Bottom Line: Siebe likely to sail on regardless

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The Independent Online
RUTHLESS cost-cutting, rigorous improvements in profit margins and burgeoning cash generation have carried Siebe through the Anglo-Saxon recession with its reputation enhanced. Who would be willing to bet that the storm clouds now gathered over Continental European economies and Japan will blow it off course?

Unlike some other commentators, Siebe is not seeing a 'double-dip' in North America, which chips in almost half group sales. Far from it: the region ended its last financial year on a roll with a swelling backlog of orders. In the UK, a further 9 per cent of turnover, Siebe sees more than just green shoots.

With all its factories in Europe, which contributes 28 per cent of group sales, working on short time, Siebe will not hesitate to cut head counts if the situation shows no improvement. Between 300 and 500 jobs are on the line compared with the 1,900 who left the group last year at a cost of pounds 6.7m, reducing the total head count to 30,000.

This exodus, on top of previous clear- outs, is a key reason why Siebe was able to report a 9.1 per cent increase in pre-tax profits to pounds 185.1m in the year to 3 April, despite a 0.6 per cent drop in sales to pounds 1.62bn, although the outcome was slightly flattered by pounds 5.3m of exchange benefits.

Remarkably, all divisions increased operating margins, contributing to an overall 1-point increase in the group pre-tax margin to 11.4 per cent.

A case in point is compressed air, where sales fell 11 per cent and yet margins jumped from 6.5 to 8.6 per cent and profits from pounds 13.5m to pounds 15.8m.

Controls, the core business, suffered a 4.3 per cent drop in volume but margins rose from 16.1 to 16.4 per cent. With a boost from North America it began the financial year with a 12.5 per cent increase in order backlog. One could be a bit wary of Foxboro's trumpeted success since an unutilised pounds 22m store of acquisition provisions continues to make its numbers look soft.

Specialised mechanical engineering survived a poor European scene to move ahead, and safety products continue their unstoppable progress, notching up margins of almost 22 per cent.

A hefty pounds 95.2m of surplus cash generation has chopped back gearing from 78.8 to 60.4 per cent without threatening required capital spending, and Siebe is on course for its autumn target in the mid-fifties. Shares moved 17p higher to 477p.

A cautious NatWest Securities expects pounds 206m pre-tax profits this year and a 10.5 per cent dividend increase. A p/e of 15 and a yield of 3 per cent is still good value.