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.

Arts and Entertainment
On set of the Secret Cinema's Back to the Future event
filmBut why were Back to the Future screenings cancelled?
Susan Sarandon described David Bowie as
peopleSusan Sarandon reveals more on her David Bowie romance
Lewis Hamilton walks back to the pit lane with his Mercedes burning in the background
Formula 1
Arts and Entertainment
The new characters were announced yesterday at San Diego Comic Con
comic-con 2014
Arsenal supporters gather for a recent ‘fan party’ in New Jersey
ebookA unique anthology of reporting and analysis of a crucial period of history
Arts and Entertainment
No Devotion's Geoff Rickly and Stuart Richardson
musicReview: No Devotion, O2 Academy Islington, London
newsComedy club forced to apologise as maggots eating a dead pigeon fall out of air-conditioning
Life and Style
Balmain's autumn/winter 2014 campaign, shot by Mario Sorrenti and featuring Binx Walton, Cara Delevingne, Jourdan Dunn, Ysaunny Brito, Issa Lish and Kayla Scott
fashionHow Olivier Rousteing is revitalising the house of Balmain
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

Senior Risk Manager - Banking - London - £650

£600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

The benefits of being in Recruitment at SThree...

£18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

Test Analyst - UAT - Credit Risk

£280 - £300 per day + competitive: Orgtel: Test Analyst, Edinburgh, Credit Ris...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Day In a Page

Best comedians: How the professionals go about their funny business, from Sarah Millican to Marcus Brigstocke

Best comedians: How the professionals go about their funny business

For all those wanting to know how stand-ups keep standing, here are some of the best moments
Jokes on Hollywood: 'With comedy film audiences shrinking, it’s time to move on'

Jokes on Hollywood

With comedy film audiences shrinking, it’s time to move on
Edinburgh Fringe 2014: The comedy highlights, from Bridget Christie to Jack Dee

Edinburgh Fringe 2014

The comedy highlights, from Bridget Christie to Jack Dee
Evan Davis: The BBC’s wolf in sheep’s clothing to take over at Newsnight

The BBC’s wolf in sheep’s clothing

What will Evan Davis be like on Newsnight?
Finding the names for America’s shame: What happens to the immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert?

Finding the names for America’s shame

The immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert
Inside a church for Born Again Christians: Speaking to God in a Manchester multiplex

Inside a church for Born Again Christians

As Britain's Anglican church struggles to establish its modern identity, one branch of Christianity is booming
Rihanna, Kim Kardashian and me: How Olivier Rousteing is revitalising the house of Balmain

Olivier Rousteing is revitalising the house of Balmain

Parisian couturier Pierre Balmain made his name dressing the mid-century jet set. Today, Olivier Rousteing – heir to the house Pierre built – is celebrating their 21st-century equivalents. The result? Nothing short of Balmania
Cancer, cardiac arrest, HIV and homelessness - and he's only 39

Incredible survival story of David Tovey

Tovey went from cooking for the Queen to rifling through bins for his supper. His is a startling story of endurance against the odds – and of a social safety net failing at every turn
Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride