Morgan Crucible strategy pays off

THE INVESTMENT COLUMN

Morgan Crucible's strategy of building commanding positions in areas ranging from carbon brushes for electric motors to metallurgical ceramics is clearly paying off. Now firmly focused on industrial markets since last year's pounds 57.5m sale of the Holt Lloyd consumer car care business, the group is well on the way to achieving its target of 15 per cent margins.

Interim figures yesterday showed operating margins from continuing businesses at 12 per cent in the six months to 4 July, up from 10.6 per cent in the comparable period. That had a dramatic effect on the bottom line. Although sales, at pounds 415m, were almost static, pre-tax profits marched up a fifth to pounds 42m.

All areas contributed to growth but thermal ceramics stood out, raising margins almost 2 points to more than 11 per cent almost entirely by organic growth. Growth from customers in the petrochemical and automotive industries boosted the figures, along with new products such as fibre-reinforced metal for pistons, helping profits to power from pounds 11.4m to pounds 16.7m.

The carbon business is now a whisker away from the 15 per cent margin target, after raising its return on sales over 2 points to 14.8 per cent. Reshaping the US operation should eventually deliver an additional $5m (pounds 3.2m) in extra operating profits and there should be a further boost from shifting production to Hungary.

Morgan has also done well to make up for the loss of US defence business, which hit both the technical ceramics and speciality materials businesses last year. The new semiconductor ceramics operation in California's Silicon Valley has alone raised sales from zero to $15m in less than three years.

The group has survived the recession better than many of its peers in the engineering sector and is now confounding the sceptics by cashing in on the recovery too. This year looks like at least equalling its previous peak earnings of 24p, hit in 1989, assuming profits top pounds 84m, which puts the shares up 8p at 389p, on a forward p/e of 16. With the order intake maintained at 10 to 12 per cent and late-cycle businesses still to benefit from recovery, the shares should have further to go.