Smaller Companies: Cool heads build up hot properties

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The Independent Online
The long slump in the construction industry will have persuaded many investors that this is a sector to be avoided. But some building- related companies, often with the help of fresh management, are coping well in tough conditions and creating strong platforms for future growth.

Two that look promising are pumps, heating and air-conditioning equipment supplier and hirer, Andrews Sykes, at 340p; and construction group, Jarvis, at 90p, where trading has just resumed in the shares following the acquisition of a provider of railway track-maintenance services.

Jarvis looks interesting on two grounds. First, the group has taken a massive step forward via the acquisition for pounds 9m of one of six infrastructure maintenance companies (IMC) sold as part of the BR privatisation process. The stock market's enthusiasm for the deal is shown by the fact that when details of the associated fund raising were published and the shares came back from suspension, the price briefly shot over 90p against a previous peak of 69p. In November 1994 the shares were 10p.

The other bull point is the management team led by Paris Moayedi, an experienced construction manager. He became involved with the then heavily loss-making Jarvis in November 1994. Even before the latest deal, his strategy of focusing on more profitable design and build and space-management contracts had restored the group to modest profitability. Significant further progress is expected, supported by a massively expanded order book.

The IMC deal and a far-reaching recapitalisation of the group is being financed by a placing and open offer of 40.5 million new shares at 58p with an entitlement to existing shareholders on a 19 for 20 basis. Buyers since the resumption of trading have no entitlement to apply for new shares. But they may still do well.

The IMC Jarvis is buying supplies maintenance services to Railtrack in northern England. It takes over a labour force of 3,200 with contracts worth pounds 353m over the next five years to look after a fifth of the UK's rail network.

In several years' time, if not sooner, that purchase price of pounds 9m could look almost nominal. The numbers are distorted initially by redundancy payments and the hefty additional overheads that Jarvis is going to incur from operating the business in the private sector. But the workforce has already been slimmed from 3,600 in the last two years and will fall further to below 3,000. As these benefits come through it is easy to see the group reporting profits greater than it paid for the business. Add in a fast improving construction division and profits on a two-to-three year view should fall in a range between pounds 15m and pounds 20m even before Jarvis exploits its network to provide maintenance services to other industries like road, electricity and water. The shares look excellent value anywhere below 100p.

Andrews Sykes is another management story. The shares have already more than doubled from 152p when I recommended them in February 1995 but should have further to climb. The group operates a branch network supplying heating, pumping and air-conditioning equipment both for purchase and hire. Under the previous management huge debts had threatened to push the business into bankruptcy. A major shareholder, Jacques Murray, came to the rescue and installed new management led by 42-year-old Eric Hook. Under his leadership there has already been a remarkable turnaround from losses of almost pounds 5m in the year to 31 March 1994 to a pounds 4.7m profit for the nine months to a changed year end of December 1995.

Even though the price has already risen strongly, from under 40p at the lowest point, the shares still do not recognise the quality of the business and the good prospects. Last year's results were helped by the hot summer stimulating demand for air conditioning. But capacity has since been increased by 15 per cent. Another hot summer and the division will do even better. Hook points out that there is a strong underlying growth trend in air conditioning as business recognises the advantages of an improved working environment. There are further efficiencies coming through to boost margins and a small acquisition, Ground Water Control, has just been announced. On forecasts of profits reaching pounds 6.4m in 1996 and pounds 7.3m next year the p/e multiple falls to 13.2 and then 11.3 which is not demanding.