Given both are trying to slash their supplier costs it would be wise for Tomkins to start looking elsewhere for customers. In the mean time, raw material prices continue to soar. Although in building materials it is able to pass these on to its customers, in the auto market it is not.

Then there is the US housing market, which accounts for 35 per cent of Tomkins sales. After years of buoyancy it has started to cool and this trend looks set to continue. Last, but not least, is the company's exposure to the falling greenback. It generates 70 per cent of its sales in US dollars, but reports its results and, more importantly, pays dividends in pounds.

Tomkins shares trade at a discount to the wider sector. Given some of the clouds on its horizon, this is probably about right.

Numis

Our view: Buy

Share price: 357p (-14p)

In the broiling arena of smaller companies stockbroking, Numis yesterday entrenched its position at the vanguard.

Under Oliver Hemsley, the chief executive, Numis turned in a stellar performance over the first six months of its year. Pre-tax profits soared 51 per cent to £18.6m, allowing for the interim dividend to be doubled to 1.25p a share.

Numis now has 18 more corporate clients than at this time last year, taking it to a total of 101. Prodigious fund-raisings, such as the £500m for the new life company Pater Noster in April, have brought with them commensurately ponderous fees.

Numis' costs compared to income are the very lowest in the sector - partly a result of its remuneration strategy. Only 30 per cent of profits are poured into Numis' bonus pool, against half at some of its rivals. To compensate, its 137 staff are incentivised with shares. Half the company is in the hands of its workers, engendering both industry and loyalty.

Those shares have done very nicely. Despite easing 14p to 357p on profit taking yesterday, their value has increased more than sevenfold since early 2002.

And there's the rub for potential investors: just how much better can performance get?A lone analyst covers the company - Jeremy Grimes at Altium Capital - and he is cautious, arguing that Numis may struggle to maintain the levels of earnings growth seen so far.

Numis is, however, a well-run and highly successful business. The shares still trade at a modest discount to others in the sector, and they may yet have some way to go. Buy.

TTP Comms

Our view: Avoid

Share price: 15.5p (+2p)

Shares in TTP Communications surged almost 15 per cent to 15.5p yesterday after the mobile phone software developer secured a $23m (£12.5m) extension to its contract with Analog Devices, its longest serving customer in second-generation mobile phone semiconductor designs. Delays in signing this deal triggered a profit warning back in March and yesterday's gains helped to claw back some of the ground lost at that time and also alleviated fears of a cash crisis.

One important point in the revision of the contract is that Analog Devices will now sublicense the British company's software to the makers of mobile phones, a shift for TTP, which previously maintained a direct relationship with those vendors. The revenue TTP derived from handset vendors under the previous arrangement was often outweighed by the cost of supporting and integrating the software for the customer. Thus while the contract revision is likely to lead to a drop in royalty revenue in the short term, TTP's cost base will be significantly reduced.

While it is clearly good to see the company reduce costs it would have been much more positive if TTP had signed up a new partner such as Taiwan's Mediatech, which has been winning market share from Analog Devices. TTP could also do with signing up customers for its third-generation mobile phone systems. Until there is evidence of progress on both fronts the stock is best avoided.

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