Avoid Kidde until sector's smoke clears

Kidde; Blacks Leisure; Xaar
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The Independent Online

Who would own shares exposed to the civil aerospace industry right now? Kidde makes the cargo smoke detectors, alarm systems and fire suppressants for passenger aircraft and yesterday outlined its view of the effect of the downturn in air travel on profits.

Fewer aeroplanes are being made, while the growing numbers grounded will reduce maintenance income, too. Since civil aviation accounts for a third of profits, Kidde now reckons that operating profit across the group will be flat this year.

Unsurprisingly, given that the pieces of the kaleidoscope have not yet settled, there was little guidance on next year. There remains the suspicion that manufacturers such as Boeing – which said it would cut output by 20 per cent within days of the 11 September attacks – have reacted only to the pre-terror decline in air travel and the true extent of the latest problems is yet to be measured. In the early Nineties' recession the downswing in the civil aerospace market lasted more than three years, so it is difficult to image any growth from Kidde's main business in the foreseeable future.

The scope for further disappointments is large. Meanwhile, the lower-margin areas of Kidde's business are also on the slide. Worst is its manufacture of home fire extinguishers and smoke detectors, which is exposed to the US consumer downturn. Many industrial customers are also delaying making decisions while they assess their own trading positions. Kidde's chief executive, Michael Harper, is already restructuring in a bid to boost profits, and promised yesterday to accelerate the programme in a move that will cost hundreds of jobs and shave another £4m from earnings. The search for infill acquisitions has also been halted.

Earnings per share in 2001 are impossible to forecast with any accuracy, but are certain to be lower than this year. The consensus seems to be around 5.7p, but Deutsche Bank reckons an aerospace collapse could send them as low as 4.4p. Kidde shares, up 3p to 58p yesterday, would not then have the benefit of looking cheap and, unlike peers in the engineering sector, are not a play on economic recovery. Avoid.

Blacks Leisure

For a sports and fashion retailer, Blacks Leisure has spent the past year looking distinctly out of shape. The company's Milletts and Blacks chains, which cater for outdoor pursuits such as camping and hiking, were hit by the foot-and-mouth crisis in the spring and early summer. In May there was an aborted takeover from a board director, Tom Knight. And in January there was a profits warning caused by Christmas stock problems. No wonder the share price tore a muscle. It stood at 247p last December but has been wheezing along well below that ever since.

Now with Simon Bentley back in the chief executive's, chair after a horrific skiing accident last year, Blacks Leisure has started to look a bit fitter.

Yesterday's half-year results were hardly a pleasure to behold, with profits falling to £4.7m from £7.2m. But this was already factored into City expectations after Blacks Leisure was forced to lower prices and increase advertising in order to stimulate demand. So while like-for-like sales grew by 2.4 per cent in the sports business – which includes the First Sports and Active Venture chains – and by 4.8 per cent in the outdoor division, there was an element of "buying" these sales with lower margins. Current trading is decent but margin pressure continues in sports as the market leader JJB Sports cuts prices.

Mr Bentley says Blacks's strategy is to differentiate itself with more exclusive, fashionable merchandise displayed in visually arresting environments. Its Free Spirit surfing stores feature waterfalls.

One worry is that Blacks may be juggling too many formats across its 500-plus stores. It currently has seven separate chains, including a new womenswear sports fashion concept called Pure Woman.

There is clearly scope for recovery with the shares, 3p higher at 191.5p yesterday, well off their 1997 peak of 549p. Assuming full-year profits of £14m, the shares trade on a flabby forward rating of just 8 and are ripe for tone-up. Rebuilding City credibility will take time, though, so there is no need to sprint to your local broker.

Xaar

A profit warning from Xaar yesterday hardly came as a surprise to analysts, who have been forecasting a decline in orders from the printing technology company's customers. The surprise was that the warning was due not to falling demand, but failing supply.

Its Cambridge plant, designed as a research facility, has been unable to keep up with orders for its high-speed ink jet printer parts, which remain unfulfilled. Xaar will take a £1m charge to relocate to its bigger, under-used Swedish factory. Up to 45 jobs will go in Cambridge, where the group will now concentrate on the development of prototypes. There are high hopes for a giant new ink-jet printer head that will be able to squirt out a complete A4 picture in one blast, but Xaar needs a development partner first, and a prototype isn't likely for another year or so.

Before then, this year's results will make grim reading. The projected £4.4m profit won't now come through, with break-even a more likely outcome. WestLB Panmure, the house broker, is predicting a swift rebound next year, though, with profits of £7.6m.

A substantial new technology licence is close to being sold to a customer in Asia, and the shares could come back to life when that gets signed. Down 9.5p to 71.5p yesterday, they are worth a gamble.

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