The Investment Column: Investors look to higher Emerson bid for Chloride

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The Independent Online


Our view: Hold

Share price: 281p (+2.25p)

Investors could be forgiven for being a little bit confused about what to do next about Chloride, the FTSE 250 emergency power group.

On the face of things, the company is a decent punt and looks defensive in a wider market where a whole host of groups are struggling. According to several analysts, Chloride is undervalued, with most saying that management is likely to deliver on promises of strong growth over next few months. Watchers at Arbuthnot argue that "the momentum in the business is very strong and appears set to remain so, with a record order book carried forward".

The potential fly in the ointment is the fact that the group is vehemently resisting the interest of Emerson Electric, which made a 255p-a-share approach for Chloride on 12 May. The share price jumped from 207p to something close to its current level. For investors without a crystal ball, Emerson could well up its offer if it is serious about buying the group; the share price clearly indicates, being above the approach level, that this, or a bid from a third party, is likely. It is understood that Emerson still thinks its bid is reasonable.

Investors can look at the situation in two ways: either Emerson will come back with as higher bid (most analysts think it should be worth more than 300p), or the takeover collapses. If the latter happens, the shares could fall as much as they rose on the approach. The outgoing chief executive Keith Hodgkinson reckons that the stock would not collapse because of the group's performance and especially given Chloride's impressive annual results announced yesterday, showing adjusted pre-tax profit growth of 54 per cent, although this view might be a bit fanciful.

Analysts at Investec, who recommend a buy, say the stock is worth 225p without bid interest. Investors buying could do well if Emerson comes back, but that is a high-risk strategy. Hold.


Our view: Buy

Share price: 262.25p (-16.5p)

A number of observers were a bit disappointed by Detica's annual results yesterday. Organic growth was up just 8 per cent, down on the 20 per cent-plus the company normally manages.

It is a bit puzzling to work out why the number should be off to that extent. Its chief executive Tom Black said the IT services group, which helps companies and other organisations arrange large amounts of data, was down as demand dropped from companies affected by the credit crunch. Financial services clients made up 29 per cent of the group's revenues in the first half of last year, which fell to 21 per cent by the end of the second half.

However, while 8 per cent growth is disappointing, by other measures, such as adjusted pre-tax profits up 47 per cent, the performance is more impressive. Mr Black reckons that with extra government defence and security spending, as well as in areas such as immigration, the company is well placed. It already makes £100m a year from the Government. He adds that with Detica making acquisitions in the US, they are in position to benefit from $0.5trn the Department of Defence spends.

Watchers at Cazenove say: "Detica shares are trading at 16.8 times estimates 2008 calendarised earnings versus the global IT services sector on 16.7 times ... We believe the premium is deserved, given the relatively defensive nature of the government business [some 61 per cent of total revenues]."

Demand for Detica's services is not likely to tail off, and with greater regulatory needs in financial services, even the areas where it is toiling now are set to prove more lucrative. Buy.

E2V Technologies

Our view: Buy

Share price: 291p (+1p)

Hitherto, E2V Technologies, which makes bespoke electrical components, has been taking two steps forward, and one back.

The company, which yesterday reported an 11 per cent increase in annual pre-tax profits, is split into two main areas; sensors and semiconductors and an electronic tubes business. Analysts at Arden say that, 18 months ago, the market was expecting the former to be the best-performing branch of the business, when in fact the opposite has happened.

Arden also say that it is difficult to value groups in the sector, arguing that those such as Meggitt, that largely supply the aerospace industry, are suffering, while the military-focused companies like VT Group and Babcock are doing well.

E2V, spun out of Marconi in 2002, does do well from military clients, which may itself put off some investors. Those not inhibited by that should be encouraged that the group is not exposed to consumer markets and that military spending is on the up.

The Arden experts said: "We believe that prospects for growth are improving. Although the derating of the shares has partially reversed, they are still only trading on a price earnings ratio of [about] 10 times and an enterprise value to Ebitda of 6.6 times and so we are retaining our 'Buy' recommendation."

The group's shares have improved in recent months, but are still some way behind the year high of 473p, indicating that there is still some room left to grow. If this is true and the sensors business can start to meet some of its potential, E2V could be a decent shot. Buy.