Investment Column: No sterling crisis for McKechnie

McKechnie, the West Midlands plastics and engineering group, has emerged relatively unscathed so far from the effects of the rising pound. It only cost the group pounds 1.2m in the year to July thanks to its hedging policy, and had little effect on sales. But more than half its profits are made overseas and if rates remain unchanged the impact will be as much as pounds 5m in the current year. Even so the chief executive, Andrew Walker, remains confident of maintaining the five-year run of profit increases.

Turnover in the year to the end of July rose 11 per cent to pounds 650m and pre-tax profits were up 10.5 per cent to pounds 55.6m before subtracting a pounds 4m provision to cover the cost of a North American paint contract that went wrong. Dzus fasteners, bought at the start of the year, contributed pounds 3.3m.

Sales and profits were buoyant in the UK and US, and the specialist fasteners and engineered plastics divisions, which serve industrial customers, produced rising profits and margins thanks to strong demand from the aerospace and automobile industries. Consumer products were less successful and profits halved to pounds 8m on unchanged turnover, held down by the sluggish DIY trade in the UK and a dull post-Christmas market in Australia.

Cash flow is strong, gearing is down to 18 per cent and the group could spend up to pounds 100m to strengthen its European and US activities. The impact of sterling has persuaded the City to scale down earlier profit forecasts but the second half is traditionally stronger than the first and analysts are still projecting profits of around pounds 62m for the current year, equal to 43p of earnings.

The shares rose 2.5p to 502.5p which values them at less than 12 times prospective earnings. If sterling continues to fall the shares are a buy.

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