Shares: Ravaged but on the way up: Three companies over the worst

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The Independent Online
THE stock market is showing signs of going to sleep for the summer. But that does not necessarily mean investors should do the same. There are signs that the selling storm in both bond and equity markets is petering to a close.

Below, I look at shares in three companies that have had a tough recession but are now clearly past the worst. The timing could be excellent for some profitable investments.

First on my list is a consulting engineer, Hawtal Whiting, which provides an independent design capability to the motor trade. Conditions have been so tough that by early last year observers looking at borrowings standing at nearly five times shareholders' funds might easily have supposed that there was a question mark over the group's survival. Further problems came with the Leyland Daf bankruptcy, which cost the group more than pounds 1m.

But conditions have now changed dramatically for the better, as the group benefits from the strong recovery in the US car industry, buoyancy in parts of the Far East and the beginnings of recovery in Europe. Figures for the year to 31 December 1993 show a turnaround from pounds 2.2m losses to profits of pounds 761,000. The group has acted promptly to take advantage of the recovery by announcing a seven for 17 rights issue at 68p (last date for payment, 19 July) and the placing of 3 million preference shares plus warrants with Throgmorton Trust to raise approximately pounds 5m before expenses. Investors have reacted positively to these developments, and the shares have virtually doubled to 138p in a matter of weeks.

The group has not been too closely studied by the City, does not currently have either a stockbroker or a merchant bank, and the issue was handled by the corporate finance department of one of the big accountancy firms. But prospects do look good.

Hawtal Whiting says the year has begun well with plenty of new business, including work for an unnamed large component manufacturer. Interest costs can be expected to fall sharply from the pounds 1.1m plus levels of recent years. Even a guesstimate that pre-tax profits could treble this year to more than pounds 2.4m looks possible for a group that had a turnover of nearly pounds 70m last year, has high operational gearing, and has made profits of more than pounds 2m on much lower turnover in the past.

On a prospective p/e well down in single figures on what should be a low tax charge, the shares look well worth buying.

A company at a more advanced stage of a dramatic profits recovery is loudspeaker manufacturer, TGI, at 85p. Group brand names include Tannoy, Mordaunt-Short, Martin Audio and GLL, and the group makes speakers for the Ford Mondeo, which won the European Car of the Year. Award.

Since 1991, TGI - which was making losses in the early years of the recession - has appointed a new chief executive, Nigel Hamilton, and disposed of its unsuccessful factored products division. It has also invested heavily in improving productivity at its factories in Havant and Glasgow, and brought to market a stream of new products. The reward has been a trebling of profits to pounds 1.25m for the year to 31 March 1994, helping earnings per share to increase by 86 per cent to 5.2p.

Prospects look good for at least another year and perhaps many more if we are at the early stage of a global economic recovery. Nearly 70 per cent of group production is exported, with customers in the professional, domestic and automotive markets.

Profits should easily top pounds 1.6m this year to drop the p/einto the mid-teens for a business that made more than pounds 4m in 1989.

An interesting but less predictable investment at 55p is tiny Booth Industries. The shares are clearly speculative since this long-established family company has just reported a loss of pounds 2.1m for 1993/94. The problems were caused by the structural steel division, which has, in effect, been put into hibernation until industry circumstances change.

This leaves the group with a business supplying blast-resistant doors and windows, for customers such as Number 10 Downing Street, which is expected to make a modest profit in the year to March 1995 for a p/e of around 10.

Speculative spice comes from the group's plans to sell a long-leasehold, 20-acre site in Bolton, for which it should have no difficulty in obtaining residential planning permission. Ball-park figures for the likely sale price range from pounds 2m to pounds 5m. Assuming the sale proceeds are pounds 3.5m, the impact on the group's balance sheet would be spectacular. Net assets would leap towards 100p a share, much of which would be in cash. This could be used for a small acquisitions programme.

Or, the group could be a cash-rich, clean 'shell', into which a larger and more exciting business could be reversed with dramatic benefits.

(Photograph omitted)

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