Bottom Line: Strong defence case

SHARES in Alvis, the military vehicle manufacturer, reacted dramatically to yesterday's announcement of a small acquisition, rising more than 17 per cent to 68p. They have nearly doubled in a little over two months.

With the company's core defence business plodding, and no upturn in orders expected until late this year, Alvis is clearly getting something else right.

With the acquisition of Unipower, another specialist vehicle maker, it is building on its strengths. The defence business is what Alvis knows and Nick Prest, chief executive, argues that there is nothing wrong with the military market if you occupy a good position in it.

Unipower has been making substantial losses due to delays in a particular contract. Alvis is paying an initial pounds 2m and taking over debts of pounds 6m. But it gets a pounds 30m order book and the potential for very strong earnings recovery.

A second reason for the share price rise is the fact that the Unipower acquisition, along with the purchase last November of a maker of bomb-disposal robots, will provide a better return than sitting on the pounds 11m cash Alvis made last summer from selling its electro-optic businesses to Avimo.

The company's low tax charge and strong potential earnings per share growth make its prospective multiple of 10.5 look modest despite the recent share price gains.