Shares: Parts suppliers motor ahead: Britain may not make its own cars but components companies offer attractive prospects

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The Independent Online
THE NEAR disappearance of a UK-owned car-making industry may be bad for national pride, but is proving a boon to an increasingly successful indigenous group of component suppliers. The UK has not lost its reputation as a repository of engineering and design excellence, and there are many companies with world-class reputations in their particular niche areas.

As we move into the era of the world car, the giant manufacturers such as Ford, GM, Volkswagen and some of the Japanese companies are focusing their sourcing on the best suppliers all over the world. This is creating remarkable growth opportunities for some tiny companies, which may soon become a great deal bigger.

A good example is safety equipment maker, First Technology, at 333p, with factories in Farnborough, in the UK, and Detroit. The company is far and away the world leader in the supply of sophisticated dummies used in crash testing. This is a relatively mature market, with sales growth in the 10 to 15 per cent range. But it is a good indicator of motor industry trends because it is directly linked to new model development. Activity is particularly buoyant in the US, the UK and Korea, patchy in Europe and weak in Japan.

The big growth area for First Technology is the use of sensors to improve car safety. A few years ago, it seemed that consumers and manufacturers were unwilling to pay extra for safety features and the group embarked on some disastrous diversifications. The wheel has spun full circle. The diversifications have gone, car safety has become arguably the most important selling point for new models, and business is growing strongly. Big customers for the group's fuel cut-off switch, which helps prevent post-crash fires, include Ford, Jaguar, Peugeot and Fiat. First Technology has a quarter of the world market and great hopes that a domino effect will bring other large customers.

Since 1991, the group has improved from heavy losses to profits of pounds 4.1m for the year to April 1994. The healthy sequence is expected to continue, with Kleinwort's Jeremy Allen looking for pounds 4.7m and pounds 5.4m over the next two years to drop the p/e to under 15. That looks solid value for a company so well placed to benefit from the growing demand for safer cars.

An interesting company for investors wanting to benefit from the worldwide boom in four-wheel drive vehicles is the recently floated UPF. A management buyout from the ruins of the collapsed Parkfield, it initially had a troubled time with cash-flow problems and teething pains on a new chasis production line for Vauxhall's Frontera.

The difficulties are old history, and the group is now enjoying its position as a main chassis supplier for the Range Rover and Discovery as well as the Frontera. Other items go into commercial vehicles and white goods, where demand is also healthier. The shares have raced up from an issue price of 108p in June to 163p, currently but could still go further. The p/e for the year ended 31 August is 12.9, based on the prospectus forecast and a minimal tax charge. It would not take much of an advance in 1995/96 to make the shares look cheap.

Another recently floated motor component supplier with a quality feel is Automotive Precision Holdings, at 118p. Placed at 100p in May, the company makes a number of highly machined parts which it supplies in large volumes, typically to other component manufacturers further down the supply chain. Some idea of the global reach of the business is that 93 per cent of output is exported to end up in cars made by Chrysler, Ford, General Motors, Nissan and Volkswagen.

The company expects to grow faster than the motor industry generally because many of the components it makes are used for applications such as power steering and air conditioning, which are moving from being optional extras to becoming standard. Recently reported interim profits showed a 19.4 per cent rise to pounds 2.54m with further progress expected in the second half. Doubling up the first half would imply a prospective p/e of 14, which suggests the shares are not dear against the likely growth rate.

Last is Surrey-based Wilshaw, at 56.5p, which has been growing profits at a 50 per cent rate for three years and looks set to continue at that pace for another couple of years at least. The company has a significant and growing business distributing agricultural equipment and industrial components. But the supercharged growth is coming in the manufacture and supply of specialised magnets and high-technology materials and coatings.

Wilshaw supplies magnets for car instruments and safety features; one air bag needs two magnets. These magnets are made with aluminium, nickel and cobalt and have about four times the power of standard ferrite magnets. Smaller and more powerful still are magnets with a coating of a special material called neodymium. These tiny magnets make possible miniaturised products such as personal stereo systems.

Wilshaw is installing or planning new facilities for its magnet and powdered metal operations and is also close to signing a joint venture with a Chinese company to produce neodymium for an anticipated explosion in demand from Europe and the US. The shares are highly rated on an historic p/e of 23.5, but that should fall dramatically in future years.

(Photographs omitted)

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