Bottom line: Rhombus deal seen as bad omen

News of the pounds 25.8m acquisition of Rhombus appeared to put the castors under FKI's share price yesterday. Not that a 9p fall to 164p could be put down to the purchase of the loss-making German castor manufacturer. Nor could full-year results that were up to best expectations, showing a 37 per cent rise in pre-tax profits to pounds 52.3m and a 23 per cent dividend increase to 3.7p.

Rather, the modest Rhombus deal has reinforced fears that a big, paper-financed acquisition by FKI is due sooner rather than later.

Rhombus in fact makes great strategic sense, linking FKI's US castor interests to European distribution outlets.

A few millions spent on reorganisation, and Rhombus should be heading towards margins of 10 per cent on its pounds 40m sales base, offering a fine return on the purchase price.

FKI's material handling, hardware and engineering businesses are all showing adequate margins. Material handling, where profits doubled on falling volume, thanks to better pricing, cost cutting and an acquisition, showed the most impressive performance.

But FKI's US automotive components operation, which accounts for pounds 70m out of total divisional sales of pounds 171.7m, although now at break-even, is depressing margins and could certainly benefit from a sizeable acquisition to activate idle plant.

The disposal of pounds 50m of process control turnover this year will also help to move margins - 7.6 per cent last year - much closer to FKI's target of 10 per cent.

FKI is a revival story that deserves support even on a prospective p/e of 15, assuming pre-tax profits of pounds 68m and yield of 3.4 per cent. But fears of a rights issue, given the 60 per cent gearing, will nag at this premium rating.