Smaller Companies: Aerospace supplier gains altitude

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The Independent Online
Twenty twenty hindsight is making it increasingly clear that September 1992 should rank alongside November 1987 and December 1974 as one of the best times in the post-war period to buy shares. Small companies in particular were spectacularly bombed out in 1992 as Britain's attempts to stay in the European Monetary System threatened to send the economy into a tailspin.

But that buying opportunity still holds a message nearly four years later. Many of the companies which have since recovered strongly have built up a momentum which can take them to still greater heights in the future. One such company which should have further to go is Berkshire- based aerospace equipment supplier, UMECO, trading at 213p.

UMECO's potential did not go completely unnoticed at the time. In early 1993, when the shares were trading around 24p, a consortium led by Osman Abdullah, formerly involved with highly-acquisitive building products group, Evered, injected pounds 1m into the business at around 36p a share against a then market capitalisation of pounds 1.6m. The idea was that he would use his contacts to find deals. This, admittedly, has not happened and he has taken no part in the management; but the business and the shares have stormed ahead.

Recently reported profits of pounds l.85m were up 51 per cent on the 1994-95 figure which in turn was nearly two-and-a-half times the 1993-94 figure. The shares have risen tenfold from their low point. One reason for expecting them to go further is that they are still quite modestly rated. Stockbroker, Rowan Dartington, will be publishing a note shortly upgrading its forecast for current-year profits from pounds 2m to pounds 2.5m, putting the shares on a prospective p/e multiple of around 14. Given that the company is looking for another exciting year of growth in 1995 that forecast may well be beaten.

Nor can the company's recovery be put down to a strong rebound in the industries it serves. If anything civil aviation and aerospace has been depressed until quite recently. The company's recovery has come principally from extending the range in its distribution business and improving margins by better buying and greater efficiencies. In particular the core distribution business, Pattonair, has added to its range of special seals, fasteners and clamps still targeted at the aviation markets. On the manufacturing side (30 per cent of last year's profits) the key subsidiary, Fluid Transfer, which supplies vehicles and equipment for ground refuelling of aircraft, had an excellent year partly thanks to a strong build-up in sales of higher margin components for customising refuelling vehicles to customers' requirements.

The improvement in performance is set to continue. A factor in the tough early 1990s was a moratorium on orders from the Ministry of Defence which went nearly seven years without buying a vehicle. As a result the MoD's 1,000-strong fleet of ground-refuelling vehicles is ageing and needs updating. In recent months Fluid Transfer has won some pounds 5m of orders from the MoD; this will more than offset a slight pause on the component side which had a bumper 1995 and may not quite match that performance in 1996.

On the distribution side growth should be boosted by big aviation product manufacturers outsourcing to third-party distributors responsibility for supplying components to their production lines. This trend promises big business for specialists such as UMECO which has already won several good medium-sized contracts with some chunky deals in negotiation. These deals may involve substantial turnover in products they have not supplied in the past so bringing extra benefits in extending the range. Margins may be lower but are unlikely to fall far because of the need (complex and costly to cater for) for traceability on aircraft components which keeps out competition from back-street operators. The likelihood is that years of good growth lie ahead for UMECO to keep the shares climbing strongly.