Smiths reads the runes right

The Investment Column
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The Independent Online
Sir Roger Hurn, chairman and chief executive of Smiths Industries, the medical equipment and engineering group, is living testimony to the benefits of thinking strategically. After 38 years with Smiths, he reads the runes right in aerospace, anticipating the 1990s downturn in the civil market long before others in the industry. The result is that although Smiths has spent nearly pounds 400m on acquisitions over the past five years, none has been in its aerospace division.

The results of that spending spree came through in yesterday's figures showing pre-tax profits soaring 19 per cent to pounds 69.5m in the six months to 3 February. Close to half the pounds 11.5m rise in operating profits to pounds 70.4m came from acquisitions, including a maiden contribution of over pounds 2m from the FRB connectors business bought in June and over pounds 1m from Level 1 Technologies, the US medical systems operation acquired in September.

Margins at FRB have already been raised into double figures from the 9 per cent when the business was acquired and that is only likely to be the start of the Smiths magic. Deltec, the US infusion pumps business picked up in 1994, has already seen its margins rise by 50 per cent to over 20 per cent in less than two years of ownership.

Acquisitions have not distracted Smiths from its existing businesses. The rest of the rise in operating profits in the latest six months came from organic growth of around 10 per cent. But if medical systems and industrial divisions have made all the running in recent years, aerospace is set to take up the baton in the rest of the decade and beyond.

The recent multi-billion dollar orders for the new Boeing 777 aircraft from the likes of Singapore, Malaysia and Korea will keep Smiths busy for years. Its avionics are worth $400,000 a plane, with spares on top. Meanwhile, existing work on the 737 is set to soar over the next four years as orders double from this year's 76 and Smiths expects to ride out the worst of the recent strike at the US plane maker.

At the same time, the military side, 60 per cent of the aerospace division, is ready to boom from new work. It received a further boost yesterday from the announcement of a 20-year order worth $100m for avionics for Raytheon's new US Air Force training aircraft. Further out, the expected go-ahead for the Euro- fighter next year would secure work beyond the year 2000.

Sir Roger, who confirmed he would be looking to split his dual role before retiring in 1998, will be long gone by then. But profits this year of pounds 160m would put the shares, up 11p at 709p, on a forward multiple of 20. Hold.

Havelock fits banks' bill

Havelock Europa is one of the survivors of the explosion in shopfitting which followed the boom on the high street in the 1980s. Most of its larger rivals have either been gobbled up or fallen by the wayside and Havelock itself went through a bad patch in the early 1990s. But the group is now clearly on a roll, reflected in pre-tax profits up 32 per cent to pounds 5.28m for the year to December.

What helped transform the prospects for Havelock was its recognition in 1992 that changes in the financial services industry would require banks to change their retail layouts almost as often as supermarkets. Its development of a novel way of fitting out banks more quickly and efficiently made a breakthrough when the Bank of Scotland gave it a big contract to revivify its branch network. Last year it did 56 outlets and nearly quadrupled turnover from the banking and financial division to pounds 24.4m. This year it expects to do over 40, taking completed refits to around a quarter of the total.

What would provide Havelock with a further quantum leap would be to win over an English clearer, with a typical network of around 2,000 branches. Hew Balfour, chief executive, is optimistic, but there clearly remain a number of vested interests to overcome first.

Meanwhile, turnover in the traditional non-food retail business slipped from pounds 31m to pounds 28.4m as work for Boots and Marks & Spencer reduced from cyclical peaks. That should be more than made up for this year by a record contract worth a little under pounds 10m for a new House of Fraser store in Swindon and a first- time contribution from Showcard, a display and signage company acquired in January for an initial pounds 10.2m.

There should be lots more to go for as Havelock expands further into food retailing and beefs up its manufacturing operation. But profits of pounds 7.5m this year would suggest the shares, 5p higher at 329p, are up with events on a forward p/e ratio of 17.

Kwik-Fit on target

It is only a month since Tom Farmer, chairman of Kwik-Fit announced plans to open 100 new centres this year alongside a 24 per cent increase in profits. He is halfway to that target already after yesterday's deals to buy 45 centres in the South and South-west of England for a total of pounds 7m.

The acquisitions represent part of Kwik-Fit's strategy to buy up strong regional brand names which will keep trading under their existing formats, despite competing with local Kwik-Fit outlets. The group has had the Budget brand in Scotland for years and last November it bought a chain in Birmingham. Yesterday's acquisitions are strong in Bristol and Gloucester and further regional deals are expected.

The City seems confident the competing formats do not cannibalise each other, but instead capitalise on the benefits of higher market share and stronger buying power as well as lower unit advertising costs.

Kwik-Fit now has 836 car tyre and exhaust replacement sites, of which 687 are in the UK. Though some fear market saturation, Mr Farmer still sees room for expansion. The 45 new outlets had combined profits of pounds 1.2m on sales of pounds 20m last year and Mr Farmer clearly thinks he can do better.

Kwik-Fit's shares have enjoyed a strong run this year, up from just over 160p to 217p yesterday. It is a belated recognition of the company's strengths after a period of underperformance and the market is clearly warming to Kwik-Fit, which reported 1995 profits of pounds 36m last month. UBS's forecast of pounds 40m for this year puts the shares on a forward rating of 14. Worth holding.