Powerhouse Aggreko looks fully valued

Aggreko; Weir Group; Applied Optical
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The Independent Online

Like Karl Power, the prank-ster who strolled out to bat in the fourth Ashes test and slipped into a Manchester United team photo, Aggreko is determined to muscle in on some high-profile events. The plant-hire group popped up at George Bush's presidential inauguration, appeared at this year's Edinburgh Festival book fair and is already planning an assault on the 2002 Winter Olympics in Salt Lake City.

Aggreko supplies portable power generation to these events or to industry – and a juicy business it is, too. The group made a profit of £26.6m in the six months to June, up 18 per cent on last year. Sales increased £33.1m to £157.3m.

Chris Masters, the chairman, admitted the company has been a big beneficiary of the power shortages in California, and could be again in the second half if the US summer turns out to be a hot one. Then, Aggreko's other area of expertise – air-conditioning units – will come into its own. Even without that bonus, analysts forecast full-year profits of more than £68m, a rise of more than 15 per cent.

There was some alarm at the scale of margin erosion outside of Europe and the US, but Aggreko is pursuing a deliberate policy of accumulating market share and there should be strong growth from these regions in the coming years.

The figures show that Aggreko's business can prove resilient in the teeth of a slowdown among its industrial clients, particularly in the US. And in the long term, the company is focusing on bundling together hire services with higher-margin maintenance.

The real trouble, as ever, is that Aggreko is well understood by the big institutional investors and its impressive future prospects are reflected in the share price already. Down 10p to 466p yesterday, the stock is on a price-earnings ratio of 29 for the current year and is looking fully valued. The stock has more than trebled in value since being spun out of Christen Salvesen in 1997.

While its current growth rate looks sustainable unless the global economy really hits the skids, it may be prudent for Aggreko shareholders to lock in some of their profits.

Weir Group

Weir Group is a rare beast: a British engineer that is not warning of a catastrophic meltdown in its markets.

The maker of pumps used in the mining, oil and power industries is seeing record order levels – at £390m. Yesterday it reported flat interim pre-tax profits of £25.6m but it sees improving conditions. Analysts at HSBC expect full-year earnings of some £66m, implying a much-improved second half.

Glasgow-based Weir is lucky in its markets: oil still booms, while the electricity crisis in the US has provided extra business. Government programmes to tackle the crisis should offset a US downturn. Even mining demand seems to be holding up and there are upcoming water projects in the Middle East.

The company lacked a chief executive for almost a year, after Duncan Whyte was ousted. Mr Whyte was blamed by the Weir board for not moving fast enough on restructuring. Since his departure some divisions have been closed or sold and others are on the way to being divested. It finally appointed a new chief executive, Mark Selway, a former managing director of Britax Automotive, in June. So things seem to be shaping up.

The company is progressing in reducing debt, which now stands at £105m, and by the end of this year it should be in a position to look at acquisitions. It is likely to cast its eye towards the US. The new shape of the group is also likely to make it more attractive as a bid target.

Weir shares have had a very good run this year amid a collapsing stock market, rising from about 240p to close yesterday at 282.5p, down 3p. The stock trades on a forward multiple of about 11 times, which is not a bargain but the company is a relatively safe haven in these uncertain times. Hold.

Applied Optical

Take a look at a £20 note. That hologram opposite the Queen's head – half Britannia, half "20" – is the biggest headache for a wannabe forger. It is also a big headache for Applied Optical Technologies, the little British company that wants to be a giant in the security printing industry. It is a nightmare because the hologram is produced by Kurz, a German company which has the banknotes market sewn up.

Applied Optical laboured hard last year to develop a state-of-the-art alternative to Kurz's products in the hope of winning lots of business from central bank printers responsible for the new euro notes. It ploughed cash into development, new printing facilities and recruitment – and then saw most of the orders go to Kurz.

Two profit warnings, one chief executive and a full-year loss later, Applied Optical was able yesterday to reassure investors that the one euro contract it has won – in a middle-sized European economy – has been repeated and it expects the market for euro notes to be strong next year, too. A statement to shareholders at its annual general meeting also held out the prospect of new contract wins in other security areas, such as tax stamps and brand protection.

The company is expected, by its house broker Old Mutual, to post profits of £1m, before exceptionals, in the year to March 2002. The company expressed its confidence in meeting those forecasts yesterday, and the stock duly rose 6.5p to 72p. While it is unlikely to revisit the peak of £5 a share – reached in March last year – the company has become an interesting recovery play, thanks to a prudent, reshuffled management team. Worth a serious look.

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