Bottom Line: Bond urges Bullough to recovery

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MARKET reaction in December to news of the appointment of Gordon Bond, ex-Rank Xerox and Arjo Wiggins, as chief executive of Bullough, was little short of euphoric.

Within a month the battered Bullough share price had soared from 132p to 186p at which point Mr Bond signed up for 300,000 share options.

Revelations in February that past Bullough profits had been overstated to the tune of pounds 1.4m helped to knock the price all the way back down to a low point of 136p earlier this month.

Mr Bond therefore has a strong incentive to justify the market's earlier faith. The first interim results under his stewardship, showing a 35 per cent increase in operating profits to pounds 7.6m and pre-tax profits of pounds 7.1m, compared with just pounds 50,000 after restructuring costs of pounds 4.7m, prompted a 9p rise in the shares to 154p yesterday.

The new chief executive is confident that Bullough can get back to its previous peak 1990 operating profits of pounds 28m within a few years. The bulk of this revival should come from margin improvement and revenue growth with perhaps 15 per cent stemming from future acquisitions, easily affordable from a strong balance sheet.

Current margins of 13.5 per cent in heating and 10.5 per cent in the assorted engineering division may be hard to boost although some disposals in the latter area would not go amiss.

But market-leading refrigeration for supermarket and commercial users must be capable of more than a 3.6 per cent return on sales. And office products, on whose restructuring Bullough has spent around pounds 8m, eventually can do a lot better than a 2 per cent margin.

Assuming pre-tax profits of pounds 17m, a p/e of 16.7 is a premium rating and a yield of 5 per cent is not expecting much dividend growth for some time, given a likely 1.5 times cover this year. But if Mr Bond's profit targets prove credible, then the shares have room to perform.

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