Shares: BTR bounces back on the profits trail: The UK-based conglomerate with fingers in many pies, including mining and leisure, is set to score from world recovery

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The Independent Online
THE world economy is moving into the recovery phase of the economic cycle. That is good news for global manufacturing companies in general and BTR in particular. Yet the shares are modestly rated on a prospective price-earnings ratio that could be below 14 for 1994.

They look worth tucking away, and investors who like a not-too- risky gamble could consider the various issues of warrants to gear up the returns.

BTR should make profits this year of at least pounds 2bn as the world economy picks up speed, against the pounds 1.28bn reported for 1993. Natwest Securities forecasts that BTR is heading for a profits sequence rising from pounds 1.38bn this year to pounds 1.65bn in 1995 and pounds 1.96bn in 1996. That would drop the p/e towards 10 and, if the dividend was raised pro rata, would take the yield towards 5.5 per cent.

In stock-market terms, BTR is recovering after a rocky period in the autumn when the group's own stockbroker, Cazenove, downgraded the profits forecast.

Further worries were generated when Alan Jackson, the chief executive, sold half his shareholding, and there was talk of profits being artificially boosted by excessive provisions. Against a strong overall market, the share price plunged below 340p.

The full-year figures went a long way to calming fears. They were up to expectations and accompanied by a better-than- expected dividend increase reflecting the group's confident view on its prospects for 1994.

Analysts poring over the balance sheet also concluded that the debt position was comfortable with interest costs covered 9.2 times by profits, and long-term financing in place to back up the short-term borrowings.

In any event, many investors will feel the group deserves some benefit of the doubt for its phenomenal record. As well as being probably among the five greatest UK equity performers of the past 20 years, the group looks impressive on the 10-year record reported in the accounts.

Between 1984 and 1993, sales grew from pounds 3.29bn to pounds 9.8bn, profits from pounds 263m to pounds 1.28bn, earnings per share from 6.7p to 24p and dividends from 2.6p to 12.25p.

This has been achieved by a group that has had consistently high borrowings. One of the attractions of BTR for shareholders is that it finances its acquisitions with debt and then squeezes out phenomenal amounts of cash to cut that debt down.

Last year, the group generated more than pounds 1.4bn of cash against gross capital investment of pounds 502m. Observers reckon that with a combination of disposals, cash generated from warrant conversions and general tight control of the business, the debt would disappear within three years.

BTR is also selling distribution businesses and progressively turning itself into a purer manufacturing business, with facilities all around the world including China. One problem is that investors do not have a clear picture of what BTR does.

The report and accounts come with masses of explanation and even a separate brochure explaining the principal operating businesses under the five headings of industrial, transportation, construction, consumer related and control and electrical systems. Future disposals may come in the construction and consumer related areas, although both are full of good businesses. Of slight concern is that between pounds 80m and pounds 120m of profits each year comes from so-called corporate activities, such as profits on the sale of businesses.

But a counter-argument is that a dynamic group of businesses with 125,000 employees in more than 1,000 operations in 40 countries is going to be in a permanent state of reorganisation and the corporate profits will be regularly repeated and are not exceptional.

Investors who share my view that BTR is a superbly managed world-class manufacturing business, poised at the beginning of a long upswing in profits and profitability, should buy the shares.

Tactically minded investors may opt for a programme of small, staggered purchases. More aggressive investors will likely go for the warrants.

Most highly geared are the latest issue, which run until 1998 with an exercise price of 405p.

They are currently 65p for a premium of 22.7 per cent, with the shares at 390p.

If BTR ever makes it to 555p, which looks an undemanding target on a three-year view, those warrants would have an intrinsic value of 150p. Gamble a little more by placing a buying order with a limit of 50p (the risk is that you never buy them) and there is an excellent chance of trebling your money in three years.

(Photographs omitted)

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