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SMALLER COMPANIES: Painting a brighter picture

At first glance, Haden MacLellan looks like your typical high- volume, low-margin engineering business, specialising in the lowest end of the market, writes Richard Phillips.

Sales of pounds 597m generated a pre-tax profit of pounds 15.5m in 1996. But closer examination modifies some of this perception. For a start, return on capital employed runs at between 21 per cent for its industrial services division, chiefly facilities management, to more than 100 per cent for its process engineering arm, which supplies paint finish workshops for car manufacturers. The largest business by turnover, it is now the second largest supplier of paint finishing plant in the world.

Overall, group managing director Richard Taylor points out that HM has had an excellent run in the last few years, after a concerted restructuring effort saw loss-making units shaken up or sold off. He concedes it is unlikely the group will continue to make this sort of progress indefinitely.

Process engineering has gained a strong reputation, cemented by a pounds 116m deal to build a new paint shop for Land Rover, after it was acquired by BMW. The German car maker was sufficiently impressed by the hi-tech skills Haden MacLellan brought to the design, it also ordered a DM60m (pounds 20.4m) plant for a car factory in South Africa. The company is also well placed to take advantage of an emerging trend among car manufacturers to outsource the entire paint finishing process, and lease paint workshops and staff from the supplier. "These plants are increasingly complex operations to run," said Mr Taylor.

The more prosaic fastners business has also been steadily gathering steam. Nuts and bolts, which is what the term describes, saw profits rise 94 per cent, on turnover up 107 per cent, from 1995 to 1996. Just in time (Jit) stock delivery, with substantial investment in IT, has enabled HM to benefit from significant economies of scale. It now has 230 Jit depots in the UK, where critical mass occurs over 40 to 50 units.

There are still five non-core businesses left to dispose of, which should go over the next year or so. Meanwhile, the US is a source of $250m in sales, so the group feels sufficiently established there to aim for further expansion. "We have a good bridge there, and we think we understand the US now, so it's not so big a leap," said Mr Taylor.

For next year, the analysts' consensus forecast is for pre-tax profits of pounds 17.8m for the current year, to provide earnings per share of 10p, followed by pre-tax profits of pounds 19.8m in 1998, with EPS of 11.1p. With the shares at 111.5p, they trade on a current year p/e of 11 times earnings, and 10 times 1998 earnings. It hardly seems overly high, for a group where the dividend is covered three times or so, and interest cover is about 20 times. Buy.