Bottom Line: Challenge for Chubb

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The Independent Online
CHUBB Security, another high- flying share, also came in for a corrective reaction yesterday after producing results in line with the management's recovery plans and most forecasts.

But even after a 19p fall to 365p, Chubb shares have all but doubled since the company was floated off from Racal at the end of October 1992, while over the same period the stock market has risen by 22 per cent. There is no need for the alarm bells to start ringing. Despite an expected dull sales performance - turnover was up by only 3 per cent excluding currency gains - half-year pre-tax profits have bounced up by 37 per cent to pounds 34.2m and the interim dividend has marched in step with a one- third rise to 2p a share.

About half the increase in profits is because of a combination of reduced redundancy and reorganisation costs and a pounds 1.1m currency translation gain.

The rest has come from an improvement in operating margins from 10.1 per cent to 10.5 per cent - the fruit of hefty cost-cutting in the past 18 months and worth pounds 3.4m extra to profits - together with an pounds 800,000 reduction in the interest bill.

As promised by management, Chubb is generating safe-loads of surplus cash - an inflow of pounds 13.1m turned net debt of pounds 4.8m into a net bank balance of pounds 8.3m during the half-year. The emphasis on slashing costs is now shifting towards a four-year programme to boost market share, increase the sales force, introduce new products and drive for efficiency by closing central stations and some manufacturing sites.

This programme could unlock another pounds 40m of operating profits - an increase of 50 per cent - which helps to explain a p/e of 22, assuming pre-tax profits of pounds 80m this year. The stream of encouraging news will help sustain the shares for some time. But what will Chubb do for an encore?