Leng puts a stop to Laporte's shop till you drop policy
The Investment Column
Tuesday 11 March 1997
That something needed to be done is reflected in the fact that the shares have underperformed the rest of the market by over one third in the last five years. Yesterday's figures for 1996, the first full year with Mr Leng at the helm, are complicated by the huge changes he has wrought. The pre-tax profit jump from pounds 24.5m to pounds 78.7m is after huge exceptional provisions of pounds 88.7m in 1995, mainly for restructuring, and another pounds 48.3m last year, when the focus shifted to removing some of the underperforming parts of the portfolio.
In the space of 15 months, Mr Leng has axed or sold one third of the group's operating sites, raising pounds 165m in the process. Given that the businesses were generating only 9 per cent of sales, it is perhaps hardly surprising that the return from the resulting cash equals the annualised profits foregone.
But it goes a long way to explaining why a fresh eye can work wonders at a tired business. Laporte had become hooked on acquisitions: last year was the first in 16 that it had not bought anything, after picking up 140 businesses since 1980. Gearing of 62 per cent has been wiped out and the company boasts net cash of pounds 13m.
There is not much more to clear out, but Laporte is talking to interested parties about the rump of the sealants and adhesives businesses in the US, which analysts reckon could fetch above pounds 50m. The remaining odds and sods, including industrial materials, could pull in another pounds 20m.
Mr Leng reckons pounds 300m to pounds 400m of acquisitions would still leave interest cover at a comfortable seven to eight times. Purchases are likely to come this year, but he is wisely emphasising the primacy of shareholder value.
The City will want to see that applied to the existing operations first. Underlying margins rose from 11.8 to 12.9 per cent, with pounds 7m of the promised pounds 10m of cost savings kicking in so far, but there is clearly more to go for. Kleinwort Benson's forecast of pounds 135m, including an pounds 8m currency hit, would put the shares, up 26.5p at 695p, on a forward multiple of 14. Worth holding on.
Psion calls for
leap of faith
Yesterday's slide in Psion's share price was a pretty grudging reaction to yet another sparkling set of figures from the hand-held computer maker and the welcome return of David Potter to the company's helm. Although the party line was that the company had been left in capable hands during his convalescence from heart surgery, it is hard to escape the conclusion that Psion without its founder would have been a much less valuable proposition than it is with him back in charge.
Under his visionary command, Psion has been a magnificent investment since a profits hiccup sent the shares tumbling in 1992. Since then they have risen more than 20-fold as profits have risen without fail every six months. Yesterday's numbers showed profits up an impressive 38 per cent in 1996 to pounds 16m, and the dividend up 35 per cent to 2.25p.
Valuing any company requires some pretty heroic assumptions about future trends, but with a company operating in Psion's cutting-edge markets forecasts are more than usually finger-in-the-air. Twenty years ago few of us had even seen a computer, let alone used one; now they are as familiar as the telephone. Not even someone as bright and far-sighted as Mr Potter can have a clue what the next 20 years hold.
That makes an investment in Psion a leap of faith in the ability of Mr Potter and his team to read trends quickly and adapt the company appropriately. The decision to license out the company's unique operating system is an example of the sort of flexibility required if Psion is to stay ahead. It is a fiercely competitive market and the threat from the likes of Microsoft and the Japanese is daunting.
With so much uncertainty, using traditional valuation yardsticks is unlikely to be very meaningful, but it is a start. On the basis of forecast profits this year of pounds 24m and earnings per share of 21p, the shares trade on a prospective p/e multiple of 19. For a firm that has grown profits at a compound rate of 40 per cent for years that seems good value.
Polypipe's window of opportunity
Polypipe has a problem. Its core business, plastic pipes and fittings, is not only mature but in some areas, such as land drainage and road construction, sales are declining by about 10 per cent. The patchy state of the housing market is another cause for concern, as is Polypipe's inability to raise prices charged to builders' merchants and hundreds of independent DIY outlets.
One solution is to expand geographically by acquisition. France now makes up almost 12 per cent of Polypipe's turnover, and more deals on the Continent are in the pipeline given the ungeared balance sheet. But how robust the continental capital goods market will be as countries whip themselves into shape ahead for the single European currency is anybody's guess.
New product ranges are also being developed, notably windows, to keep Polypipe's impressive 11-year record of unbroken profits growth intact. In the first half, pre-tax income rose by 16 per cent to pounds 11.3m on sales from continuing operations 8 per cent ahead at pounds 93.1m.
Kevin McDonald, the chairman and managing director who owns 18 per cent of the shares, reckons windows could be Polypipe's main business within two years. But much rides on a sustained improvement in the maintenance and refurbishment markets, of which there is little sign.
There is plenty to go for - the window profiles division Premier has only 6 per cent of a growing market - but investors should be wary of mature companies which try to re-invent themselves.
In the meantime, stable raw material prices, tight cost controls and investment in plant and machinery should ensure full-year profits move ahead again to about pounds 33m (pounds 28.5m).
That puts the high-flying shares, down 14.5p at 240.5p, on a prospective p/e ratio of 11. Not demanding, but given the uncertainty ahead and a doubling in the price over two years, high enough.
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