Siebe keeps good news flowing

INVESTMENT COLUMN

or anyone of a less technical bent, it is a little hard to understand what Siebe does. Even when you do, its portfolio of electronic controls, valves, compressed air equipment and safety products is not guaranteed to set the pulse racing. But as an investment ... now there's a story.

Over the past five years, throughout the recession, Siebe has increased profits by an average of 15 per cent a year, earnings by 13 per cent and the dividend by only a fraction less. In the last year productivity per employee rose a healthy 7 per cent, stocks were turned over 17 per cent faster and debtors were kept in check.

Investment for the future continued, with capital expenditure and research spending increasing as a proportion of sales. Despite spending a further pounds 200m on acquisitions, gearing nudged up to only 32 per cent. Net cash flow from operations was a record pounds 242m, which compared very favourably with pre-tax profits of pounds 275.1m, a 27 per cent improvement.

After a 19 per cent rise in earnings per share to 37.5p, the final dividend of 8.07p made a full-year total of 12.1p, a 10 per cent increase; the shares, which have grown five-fold in five years, added a further 20p to 621p yesterday. Siebe is that rare animal, a genuine growth stock.

Siebe manages to keep the good news flowing for a number of reasons. It has an enviable geographic spread, so while the North American market could post only a relatively modest 6 per cent growth in sales last year, the average was dragged up by a 28 per cent rise in Europe and similar increase in the Far East.

It is nicely spread over several business cycles, so that as the US automotive and housing cycles peak and decline, the mid cycle controls businesses take over before handing on the baton to late cycle safety and life support operations. The technical barriers to entering Siebe's businesses are generally high enough to maintain healthy margins.

And Siebe tells its middle management what it wants from them. This year's targets are a 5 per cent cost reduction, 10 per cent rise in organic sales, 15 per cent growth in profits before tax and a 20 per cent increase in stock turn. Demanding, but on the recent evidence achievable.

On forecast profits of pounds 324m, the shares now stand on a prospective p/e of 14. That's a premium to the market but so it should be. Good value.