Blue Chip: Phew what a scorcher

From heating to oil refining, Siebe is a master of control systems and a very strong buy
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The Independent Online
Siebe, one of the great unsung investment stories of the last 20 years, stands at a crossroads. Within the next two to three years, Barry Stephens, now executive chairman and the architect of its success, will stand down after 32 years at the helm.

Meanwhile, its pounds 520m offer for Unitech, the highly rated electronics company, and its biggest ever deal, went unconditional last week.

It is hard to say which of the two is the most significant development for the company. In the City, Stephens' tenure has been applauded as one of the greatest by any boss of a big British manufacturer.

As one fan put it: "He must be ranked as one of the great post-war industrialists alongside Hanson and Weinstock." Indeed, he has done far better for shareholders than either Hanson or Weinstock.

Yet asked to name Britain's biggest engineering firm, most people would answer Rolls-Royce, or British Aerospace. Few would know it is Siebe, with a stock market value of pounds 4bn. That is partly because a fraction of its sales are in the UK.

Since 1991, the shares have outperformed the market by more than 500 per cent. Dividends over that period have grown at an annual compound rate of 10 per cent, while earnings per share have grown from 23.1p to 36.2p. All that, and yet the company remains largely unknown outside the City.

Unsung it may be, but not unappreciated by the few - a fact reflected in the demanding rating that its shares have enjoyed for many years. So what has been the key to Siebe's success? Mr Stephens puts it down to management. "You must have management in depth. It's no good just having the top soil," he says, in his soft-spoken Welsh accent. "We have depth, and it is the key to our future success."

Siebe's success has come, not in the low-tech end of the market, but in advanced control systems - specialist hardware and software to monitor and control all kinds of industrial processes from steel manufacture to oil refining. It has had to compete against the best from the US, Europe and Japan.

Despite the remarkable share price performance, Siebe has had its ups and downs. When it paid $650m (pounds 395m) for Foxboro of the US in 1990, its share price halved on fears of earnings dilution. But Foxboro proved an amazing turnaround.

Costs, the first area of attack for Mr Stephens' team, proved an easy target. Gross margins at the time were 45 per cent, but at the bottom line the company was only just breaking even.

Since then, Siebe has cut its wage bill to just 1 per cent of sales; sales per employee now stand at more than $600,000.

The City is hoping Siebe will repeat the trick at Unitech. As a public company, there is less scope for the type of cost-cutting that transformed Foxboro, a sleepy family concern. But there are other attractions to compensate.

It gives the company an entree into power controls, a business where it had been weak. Mr Stephens says it is too soon to talk about how they expect to integrate Unitech.

"But we know the management well, and putting our technology together with Unitech does not just give us 4 per cent plus 4 per cent of market share; it gives us more like 15 per cent." His reasoning is that the two companies' complementary but not overlapping power technologies will grow faster when combined.

Unitech already has an established and commanding presence in the Far East, especially Japan, where it owns 51 per cent of Nemic-Lambda, one of Japan's biggest power supplies groups. The latter will act as a distribution channel for other Siebe products.

To potential investors, the worry must be how long Siebe can continue to grow at this rate. As another former high-flyer, Sainsbury, has more than amply demonstrated, what goes up can come down.

Siebe, too, is on an earnings treadmill that could become a millstone around the management's neck rather than an incentive, as it is now, to improve performance.

So do the shares remain a buy? Or is now a good time to sell out, with Mr Stephens departing, and Unitech an unknown quantity? Unitech may be Siebe's biggest deal to date, and Mr Stephens' swansong. But given how familiar Siebe is with Unitech, the risks are outweighed by the prospective rewards. According to Ewan Fraser, an analyst at James Capel, who has followed the company for five years: "Unlike Sainsbury or Hanson, which lost touch with the dynamics of their markets, Siebe remains in touch." The conclusion is that there are more years of growth before the party is over.

Unitech takes to pounds 1.9bn the amount Siebe has spent on acquisitions over the past 12 years; few shareholders would begrudge the expenditure. The shares may be on a tough rating of more than 19 times 1996 earnings. But they remain a raging buy.

Siebe

Share price 862p

Prospective p/e* 19.9

Gross dividend yield 1.7%

Year to 1 April

1993 1994 1995 1996* 1997*

Turnover (pounds m) 1618.6 1863.5 2146.2 2511 3220

Pre-tax profits (pounds m) 169.6 185.1 217.2 330.9 432

Earnings per share 27.2p 29.7p 36.2p 44.1p 51p

Dividend per share 10p 11p 12.1p 13.4p 14.8p

* HSBC James Capel forecast

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