SGB scaffolding looks to Far East for profits growth

THE INVESTMENT COLUMN
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The Independent Online
Past problems continue to haunt John Mowlem, the construction group, despite its remarkable turnaround under new management over the past 18 months or so. The decision to float SGB, the scaffolding business which forms Mowlem's most profitable division, says more about the millstone of a pounds 50m Eurobond at an 11.5 per cent interest rate than any grand strategic plan. But the group is doing its best to have its cake and eat it: the float should save Mowlem pounds 1.7m a year in interest costs, while its decision to retain 51 per cent of SGB will allow it to continue to consolidate the scaffolding group's profits.

That represents a powerful vote of confidence in SGB from its former owner, which must assume another year of profits growth ahead. New investors may, however, choose a more cautious approach.

Certainly SGB looks a decent enough business on the face of it. Half its pounds 135m UK sales come from the SGB Youngman hire-and-sale operation, which claims market leadership in non-powered building equipment such as scaffolding and access towers.

Another 30 per cent of SGB's domestic turnover is derived from contracting, of which around a quarter is specialist scaffolding for oil refineries, chemical plants and the like. Here the hope is that, given the high barriers to entry, this will provide better and more sustainable margins than the wafer-thin fare usually provided by traditional contracting.

SGB also has new management, most of whom appear to have been parachuted in from Laporte by Ken Minton, the chemicals group's former chief executive who chairs Mowlem and its scaffolding subsidiary. The team is already busy on a pounds 3.7m rationalisation programme for the manufacturing division, which will involve around 200 jobs being cut for an annual saving of around pounds 2m by 1998.

However, despite its international spread, SGB remains highly dependent on large and lumpy contracts. A large chunk of the profits growth over the past two years has come from work for the new Hong Kong airport, which came to an end this year. Robert Stokell, the chief executive who arrived from Laporte in October, is confident the baton can be picked up by other Far Eastern business, but he still has to prove that large parts of SGB's UK operation are more than just in commodity businesses.

He should be given a fair wind in his quest by the housebuilding revival, even if an upturn for general construction might help the scaffolding industry more. Assuming pre-tax profits come in at around pounds 15m this year, brokers are tentatively looking at a forward p/e of 14 on the pounds 130m-odd launch value. That is no bargain, but the issue should go well in the current market.

British Bio hit

by no-news-itis

Never mind cancer, British Biotech needs to find a cure for no- news-itis. Shares in the UK's largest biotechnology group have underperformed the market by 25 per cent since hitting a 326p high 12 months ago. Small wonder the group has resorted to dressing up old news as new.

Yesterday it used the pretext of a presentation given to a US conference on digestion to announce that final-stage clinical trials on its most advanced drug, Zacutex, the acute pancreatitis treatment formerly known as lexipafant, resulted in fewer patients dying and less organ failure. But the story had already been well-rehearsed and British Bio's shares fell 4.5p to 243.5p yesterday.

Many observers reckon Zacutex will be a small drug in sales terms; some projectpeak world-wide sales as low as pounds 50m against estimates as high as pounds 600m. If borne out, the lower figures would be immaterial in terms of British Biotech's share price.

Even so, Zacutex remains important. Given the encouraging clinical data on the treatment, the group could be the first UK biotech to get a new drug on the market, something that would undoubtedly help sentiment. True, Celltech is racing to get its sepsis drug to market first, but this has yet to be filed for approval, whereas Zacutex has already been submitted to the European authorities.

With no other treatments for pancreatitis around, the drug could be fast- tracked for approval by the year-end. More importantly, approval of Zacutex will allow the group to break in its freshly installed and untried sales and marketing teams in Europe on a minor drug before the launch of the biggie - its cancer medicine, Marimastat.

That could eventually be worth $1bn and analysts reckon 75 per cent of British Bio's valuation rests on this product alone. Though British Bio has much to prove, a positive launch for Zacutex should be just the tonic it needs.

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