Smiths to benefit from war dividend

Smiths; SSL; Bloomsbury
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The Independent Online

"The events of 11 September", as the suicide attacks on the US are now routinely referred to in company statements, have led to high-profile cuts in jobs and profit forecasts across the airline industry. Smiths Group warned yesterday that the outlook for the industry's suppliers, is suddenly murkier, too.

Smiths' aerospace business was the focus of interest in a basically solid set of annual results yesterday. The group has long planned for a 30 per cent slide in civil aircraft production, but now reckons it will come sooner. Expect job losses and factory closures in North America to be brought forward to the end of this year.

In military aircraft, though, things look positive indeed. The US military has put Smiths on a war footing, demanding it ramp up production of the avionics software it supplies and readies itself to provide replacement products. There are other silver linings: Smiths recently bought Barringer Technologies which makes systems to detect explosives and other dangerous substances being carried through airports.

The company is on top of the economic cycle; Smiths Industries, its predecessor which merged with TI Group last year to build critical mass in aerospace, does not have a history of disappointing even when industrial activity bottoms. Yesterday's pre-exceptional, pre-tax profits of £525m, excluding the disposed TI Automotive business, were bang in line with forecasts, up from £465m.

The group can raise £1bn for acquisitions, which could be used to reverse a disappointing performance from its medical devices division. It wants to move into safety syringes and women's healthcare.

Smiths' shares, down 10p to 615p, have fallen a long way this month and now trade on just 10 times forward earnings. That makes them a buy for investors with a long-term view.

SSL

SSL International is finally putting the Great Condom Glut behind it. Unusually for a September, the healthcare group is not currently loading its wholesale customers with cut-price Durex so as to inflate the half-year sales figures it will report in November. The excess contraceptives from previous years of this practice should be used up by next March, and the new management team has begun guiding investors' minds back to the future.

The debacle, which included other financial overstatements that are still being looked at by the Serious Fraud Office, cost the old management their jobs and will cost the company £50m in lost profits this year. One year out, though, the picture looks much clearer and the group is gaining a new following after a charm offensive in the City.

SSL has strong core brands. Durex is one, plus it owns the Scholl range of footcare products, Regent surgical gloves and Hibi antiseptic scrubs. Sales growth should hold steady in the mid-single digits whatever the economic weather, while the new chief executive, Brian Buchan, is on a promise to improve margins.

Most happily, interim results should contain news on disposals of non-core units representing some 15 per cent of sales. It will be a symbolic moment of change for the group, and investors should consider getting in ahead of the event.

There was a flutter of nerves yesterday when the group said a factory making incontinence pads in Scunthorpe had burnt down overnight. While the cause of the blaze remains unclear, the financial implications are certainly nil. Existing stockpiles will ensure customers are not discomfited. And a decent insurance policy means that the value of the business won't be dented – should it be on Mr Buchan's disposals list.

SSL shares, up 3.5p to 491p in the end, are on a multiple of 12 times 2003 earnings and sit at a discount to the rest of the healthcare sector. That discount is likely to close as confidence returns.

Bloomsbury

The size of the mythical pot of gold at the end of the rainbow surely pales in comparison to the riches that JK Rowling's creation, Harry Potter, is showering on Bloomsbury Publishing. Though no new books chronicling the exploits of the bespectacled hero were published this year, back list titles are still selling strongly.

That, along with the acquistion of AC Black last year, helped Bloomsbury double interim sales to £22.7m, while pre-tax profit before goodwill leapt tenfold to £2.85m. With the company on a roll and sitting on net cash of £15.6m, the dividend was hiked 50 per cent to 1.5p.

Since we last reviewed Bloomsbury shares in April, advising hold, given the prospective multiple of 28, full-year earnings estimates have floated up by around 20 per cent and now stand at 31.4p. Given the plunge in media valuations and earnings, that is some outperformance and a vindication of Bloombury's approach.

Back list sales – fuelled by Potter-mania, AC Black's bias to reference works, and writers with enduring appeal such as Joanna Trollope and Margaret Atwood – now constitute about two-thirds of sales, up from around 50 per cent at the full-year. That provides solidity during a time of considerable economic uncertainty.

With the release of the Harry Potter film on 16 November, Bloomsbury seems certain to enjoy further upside from both book sales and the sale of licensed merchandise such as diary and stationery products. The group's strong balance sheet also puts Nigel Newton, the chairman, in an enviable position to make earnings enhancing acquisitions. With the shares up 25p at 717.5, giving a prospective rating of 22, Bloomsbury is a strong hold in difficult times.

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