Horrors hide Mowlem's brighter hopes

THE INVESTMENT COLUMN

At first blush this looks like yet another horror story from Mowlem, for whom 1994's small profit was little more than a blip in an otherwise relentless string of heavy losses. Actually, most of the bad news was known six months ago and prospects are as bright at the company as most people can remember.

That is not saying much of course - but it does appear that Mowlem, one of the construction industry's biggest disasters, finally has a chairman and chief executive who have some idea where they are trying to take it.

The company has a viable structure, with a collection of some quite nicely profitable businesses, and has got rid of most of its non-performers - including the ill-fated London City Airport, which added a pounds 5.8m exceptional loss into these figures to take the total one-off charge for the year to pounds 38.4m.

That pushed Mowlem back into familiar red territory, resulting in a pre- tax loss for the year of pounds 30m compared with 1994's pounds 4.8m profit. Despite a chunky 17.6p loss per share, the 2p dividend was maintained.

Ken Minton was too diplomatic to say so yesterday but the industry he has entered, after a successful stint in chemicals with Laporte, is a complete shambles. In which other business could a company make a profit of pounds 300,000 from sales of pounds 967m, as Mowlem's contracting arm did?

It is a shame that the core division is so dismal because elsewhere in the group there are some interesting and profitable companies. Brightest of those is the environmental services division, which, as a market leader in geotechnical consultancy work and contaminated land testing, generates an enviable return on sales. Profits of pounds 3.2m were struck in 1995 from sales of pounds 23m.

Facilities management, which was acquired three years ago, chipped in a useful pounds 3.5m from sales of pounds 125m. Access products - scaffolding and ladders - had a good year, pushing profits up from pounds 10m to pounds 13.4m after sales jumped to pounds 239m (pounds 213m).

These were all good performances but the key to Mowlem is plainly whether or not it can squeeze even a modest return from its substantial contracting turnover.

Mr Minton believes a margin of between 2 and 3 per cent is possible, which even at the lower end would double group operating profits.

It is that potential that has seen Mowlem's shares nudge up from their recent low of under 60p to yesterday's 79p, up 5p. At that level, and on the basis of a forecast of perhaps pounds 13m profits this year, the shares stand on a prospective price/earnings ratio of about 13.

If you believe that Mr Minton has really cleared out the dross and set up a recovery, the shares have a way to go. After the recent performance, however, it is a sizeable if.

Molins rolls up record profits

Most of the City stopped following Molins years ago, after five successive bids suggested its days as an independent company were numbered. But analysts have missed a trick. The cigarette machinery group successfully saw off all the would-be predators and since 1991 the shar price has tripled, outperforming the market by 50 per cent in the past 12 months alone.

Yesterday's figures - which sent the shares another 21p higher to an all-time peak of 900p - should revive interest in the group. Pre-tax profits rose by 24 per cent to pounds 29.8m in the year to December, on sales 28 per cent up at pounds 286m.

The figures were distorted by a change in the treatment of Molins' pounds 51.3m pension surplus, which cut the credit to profits from pounds 3.3m to pounds 0.1m this year. But that was more than offset by the first significant contribution of pounds 3.8m from Sandiacre Packing Machinery, which was acquired for pounds 28m in 1994.

Stripping that lot out, it is clear that the businesses are still growing. The core tobacco machinery operation should be mature, yet it managed a 25 per cent increase in sales in 1995. Operating profits of pounds 23m, up 12 per cent, were affected by the pension changes and underlying margins are said to be slightly ahead.

Cigarette consumption in the Western world is barely growing and this week's Liggett settlement could badly dent the big tobacco companies' profits. But Molins points out that these pressures could spell good news for suppliers of increasingly sophisticated machinery like itself, as the drive to reduce costs intensifies. Meanwhile, third world demand, already solidly underpinned by soaring consumption of cigarettes, is magnified by moves from hand-rolled to machine-rolled product.

The corrugated board machinery division continued last year's improvement. Increased demand eliminated losses in Bristol and raised operating returns from the US business, which commands around 30 per cent of the domestic market. Profits jumped 40 per cent to pounds 6m.

More exciting, though, is packaging machinery, which is effectively a new operation centred on Sandiacre. The latter has fully lived up to expectations at the time of purchase, although the results have been affected by the costs of expanding the new business and higher development spending.

Molins believes that it can lever off its high-speed cigarette-making technology and world-wide marketing network to create a new business serving the multinational food industry. Pyramid-shaped tea bags for Unilever's PG Tips and bags for frozen catfish are just two applications so far developed. The group is now looking for bolt-on acquisitions "measured in tens of million of pounds" to broaden the range.

With order books 13 per cent ahead and a competent new management team in place, there looks plenty to go for at Molins.

Charterhouse Tilney reckons profits could come close to pounds 34m this year, putting the shares on a modest forward p/e of 12. Still good value.