The Investment Column: Close slips after throwing out takeover options

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Close Brothers

Our view: Avoid

Share price: 636p (-23p)

The various bidders attempting to take over and then take apart the old-school merchant banker Close Brothers have been sent packing. That was the easy bit. Now the firm has to deal with the little matter of seriously weakening financial markets and key staff peeved at missing out on windfall bonuses from the abortive takeover.

Close threw out a joint offer from the broker Cenkos Securities and the Icelandic bank Landsbanki of 950p a share, later raised to 1025p, before talks collapsed, opening the way for the private equity group Blackstone, whose plans included selling the prized Winterflood share dealing side to the UK broker Collins Stewart.

Now all talks are at an end, and Close, after a strategic review, says it intends to keep all parts of the group together – asset management, a deposit and lending bank, corporate finance, and Winterflood. Group half-year profits reflected the seismic changes in financial markets, falling nearly 30 per cent to £69.8m.

Winterflood raised profits 17 per cent to £23m, helped by new associate Mako Global Derivatives, banking was unchanged at £37m, while asset management profits were lower at £18m and funds under management fell 2 per cent. A drop in takeover activity left corporate finance sharply down at £4.6m.

Close is likely to be spared any reproach from its main shareholders, Prudential and Caledonia Investments, who own 23 per cent between them and who clearly supported its stance during the bid saga. However, key staff may not be so sanguine. Many are believed to have supported the Cenkos approach. Others may also be dismayed that there are no plans to spin off Winterflood, the most saleable part of the group.

Close is addressing the potential impact of defections by promising to overhaul its incentive arrangements. The shares lost further ground, making a fall of 36 per cent since early January. Avoid for now.


Our view: Buy

Share price: 99p (unch)

The civil aviation industry went into freefall after the attack on the twin towers, but the recovery has been rapid and dramatic. Airbus and Boeing are sitting on orders for 6,848 aircraft – enough work for the next seven and a half years.

Component suppliers such as Senior are grinning from ear to ear. Senior supplies parts such as engine structures and mountings and ducting systems. Aerospace profits, including parts sold to the military, soared 84 per cent last year.

Senior has been buoyed by strong demand across all its major markets, embracing civil aviation, energy, and heavy-duty diesel products. Overall group sales increased 21 per cent to £470m and profits before tax 90 per cent to £34m. The Boeing and Airbus manufacturing programme underpins future growth. On the Boeing 787 Dreamliner, which enters service in 2009, it is supplying £460,000 of components for each aircraft. The delayed Airbus A380 airline will take £176,000 of Senior kit.

Demand in the military sector remains strong, with parts needed for Sikorsky helicopters on duty in Afghanistan and Iraq.

The programme for future orders gives Senior confidence to strengthen its position by making selective acquisitions such as Absolute, which specialises in tyre pressure monitoring systems, and Cap, whose high-performance units are used in auxiliary power units.

Supplies to the engine manufacturer Cummins reflect strong demand in the heavy diesel market, where engines have to meet tough new emission legislation.

Senior is selling into markets with long-term delivery schedules unlikely to be derailed by concerns over the credit crunch. Selling at just over 11 times expected earnings the shares look attractive.


Our view: Buy

Share price: 631p (+34p)

The engineer Keller has been lessening its reliance on the US, but the shift to more promising regions such as the Middle East and Australia has not been quite fast enough. Keller is a ground engineering specialist, sinking foundations and pilings for construction of housing estates to multistorey offices.

Keller increased profits by nearly a quarter to £103m last year, with the US contribution falling from 44 per cent two years ago to 28 per cent. But because a slug of the work involves the bombed-out housebuilding industry the shares have suffered a sharp sell-off since the back end of last year.

Keller has cut numbers at its US residential Suncoast business by 40 per cent because of the slump. Strong demand for its foundations operation left the division's profits only marginally down.

A marked increase in construction activity in areas such as the Middle East and Australia offset the weakness in US housing. Keller won contracts for a vast new petrochemical complex in Saudi Arabia and the man-made islands being built off the coast of Dubai.

Tipped here as a buy last December, we continue to think the shares, backed by strong levels of work due to come through, look undervalued on just over 6 times forecast earnings. Buy.