Smaller Companies: Acquisition could help Kingston clean up

FANS of recovery and 'green' stocks could do worse than take a close look at little Kingston Oil & Gas, the ailing UK fuel recycler and owner of US gas-producing interests.

Last Friday the company announced an important acquisition that could not only tranform its financial prospects but also generate much investor interest due to its environmentally friendly business.

After months of talks, Kingston has agreed to acquire BCS, its key rival in the oil recycling market, for about pounds 2.8m - to be financed by the issue of 5.6 million shares.

At the same time, Kingston plans to sell its US gas interests to a management buyout team for pounds 1.9m in cash to concentrate on its UK activities. The disposal has forced Kingston to take an exceptional pounds 5.8m write-down on the American assets, pushing it into a pounds 4.1m pre-tax loss last year against a pounds 1.2m profit in 1991.

The loss per share amounted to 32p compared with earnings of 9p. The final dividend has also been passed, slashing the year's total payout from 2.5p to 1p a share.

But if shareholders approve the proposed changes, Kingston will become Britain's biggest engine oil recycling company, with considerable profit potential. At present, it owns Orcol Fuels, which specialises in collecting waste oil from more than 30,000 garages and industrial sites around the UK and recycling it into a branded fuel oil.

However, due to falling demand and fierce competition, notably from BCS, Orcol's taxable profits fell from pounds 788,000 to pounds 452,000 last year, on sales down from pounds 4.8m to pounds 4.5m. Meanwhile BCS's performance worsened from a loss of pounds 458,000 to pounds 572,000 last year.

Not surprisingly, Kingston's management has long sought to merge the two businesses to boost their efficiency and bolster margins. And after lengthy talks with DCC, the Irish venture capital group that owns BCS, this aim is about to be achieved in an all-paper deal that will give DCC a near 30 per cent stake in the enlarged group.

With the US gas interests out of the way, the group - to be renamed Greenway Holdings - will become a pure oil recycling business with an annual turnover of about pounds 9m.

Demand for its services is likely to grow steadily in the next few years due to EC legislation requiring the safe disposal of used lubricants. In addition, Orcol has won formal endorsement from some big oil companies such as Shell as an approved handler of waste oils.

Kingston said that the acquisition would provide it with an 'excellent' fit and allow the rationalisation of production facilities as well as collection, distribution and administrative facilities used by the two companies.

There are always dangers in any merger, especially with a loss-maker, but here the risks appear small.

Kingston said that after recent cost- cutting BCS was breaking even while margins at Orcol during the first quarter of this year had recovered in line with plans.

If the group's management is able to achieve the kind of profit margins Orcol had two years ago, the reshaped group could make taxable profits of about pounds 1.4m next year.

Based on last Friday's closing price of 50p, that implies an earnings multiple of about 10 times. The enlarged group will also be debt-free. Analysts believe DCC is likely to hang on to its shares. Given the modest rating, the shares offer long-term potential. Moreover, their environmental credentials should appeal to 'green' investment funds.