Smaller companies: Have faith in UCM for throwing off its shackles

Could Universal Ceramics Materials be about to succumb to the MBO effect? There are in fact two MBO effects. The first is where a management buyout releases a company's energies, allowing it throw off the shackles of bureaucracy, red tape and general inertia of its parent, to see profits soar, sales rise, and management make a fortune out of their decision to back their own company. That, of course, is a good thing.

Less widely reported is when the process of throwing off the shackles of bureaucracy, etc, reaches its natural conclusion, and there is no more red tape left to cut. Profit growth tapers off, sales are flat, and management wonders what the next move might be. Investors can get a bit shirty at this point, and, generally, it is seen as a bad thing.

Last week, results from Universal Ceramics Materials from Stafford illustrated the point. UCM makes ceramic materials for the construction and engineering industries - heating elements for electric kettles are one of its major markets. This time round, sales rose 14 per cent to pounds 39.5m, chiefly export- driven, as Europe and Asia proved strong centres of demand. Profits rose 16 per cent to pounds 3.08m, while earnings per share jumped 8 per cent to 8.2p. The board also approved a 10 per cent hike in the dividend to 4.9p.

But the growth is a lot less than the full-year figures posted a year ago, when sales rose 23 per cent, pre-tax profits came in 29 per cent higher, and earnings per share were up 20 per cent.

So is this the start of a slowdown, or do the shares still represent good long-term value? Since its flotation in June 1994, shareholders have seen a surprisingly poor return on their cash. From 86p, the shares - other than a flurry of activity which took them to a peak of 153p last May - stand at the unremark-able figure of 96p. That puts them on a historical price earnings ratio of 13.1 times, with a market capitalisation of pounds 26.4m.

The picture going forward, however, does still look rosy. While much of the demand is export-driven, the withdrawal of two its main competitors, in France and Germany, will continue to support UCM's drive into Europe. It is also adding new capacity, while gearing remains at manageable levels. The benefits of an MBO have yet to be fully realised: buy.

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