The Investment Column: Tomkins blown off course by strong US headwinds

Galliford Try; BATM
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The Independent Online

Our view: Buy

Share price: 189.5p (+3.75p)

Tomkins was a bit of a conglomerate hotchpotch best known for making guns and buns before exiting to concentrate on supplying components for the motor and construction industries. A pity, then, that both are under the cosh at the same time.

Faced with what it calls US headwinds, it has been trimming its sails, selling unprofitable bits of the group, shutting plants where demand is weak and costs are high, and generally tightening up overheads.

The measures have proved timely – at least for now. Profits for last year came in at £262m, up 7.3 per cent on slightly lower sales. Tomkins sells plastics baths, doors, windows and pipes to the residential housing market in the US which has been weak and is due to get weaker still.

Housing starts will fall 20 per cent this year. The industrial automotive division makes transmission belts, fluid hoses, wipers and radiator caps but will be tested by a sharp slowdown in the number of cars leaving US assembly lines this year.

The group has been pushing hard in emerging countries not only to exploit new opportunities but to provide a buffer for any decline in mature markets. Sales to China, where it opened seven plants last year, advanced 37 per cent, India 32 per cent, and Eastern Europe 25 per cent. Around 20 per cent of its manufacturing is now in low-cost countries.

Tomkins is becoming more innovative launching environmentally friendly products and those that will help automotive customers meet fuel economy and emission requirements. For example, a remote tyre pressure gauge, originally developed as a safety feature for US cars, is now in demand by European manufacturers for its fuel saving features.

A drive to cut costs across the group has targeted annual savings of £50m by 2010. With 60 per cent of its business in the US, it is exposed to dollar weakness against sterling which lopped 6.1 per cent off sales and over £19m off profits. In future the results will be reported in dollars to give a more accurate idea of the underlying performance.

As expected, the group held the final dividend at last year's level providing strong support for the shares which are trading on an attractive yield of 7.3 per cent. Buy.

Galliford Try

Our view: Hold

Share price: 74p (-6p)

Galliford Try undertakes construction projects for blue-chip clients in the public sector and does building work for blue-chip firms such as Marks & Spencer and Tesco. Unfortunately, more than half of its business is still in housebuilding which has become a dirty word in investment circles. So the shares remain out of favour despite a strong performance in the first half when profits advanced 63 per cent to £33.8m.

However, despite a confidence-boosting 12.5 per cent increase in the dividend, this is going to be a tough year. Margins in housebuilding, already under pressure, could suffer further if it is forced to offer discounts to encourage sales. There are firm orders for around 75 per cent of homes due to be built this year, slightly down on the 79 per cent last time. There have been some selective sales of plots following last year's acquisition of Linden Homes.

The building division achieved strong growth with margins maintained at 1.9 per cent. Nearly two-thirds of the order book is in the public and regulated sectors providing protection against the more volatile commercial market. There has been progress in developing a facilities management arm winning a contract to provide services to two primary care centres servicing up to 25 private hospitals and 50 clinics.

Infrastructure projects increased by 50 per cent boosted by demand in the water, highways, rail, and renewable energy sectors. It is building Europe's largest on-shore wind farm south of Glasgow. Affordable housing remains profitable with £135m of sales in the pipeline this year.

Although Galliford has a strong and growing presence in the public sector, sentiment remains dominated by its exposure to housebuilding. At 5.1 times 2008 earnings the shares are due for a bounce but not yet. Hold.


Our view: Recovery punt

Share price: 38.75p (+3.75p)

A dotcom survivor is to pay a dividend. Can this be true? Indeed it is. BATM Advanced Communications, which once catapulted into the FTSE 100 with a valuation of £3bn, will soon be posting its first dividend cheques since 1999.

The company appears to have undergone a genuine recovery in its fortunes last year. The Israeli-based firm supplies sophisticated systems and software enabling voice, data and video to be sent down ultra-fast broadband lines. Its customers are big telecoms carriers such as BT and Nokia.

While they placed more orders, the company picked up business in countries such as Japan and Russia. Pre-tax profits jumped by 190 per cent to over £10m on sales 32 per cent higher at £50m.

The current year promises to be as good if not better – hence the decision to dig in to its cash pile and hand over £2m to its loyal and long-suffering shareholders, among them city names such as Gartmore and Morley.

BATM stands to benefit greatly if the big telecoms groups upgrade their networks. The market is estimated to be worth $3bn (£1.5bn). The shares, 765p at their peak in April 2000, rose nearly 11 per cent yesterday. A recovery play.