Bottom line: Intriguing possibilities at TI

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The Independent Online
THE stock market expects a lot from TI Group. Even after analysts dutifully increased their 1994 forecasts to around pounds 145m, in the wake of impressive half-time figures showing an underlying 20 per cent increase in pre-tax profits, TI shares, up 7p at 412p, are on a 30 per cent p/e premium.

Extensive restructuring, mostly of its expensive Dowty acquisition in 1992 but also in Bundy tubing, has yielded a 1.3-point improvement in group operating margins to 10.6 per cent. The current demanding rating requires further noticeable improvements.

Within Bundy the long march up the value-added product curve from simple tubes to tubing systems has some way to go, more in refrigeration than automobiles. But while this improves margins Bundy's customers are pushing down equally hard on prices.

Bundy's margins improved by one point to 8.9 per cent. How much more they will rise is a moot point if customers are not to be alienated - perhaps by another point.

Similarly at John Crane, a relatively late-cycle company, opportunities for improving prices may not be abundant. With Dowty's polymer side now integrated, operational gearing through the seals distribution network may add another point to current 14 per cent margins.

Encouragingly, order books are 12 per cent higher in both divisions. The wild card remains Dowty aerospace. Forming a landing gear joint venture with Messier made sense of the Dowty acquisition but, despite claims of a 20 per cent upturn in civil spares demand, TI is still anxiously scanning the skies for A320s flying in for their first repair and overhaul.

The market may be expecting more margin improvement than TI can deliver, making a p/e of 20 look high enough. Equally fascinating is where TI's renewed substantial surplus cash generation, currently paying down debt quite smartly, will take it. An eventual buyout of Messier Dowty or even a fourth leg are intriguing, medium- term possibilities.