Reed achieves impressive margins

The Investment Column

Yesterday's 17p fall in Reed International's share price to 1156.5p might be seen as a pretty churlish reaction to a 12 per cent rise in profits from continuing operations, yet another rise in the publishing group's trading margin to an impressive 25.3 per cent and a flawless conversion of profits into the hard cash that is the lifeblood of any business.

The 11 per cent rise in headline pre-tax profits to pounds 805m was at the bottom end of analysts' expectations, but it represents an enviable progression from the pounds 435m achieved five years ago. Earnings per share of 56.2p rose from last year's 51.7p and the dividend rose in line with profits to 27.2p.

The fall reflected two concerns. First, that the relentless increase in Reed International's return on sales is reaching a plateau. Second, that the recent strength of sterling will hit profits, especially in the first half of this year.

Both worries are real, but they should not distract from the underlying strength of Reed's dull, but increasingly powerful, portfolio of printed and electronic products.

Four years ago, Reed was making 20 per cent on its sales and boldly set out its stall to increase that to 25 per cent within five years. It has reached that benchmark early thanks to careful pruning of its lower-margin products, a focus on the higher return activities and cost-cutting.

Plainly, with returns of more than 40 per cent in scientific journals and only 15 per cent in what remains of Reed's consumer products there remains scope for rebalancing the margin mix upwards. The company is open, however, about the depressing effect on margins that continuing investment in the transition to electronic delivery of information will entail. The days of year in, year out margin growth are over.

The trick now is to grow the top line, which means more of the organic growth that characterised last year and an acceleration of the acquisitions that have already involved Reed spending pounds 450m in the past year or so. With net borrowings of pounds 200m, interest cover of 17 times and free cash flow last year of pounds 300m Reed is blessed with an awesome war chest if it can find the right company at the right price.

What Reed really needs is to find another Lexis-Nexis to buy. The US publisher of legal information saw margins rise another 3 percentage points to 23 per cent, more than twice the return it was making when acquired. A 10 per cent rise in sales led to an impressive 29 per cent profits rise.

On the basis of slightly downgraded profits this year of about pounds 865m, the shares trade on a prospective price-earnings ratio of 19. That's a hefty premium to the market, which, despite Reed's high quality of earnings, is barely warranted by the rate of profits growth. Hold.

Aerospace takes off at TI

TI has been one of Britain's few candidates in the engineering industry worth the title "world class". Few in the sector can boast the seals-to-landing gear group's six-year record of consistent underlying profits growth and 12 years' of dividend increases, achieved under veteran chairman Sir Christopher Lewinton. Yesterday's figures, boring in their predictability, continued that trend, showing all parts of the business firing on all cylinders.

The16 per cent rise in pre-tax profits to pounds 211m before pounds 21.1m of net exceptional gains from the disposal of four small engineering operations looks highly respectable.

TI's market leadership shone through in the results of its John Crane and Bundy operations. In the former, Crane's world-wide reach is allowing it to cash in on the increasing demand by customers for single suppliers. It has signed up 50 partnership agreements so far, including six this year. The underlying 13 per cent growth in profits to pounds 97m was ahead of both a flat market for its process industry customers and its own sales increase.

Meanwhile, Bundy shrugged off flat or falling automotive markets in North America and Europe to record a 13 per cent underlying uplift to profits of pounds 79m last year. That gives confidence that it will continue to prosper in the similar markets expected for 1997.

This year will see the first real contribution from Forsheda, the Swedish polymer engineering company controversially acquired by TI in November for pounds 189m. That could chip in pounds 14m to pounds 15m in 1997, according to Hoare Govett.

But the main story this year should be the aerospace side. Much criticised for overpaying for Dowty in 1992, that business is storming ahead on the back of the doubling and tripling of aeroplane orders at Boeing and Airbus last year. Worth up to $2m a time for Dowty, that adds up to around pounds 500m of business for the group and the orders are still rolling in.

Another pounds 220m or so of bolt-on acquisitions will keep the pot boiling this year, even if currency could represent a pounds 5m to pounds 7m hit, according to Hoare Govett.

On that broker's forecast of pounds 238m, the shares, up 12p at 576p, stand on a forward multiple of 17. A firm hold.

Iceland moves

to warm hearts

Just as Trafalgar House revealed it was a busted flush when it mounted a desperate bid for Northern Electric, so Iceland confirmed its core frozen food business was in deep trouble when it tried to buy Littlewoods' chain of high street department stores 18 months ago for pounds 450m. Norway's Kvaerner eventually put Trafalgar House out of its misery. But poor old Iceland has had to limp along alone, unloved and lowly rated.

Since the Littlewoods bid, Iceland's share price has halved as a combination of price wars, late openings and loyalty card launches saw like-for-like sales growth in the fiercely competitive food retail market virtually grind to a halt.

Such has been Iceland's frosty reception in the City that Malcolm Walker, the chairman and chief executive, considered following in Alan Sugar and Anita Roddick's footsteps by attempting to take the company private.

The consensus among analysts yesterday was that the latest wheeze - a 35 per cent capital consolidation - will do little to address the issue of Iceland's long-term profitability.

There is also concern about cost controls if Iceland's move into home delivery proves as successful as trials suggest.

At least the high level of debt incurred from the buy-back will chill Iceland's instincts to make a do-or-die acquisition like Littlewoods - gearing will rise to 130 per cent if the deal is approved.

But it also puts the pursuit of a progressive dividend policy into cold storage. The increased interest bill means pre-tax profits are likely to fall on NatWest's estimates to pounds 49.1m but the reduced number of shares in issue will enable earnings per share to advance 18.5 per cent to 15.2p, implying a prospective price-earnings ratio of less than seven and a yield of 6.8 per cent. On the face of it cheap, but no more than a hold.

Start your day with The Independent, sign up for daily news emails
ebooksA celebration of British elections
Tottenham legend Jimmy Greaves has defended fans use of the word 'Yid'
Life and Style
Arts and Entertainment
Kanye West, performing in New York last week, has been the subject of controversy as rock's traditional headline slot at Glastonbury is lost once again
Arts and Entertainment
The Ridiculous Six has been produced by Adam Sandler, who also stars in it
filmNew controversy after nine Native American actors walked off set
Life and Style
Google celebrates Bartolomeo Cristofori's 360th birthday
techGoogle Doodle to the rescue
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Senior SEO Executive

£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

Recruitment Genius: Online Customer Service Administrator

£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

Recruitment Genius: Digital Marketing Executive

£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

Day In a Page

Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

Everyone is talking about The Trews

Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living