Smaller companies: Lowe tackles alternative sports

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The Independent Online
Between 1987 and 1994 Robert H. Lowe was a disaster for its luckless shareholders. But, in the stockmarket, amazingly often there is another chance. New management and new funding have been introduced and the company has recovered to the point where it has been able to pay a small dividend. Now it plans to use that recovery as a launch pad for acquisitions and a sustained period of growth.

The shares have already rebounded from a 1994 low of 7p to 22p. But that does not make it too late to buy. Even if nothing else happens, the prospective PE for the year to 31 October 1996 is 11.4 falling to 10 on expected earnings for 1996-97. Admittedly that reflects a low tax charge; but even on a notional full charge the rating would be in the low teens.

The game plan is to use the cash flow from a booming sportswear business to make acquisitions in packaging. A new managing director, 49-year-old Andrew Dalton, has been recruited to translate this plan into action. A first deal has already been done with good initial results; and the further opportunity should be substantial given that the UK packaging industry has annual turnover around pounds 9bn, much of it fragmented.

Recovery at Lowe began in 1992 when David Sebire was appointed chairman with a brief to rescue an effectively insolvent company. A share reconstruction refinanced the group while management disciplines were applied across the board. Most of the old textile interests were sold.

But among the businesses which were retained was one cracker supplying sportswear. Helped by all the excitement over Euro '96, sales of items like replica football kits, where the group is the market leader, have been soaring. The group manufactures for all the leading brands - its products kit out players for top teams such as Manchester United and Liverpool. Fast-changing requirements and short delivery times make it hard for overseas suppliers to compete.

The strategy for the sportswear division is to broaden the product offering into sports such as rugby, basketball and athletics to reduce what has been a heavy dependence on Adidas and football. There is scope for bolt- on acquisitions but cash generation is expected to run well ahead of investment requirements. Since the packaging side is also a healthy cash generator the group is well placed to do deals.

The first deal, with corrugated packaging specialist, Majoca, has produced a striking vote of confidence in the business because the vendors took the whole of their pounds 2.2m initial consideration in shares then valued at 15p. Latest interim figures included four months from Majoca which performed ahead of expectations contributing to a 79 per cent rise in first-half profits on sales up 93 per cent to pounds 13.7m. Earnings per share rose 44 per cent to 0.88p.

Majoca gives the group packaging sites in five locations. The plan is to create a national group capable of in-house design to supply specialist products with fast turnaround times. Further acquisitions could be of businesses, assets or even customer lists.

The other division which Dalton hopes to expand by acquisition is labels. A subsidiary, Nelsons, is the market leader in the supply of fabric labels to the bedding industry. It is also a supplier to other soft furnishing sectors with turnover around pounds 2m and premises in Manchester. Mainland Europe is seen as offering a growth opportunity.

Lastly there is the possibility of a deal to give the group a third leg in packaging. Detailed criteria for any deal include that it should be earnings enhancing with a minimum 25 per cent return on capital, 10 per cent profit margins and cash generative.

In the light of the interims, analysts who follow the group raised their current-year estimates from pounds 1.9m to pounds 2.1m with pounds 2.6m and earnings per share of 2.21p expected for next year. Shares which have fallen from a great height typically encounter steady selling as they make progress back up the hill. But if the group is even reasonably successful in its hunt for acquisitions and can continue to make progress with the existing businesses there should be plenty of scope for share price progress.