The Investment Column: The sell-off in Speedy Hire has been overdone
Low & Bonar; Phytopharm
Tuesday 19 February 2008
Our view: Hold
Share price: 811p ( +29.5p )
Speedy Hire is the country's leading supplier of tools and equipment to the building trade. So it is a pretty good barometer of the state of the economy. No surprise then that the shares have gone into reverse chiefly because of worries over the state of the housebuilding industry.
The latest update for the third quarter suggests the sell off was overdone. Revenue growth was up 43 per cent in the third quarter taking the nine-month total to 39 per cent while current trading remains strong, helped by the mild January weather. In product terms, tool hire growth was 47 per cent for the full period and equipment 30 per cent.
The Hewden Tools chain of hire depots acquired in June have now been rebranded and the enlarged business is on track to deliver cost savings of around £20m a year. Overlapping depots have been closed leaving the group with 400. Hewden has increased coverage and given it more opportunities for cross-selling. As well as small tools which account for 60 per cent of the business, the group hires portable accommodation, compressed air, pumps, and power generation equipment.
All its main markets are strong and it has only limited exposure to housebuilding and retail. They probably account for no more than 9 per cent of the total.
However, the group remains allied to the fortunes of the construction industry where delays to major projects can take longer to come through. So it is still possible some contracts could be affected if banks get tough with some less credit worthy builders.
The Hewden deal pushed net debt up to £271m giving gearing of 110 per cent but this remains in line with internal forecasts.
The shares have fallen 40 per cent over the past year but picked up on the trading news. They now stand on 11 times 2008 earnings, which does not look pricey given the group's strong market position. Hold.
Low & Bonar
Our view: Buy
Share price: 98.75p (+7.75p)
Knitting together a chain of acquisitions while squeezing more profits out of the existing business can be challenging but Low & Bonar has achieved it. The company operates at the less glamorous end of the building materials trade – supplying carpets and floor coverings for factories and offices and producing high-quality textile fabrics and yarns for carpet backing. The technology is also used to make artificial grass for soccer pitches.
With minimal exposure to housebuilding and only 20 per cent of its sales in the UK, the company has been able to produce a year-end report which does not carry the normal dismal qualifications about challenging prospects for the current year. In fact all its markets look in good shape.
Last year's profits grew 52 per cent to £22.4m on a 39 per cent improvement to £311m in sales. The textiles side which accounts for three-quarters of total sales pushed up revenues by 65 per cent of which 9 per cent came from underlying organic growth. In carpets it grew sales by 4 per cent and earnings by 12 per cent.
The group has now completed nine acquisitions in four years greatly extending its product range and taking it into a number of fast-moving markets.
Recent deals include the acquisition of Mehler Technologies, a German maker of coated fabrics, and Westbond, a UK producer of fusion bonded carpet tiles which dovetails nicely with its existing Tessera range.
After the UK, 60 per cent of the business is in Europe with the US and the Far East accounting for 20 per cent. Low & Bonar has avoided becoming a high-volume, low-margin producer. A number of its products embrace technological innovations, such as fibres to strengthen or fireproof concrete and shading screens for greenhouses among a number of other horticultural products.
The short lead times involved in meeting contract deadlines means that manufacturing increasingly takes place in overseas markets so there are now 20 locations around the world. With profits forecast to grow to about £29m in the current year the shares sell on a modest multiple of just over seven times earnings. Buy.
Our view: Hold
Share price: 22.75p (unchanged)
In late 2004, Unilever said new slimming products using a plant compound developed by drug the development tiddler Phytopharm could be on sale within three years. The timetable is slipping but at least work is continuing. Pfizer had earlier abandoned the project.
A Phytopharm trading update welcomingly bereft of bad news kept hope on track. Research work is making good progress and the United States authorities could clear the way for launch in 2009. But there are still a lot of ifs and buts.
Unilever, which is paying the research bills, would use the so called Hoodia extract taken from cactus found in the Kalahari and use it in its SlimFast food range. The UK firm would earn royalties. Demand for weight loss products is huge.
Phytopharm is pressing on with other projects. It has been awarded a $1.16m (£595,000) grant from the Michael J Fox Foundation to support work on Cogane, a treatment for Parkinson's disease. It is also seeking support for research into Myogane, a treatment for motor neurone disease.
A little cash is coming through the door. Phytopica is sold to dog owners as a treatment for skin disorders said to affect 15 per cent of the country's 900,000 dogs. Sales are better than expected.
But investors, who have seen the value of the shares fall from more than £2 to 22p, are banking on the company hitting the jackpot with Hoodia.
It is a gamble whether Hoodia will get to market before Northern Rock is viable again. Long-term holders might as well sit tight.
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