Investment Column: Wyko has room to grow profits

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At first glance Wyko's collection of engineering businesses look unlikely to set investors' pulses racing. The company repairs all manner of electrical and mechanical parts and sells bearings and power parts to manufacturers. However, what Wyko lacks in glamour it makes up in profit performance.

Its management team, lead by chief executive Richard Johnson, has come in and steadied the ship after Wyko lost its way in the early 1990s recession. Pre-tax profits rose an impressive 61 per cent to pounds 8.17m in the year to July and have jumped by 500 per cent in the last three years. A good chunk of that has come from a flurry of acquisitions. Even so, earnings per share have more than tripled in that time.

As Wyko has grown it has benefited from increased purchasing power and has been able to win customers by offering them a wider product range. Consequently, margins have risen sharply and so has its share price, at least until six months ago.

Since peaking at 170.5p, the shares have slumped, leaving them well down at 126p even after yesterday's 5.5p rise. Fears over demand from manufacturing customers battered by the rising pound and fund managers' recent unwillingness to invest in smaller illiquid stocks are probably to blame.

It is true Wyko's profit growth rate will slow. But there is still plenty of headroom to increase distribution margins, which are well below Brammer, its nearest industry rival. It should be able to achieve a decent profit growth by putting a few pounds on the price of products which typically retail for around pounds 150. Analysts also believe its fledgling repair business has scope to increase its margins from 5.5 per cent.

Wyko still has another pounds 25m or so to spend on acquisitions, thanks to its strong balance sheet. Forecast current-year profits of pounds 10.8m would put the shares on an inexpensive prospective p/e ratio of 12. The share price fall looks overdone. Good value.

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