Bottom Line: Siebe pays for being tops

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SIEBE PAYS a price for being one of Britain's top international engineering companies. The stock market does not salute a 20 per cent rise in pre-tax profits to pounds 217.2m for the year to 2 April. It asks why profit margins have not risen more.

This explains a rather grudging 2p rise to 549p in Siebe shares yesterday, despite results well up to expectations, continuing the recent trend of share price underperformance, which is unusual enough in itself.

The response does seem grudging. Unlike the halfway stage, when profits were currency- driven, almost 80 per cent of the rise in full-year profits came from improved underlying operating returns and lower interest charges, the latter reflecting a one-third increase in net cash flows despite a 22 per cent increase in capital spending.

What troubled the market was that margins overall slipped slightly from 14.7 to 14.3 per cent. What about the strong volume upturn in North America and South America, which boosted underlying sales in its two big temperature and appliance controls and controls systems divisions by 7 and 9.5 per cent respectively?

A grim scene in Europe and Japan is probably the answer, along with inclusion of low-margin new acquisitions.

The market seems likely to chew over the margin question for a while. With half the company's markets still to move convincingly out of recession, a likely reduction in last year's pounds 17m restructuring costs and a 17 per cent order backlog to get through, there is plenty of momentum to take profits over pounds 255m this year.

A prospective price/earnings ratio of 15.7 is a premium rating, but not as pronounced as some others. Resumed outperformance seems probable.