Bottom Line: Wait for the big one at Crabtree

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The Independent Online
EVEN by the exacting standards set by most sections of the stock market last year, the performance of Crabtree Group, a small but heavy engineer, was impressive.

Crabtree makes machines for printing on metal, widely used by the packers of soft drinks, beers and aerosols. Its share price has risen by 90 per cent since first entering the stock market lists seven months ago.

To obtain a quotation the Newcastle-based business injected itself in June into a listed but dormant shell called Somerset by placing shares and holding a rights issue at the same time.

Yesterday the company published its first annual profit figures since the placing. For the record, pre-tax profits rose from pounds 35,000 to pounds 1.1m in the nine months to 30 September, but Crabtree is only included for three months and the public company, as at present constituted, did not exist in the comparable period.

A better guide to prospects are figures for the core Crabtree of Gateshead business, rather than the metamorphosised public company. Turnover for the year to 30 September rose by 24 per cent to pounds 23.4m and operating profits climbed 46 per cent to pounds 3m.

Clearly, opertional gearing is high. The steep unit cost of Crabtree's machines would make the company's margins vulnerable if order volume began to falter, but there is no sign of that yet.

More than nine-tenths of Crabtree's expanding output is exported and the company is doing particularly well in China and the Far East. A stabilising element comes from spare parts and repair work on machines already sold, where Crabtree earns handsome margins.

Outside forecasts of a 25 per cent increase in profits look quite credible, implying earnings per share of 16p, a p/e multiple of 17 and a likely yield of 2.6 per cent, assuming a 6p dividend.

This is a growth rating that past recent form might support. However, questions could be asked about Crabtree's expansion plans.

The company wants to make a major acquisition, probably for paper, which will more than double its size. It is also looking outside its immediate area of expertise while still applying its well-tried management formula.

Given the notoriously fickle nature of heavy plant orders and bearing in mind the hitherto meteoric share price performance, it might be best to suspend judgement until the long-awaited acquisition materialises.

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