Chubb locks into growth abroad

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The Independent Online
It is a measure of Chubb's geographic and product diversity that the moribund construction market and a contracting banking industry in Europe were no more than an irritation to the fire protection and security group. Good growth elsewhere more than made up for a downturn in those markets and the steady improvement since Chubb was spun off from Racal in 1992 continued.

Pre-tax profits of pounds 44.4m in the six months to October were 13 per cent better than a year ago, bang in line with expectations. They were struck from a 5 per cent increase in turnover to pounds 383.2m. Earnings per share were up 17 per cent at 9.6p and the interim dividend increased 12 per cent to 2.32p.

When Chubb was demerged it was making an unexceptional return on sales of almost pounds 700m, hardly capitalising on its unrivalled stable of brand names. A four-year plan was implemented to widen margins and lift market share which, just over half-way through, appears nicely on target.

As the chart shows, operating margins have improved markedly in both the alarms and locks businesses. That has led to an impressive increase in cash generation, and a pounds 65m debt burden four years ago has been transformed into a pounds 63m cash pile.

How the company chooses to spend that money will be key in determining whether the current good but hardly heart-stopping growth continues or shows a noticeable improvement. In a fragmented market, picking up smallish acquisitions of pounds 20m-pounds 50m is the likely expansion route. There is no shortage of opportunities. Chubb is represented in more than 100 countries around the world, and while the developed countries of the West can only be expected to replace their existing stock of locks and alarms many other markets have enormous potential. The scope for growth was underlined during the first half by orders pouring in 4 per cent faster than sales went out.

To satisfy that demand, an pounds 8m investment programme is under way to build three new fire product and safe factories in Indonesia, South Africa and China. Given 13 per cent sales growth from physical security in Asia, Australasia and Africa, compared with no change in America and Europe, that is a sensible allocation of resources.

With no real surprises, analysts left their forecasts for this year and next broadly unchanged with a consensus expectation of pounds 100m before tax in the year to April and pounds 110m next time. After yesterday's 13p rise to 313p, the shares trade on a prospective priceearnings multiple of 15, falling to 13. Despite drifting from a peak of 406p early last year, the shares are still not obviously cheap. Fairly priced.

Smith surmounts paper problems

David S Smith exemplifies the problem facing investors in the paper industry. Like its peers, Britain's largest maker of recycled paper and leading wholesaler of office stationery is looking forward to several more years of rising demand. But the industry is notorious for its over- optimism, as last month's profits warning following earlier confidence at Arjo Wiggins amply demonstrates.

It is now clear that this year's destocking has been more than just a blip, an impression that is borne out by the volatility in the price of waste paper this year. Having more than doubled and then halved in the space of under 12 months, the price of a key ingredient for over 90 per cent of Smith's production has made life extremely difficult.

It is testimony to the strength of the management that Smith has been able to lift pre-tax profits by nearly 48 per cent to pounds 59.6m in the six months to October. Its decision to raise the half-way payment to shareholders by 15 per cent to 2.45p suggests it remains confident about prospects.

In fact, the company is rightly being cautious over the outlook. It has managed to widen margins in its main paper and packaging operation from 11.4 to to 12.7 per cent as selling price increases have been pushed through even faster than the soaring cost of waste paper. But in doing so Smith admits that it has lost share in a packaging market that has itself seen growth slow from 5 per cent in 1994 to 1 per cent in the first 10 months of this year.

Smith's defence against any cyclical downturn lies in the Spicers wholesaling business and the group's niche in waste paper. As well as providing greater input cost stability than wood pulp, substitution means Smith's St Regis Paper operation saw demand rise 7 per cent against a market up by only 1 per cent.

These qualities may not be sufficient if demand falls off a cliff, though. Profits of pounds 120m this year would put the shares - at 255p, up 6p - on a modest prospective multiple of 9. Fading bid hopes give some support, but the shares are likely to remain dull.

Disappointment

as MFI slides

Given the fragility of the housing market, it is hardly surprising that DIY and furniture retailers have been struggling even more than the rest of the high street. The last few weeks have seen grim news from Magnet, which is part of Berisford, and Spring Ram, the kitchens and bathroom manufacturer. Yesterday it was MFI's turn to disappoint, with pre-tax profits down 30 per cent to pounds 20m in the six months to November. On top of this MFI rolled out a tale of falling margins, flat sales and rising costs.

In some ways MFI has been unfortunate as it has tried to do some of the right things only to be clobbered by unexpected nasties. It has been moving more production in-house to improve margins and the proportion of MFI in-house manufacturing has risen from 52 per cent of sales to 55 per cent.

However, the company did not count on the massive rises in the price of raw materials such as chipboard, which have shaved its gross margin from 53 per cent to 51 per cent. With higher payroll costs caused by the increase in manufacturing capacity, the net operating margin has shrunk even more dramatically from 8.4 per cent to 5.7 per cent - although the worst should now be over on this front.

MFI has also been revamping stores under the Homeworks name. These stores stock houseware products as well as furniture and enable the company to attack new markets and move away from its downmarket image. MFI now has 27 stores in the new format and will convert a further 35-40 in the next year. Sales in the conversions are up 10 per cent. If the trial is successful all 184 branches will be changed to Homeworks.

Analysts are forecasting profits of around pounds 60m for the full year. With the shares 0.5p lower at 153.5p the shares are on a recovery-stock forward rating of 22. But much depends on an improvement in consumer spending and an uplift in the housing market. Hold.

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