Astec plugs into new industries

The Investment Column
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The Independent Online
The market took fright at yesterday's results from Astec (BSR) yesterday. Shares in the Hong Kong-based group, which makes power transformers for personal computers, fell 12.5p to 137.5p after the company reported flat half-year profits.

At first glance the numbers look like a tale of woe. Sales were adversely affected by continued stock reductions in the fiercely competitive PC industry and slower market growth rates in Europe. Margins were dented by the company's push into the volume-based PC power supply business while sales in higher margin high sectors fell.

Currency factors were another blow. Though Astec is a dollar-denominated business, it was hit by profit translation which knocked 6 per cent off the pounds 13m pre-tax figure. Operating profits fell 5 per cent to pounds 12m and sales slumped by 10 per cent to pounds 180m. The litany of grim tidings knocked the shares close to their 12-month low, though they have managed a six- fold increase in the last five years.

But the shares look oversold. For one thing the company was making bullish promises yesterday about a return to double-digit revenue growth. And new chief executive Howard Lance was getting into Sir Clive Thompson's territory when he followed the Rentokil Initial chief executive's pledge to achieve annual earnings growth of over 20 per cent.

At the trading level, the PC market may be a cut-throat business, but Astec is a leading player with a significant market share. While it plans to remain a leader in this volume-driven business it is also branching into new and higher-margin areas like supplying automotive and medical industries.

And though the PC market has been destocking, there are suggestions that this situation is now easing. Sales were weak in the first quarter but have picked up since. Order rates have also improved through the six months to June and the current order backlog is up on last year.

Management is another potential plus. Howard Lance joined as chief executive in April from Emerson Electric, the US power giant which recently increased its stake in Astec to 51 per cent. A bid from Emerson remains possible.

On Dresdner Kleinwort Benson's revised forecast of pounds 35.5m the shares trade on a forward rating of 16. With a re-rating in view, investors should hold on.