It's not cheap, but it is cheerful

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The Independent Online
Anyone who still imagines that British companies cannot compete in global markets has never heard of Druck. Founded in the early 1970s by John Salmon and Michael Bertioli, the group makes pressure sensors for a wide range of applications, exports more than 75 per cent of total turnover and has produced unbroken growth for 23 years. Not only is the present period seeing a vintage period of expansion, even by Druck's standards, but a strategy of acquisitions to add related products to sell through the group's global distribution network is producing some spectacular returns.

Amazingly, one of the two stockbroking firms to research the stock, Williams de Broe, rates them a hold/ sell. This does not reflect a lack of confidence in the company. The problem is the price - nobody wants to sell whereas many would like to buy. In the past year the shares have more than doubled from pounds 16 to pounds 33.68 after a peak of pounds 34.50. The historic rating is a demanding 36.9. On forecasts of earnings per share reaching 112p for the year to 31 March 1997 the PE would still be over 30. And the prospective dividend yield, assuming the dividend rises from 16.0p to 19.0p, is an almost invisible 0.7 per cent.

Further corroboration of the case for caution is that, perhaps tempted by the high rating, Salmon and Bertioli recently cut their stake from nearly 60 per cent to 51.5 per cent. They were influenced by the imminent move, in September, from the soon-to-disappear USM to a Full Listing and the possibility of changes to capital gains tax if a Labour government wins power. However, they do not plan to sell any more and would be reluctant to issue paper to take their percentage stake below 50 per cent so there is little danger of a flood of stock hitting the market.

They may not be cheap but that does not mean the shares are not worth buying. The long-term record shows that whatever the precise terms on which the initial purchase is made, holders soon do well. When the company was floated in 1982 the price was 130p with sales of pounds 3m and pre-tax profits of pounds 800,000. Since then they have risen 26-fold.

The acquisition strategy which has been in place since 1994 may enable the group to grow faster in the future. Druck's overall strategy, as outlined by Salmon, is a classic virtuous circle of growth. The group develops cost-effective products, finds new markets and, through efficient manufacturing systems, generates high gross margins (52.4 per cent in the last published accounts). The cash generated is then used to maintain relatively high research and development costs, develop overseas markets and, in the past few years, make acquisitions. Since 1990, sales have increased from pounds 19.1m to pounds 47.1m with pre-tax profits rising 129 per cent from pounds 4.2m to pounds 9.6m.

Unomat was bought for pounds 2.5m in June 1994. Unomat makes a portable field calibrator which perfectly complements Druck's pressure calibrator.

In 1995-96, Unomat made operating profits of pounds 850,000. But since the product is sold by Druck's global distribution network, there is an additional profit. Salmon says the true contribution from Unomat was well over pounds 1m.

A more significant move was the recently announced purchase of a US company, Ruska Instrument Corporation, with sales of $13m (pounds 8.4m) bought for $9.8m (pounds 6.3m) including assumption of debt. Ruska makes top-of-the-range, highly accurate equipment. Salmon says for Druck to buy Ruska is like Ford buying Jaguar. The moderate price reflects the fact that last year Ruska's profits were just $100,000.

But that is expected to change quickly. Apart from the opportunity to apply Druck's management skills to Ruska's Houston-based operations, the deal gives the enlarged group a complete range of calibrators to sell and an internationally recognised brand name. Salmon forecasts Ruska will make between $600,000 and $lm in its first year with the group.

Even without acquisitions the group is in good shape. The year-end order book was up 35 per cent to over pounds 23m. Rough calculations suggest that including Ruska, pre-tax profits could reach pounds 12m for 1996-97 and perhaps pounds 15m the following year which would bring the PE down to a less daunting 22.

Last but not least, the move to a Full Listing may be accompanied by a chunky scrip issue to improve liquidity. Patient buyers should not be disappointed.