Bottom Line: David Brown set to achieve strong beginnings

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The Independent Online
THE sparkling performance of Quality Software's shares on their market debut yesterday (they jumped from 380p to 537p) will have put a spring into the step of new issue stags. Next off the blocks is David Brown, the gear and pumps maker, which will be valued at pounds 90m when dealing begins in its shares, priced yesterday at 170p.

David Brown is in many ways a paradigm of British engineering. Founded in 1860, the company became an acknowledged world leader. Success fuelled growth and Brown became a huge sprawling empire, including David Brown tractors, Aston Martin cars and the Vosper Thornycroft shipyard.

By the time new management staged a buy-in three years ago, gearing had soared and profits disappeared. The joint chief executive, Chris Cook, talks of 'a low-performance culture. People were set low standards and not surprisingly businesses did not perform well.'

There is no quibbling with what he and fellow FKI man Chris Brown have achieved since 1990. Pre-tax profits in the year to January were pounds 9.3m from sales of pounds 81m. Borrowings, already well down, will be wiped out by the flotation proceeds.

Can they now keep up the good work? That depends on four things: how much of a millstone a fairly large exposure to defence proves; how well new products fare; how quickly the UK engineering cycle picks up, and how well the company expands its interests in Europe, where it has little representation and a lot to gain from sterling's recent devaluation.

Some of those worries are reflected in the decision to price Brown on a historic multiple of just 12 times earnings per share. On the basis of a 9 per cent profits rise this year the PE falls to 11, far from expensive for a company on a recovery tack. A notional dividend of 6p gives a 4.7 per cent yield, better than the average.

Don't expect quick fireworks, but with Derek Kingsbury, who did wonders at the rival engineer Fairey, in the non-executive chair, it would be surprising if David Brown wasn't a good long-term investment.