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.

PROMOTED VIDEO
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

BA/PM,EMIR/Dodd-Frank,London,£450-650P/D

£450 - £650 per day + competitive: Orgtel: My client, a leading bank, is curre...

Senior Analyst - ALM Data - Banking - Halifax

£350 - £400 per day + competitive: Orgtel: Senior Analyst, ALM Data, Halifax, ...

Java developer - Banking - London - Up to £600/day

£500 - £600 per day: Orgtel: Java developer - Banking - London - Up to £600/d...

Liquidity Reporting-Basel III-LCR-Bank-£400/day

£400 per day + competitive: Orgtel: Liquidity Reporting - Basel III - LCR - Ba...

Day In a Page

Save the tiger: The animals bred for bones on China’s tiger farms

The animals bred for bones on China’s tiger farms

The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

A former custard factory, a Midlands bog and a Leeds cemetery

Introducing the top 50 hidden spots in Britain
Ebola epidemic: Plagued by fear

Ebola epidemic: Plagued by fear

How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

From 'Parks and Recreation' to 'Guardians of the Galaxy'

He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star
How live cinema screenings can boost arts audiences

How live cinema screenings can boost arts audiences

Broadcasting plays and exhibitions to cinemas is a sure-fire box office smash
Shipping container hotels: Pop-up hotels filling a niche

Pop-up hotels filling a niche

Spending the night in a shipping container doesn't sound appealing, but these mobile crash pads are popping up at the summer's biggest events
Native American headdresses are not fashion accessories

Feather dust-up

A Canadian festival has banned Native American headwear. Haven't we been here before?
Boris Johnson's war on diesel

Boris Johnson's war on diesel

11m cars here run on diesel. It's seen as a greener alternative to unleaded petrol. So why is London's mayor on a crusade against the black pump?
5 best waterproof cameras

Splash and flash: 5 best waterproof cameras

Don't let water stop you taking snaps with one of these machines that will take you from the sand to meters deep
Louis van Gaal interview: Manchester United manager discusses tactics and rebuilding after the David Moyes era

Louis van Gaal interview

Manchester United manager discusses tactics and rebuilding after the David Moyes era
Will Gore: The goodwill shown by fans towards Alastair Cook will evaporate rapidly if India win the series

Will Gore: Outside Edge

The goodwill shown by fans towards Alastair Cook will evaporate rapidly if India win the series
The children were playing in the street with toy guns. The air strikes were tragically real

The air strikes were tragically real

The children were playing in the street with toy guns
Boozy, ignorant, intolerant, but very polite – The British, as others see us

Britain as others see us

Boozy, ignorant, intolerant, but very polite
How did our legends really begin?

How did our legends really begin?

Applying the theory of evolution to the world's many mythologies
Watch out: Lambrusco is back on the menu

Lambrusco is back on the menu

Naff Seventies corner-shop staple is this year's Aperol Spritz