Remoulded BBA shows its fibre

Investment Column

It is hardly surprising that BBA, the brake pads to nappy-liners group, was yesterday emphasising the importance of organic growth and bolt-on acquisitions. After its still-born attempt to break up the Lucas- Varity merger earlier this year, Robert Quarta, BBA's aggressive chief executive, had some ground to make up with City sceptics.

He need not have worried. Yesterday's figures for the half-year to June should have quelled any remaining doubts about Mr Quarta's record. The underlying performance was hidden by the last elements of his reshaping of the business. A pounds 26.7m goodwill write-off on the sale of the Automotive Products clutch and brake business last time turned into an pounds 11m write- back in the latest figures from the sale of the Duralay carpet underlay operation. But leaving one-offs to one side, there was a 19 per cent increase in profits to pounds 72.1m in the period.

Having now largely completed the remoulding of BBA, Mr Quarta's task this year is to prove that the resulting business is capable of growth. The 24 per cent rise in turnover in the first half is early proof that it is.

Admittedly, Mr Quarta had some, unspecified, help from the first-time inclusion of Holvis, the Swiss group acquired last June. After disposals, that deal netted the Fiberweb business for BBA, turning it into the world's third-largest producer of non-woven fabrics for the likes of nappies, surgical use and filters. Stripping that out, the underlying sales increase was pared back to 5 per cent.

Even so, there is clearly still plenty to go for at BBA. Weeding out the underperformers has resulted in a further step change in margins, and even in the continuing operations, the return on sales has marched up 1.2 percentage points to 13.5 per cent in the half-year. The addition of Fiberweb and improvements to its pre-acquisition return on sales of 5 per cent helped continuing profits in effect double to pounds 44.7m in BBA's industrial division. But given that Fiberweb's utilisation is still only 85 per cent of capacity, and with new applications for non-wovens appearing all the time, there should be more where that came from.

Elsewhere, despite its heavy exposure to the car industry, which accounts for around a quarter of group sales, BBA's brake linings business has much to commend it. The friction materials arm, Europe's leading manufacturer, shrugged off a tough six months for German car sales and, despite signs of a slowdown in the European market, the outlook is set fair. The DM20m (pounds 8.45m) efficiency programme launched in Germany last year will be delivering in full from next year, but most excitement should come from the US business. From a standing start in 1991, that is on course to take 10 per cent of the $1bn-$1.5bn market by the end of the decade.

The group now has firepower of up to pounds 300m for acquisitions without recourse to shareholders. Full-year profits of pounds 142m before exceptionals would put the shares, up 11p at 334p, on a forward p/e ratio of 17. Hold.