Sterling hammers British Steel
The Investment Column
Tuesday 17 June 1997
As fast as the company sheds jobs at home and expands production abroad, sterling's strength eats away at profits.
The one consolation is that things could have been worse. Pre-tax profits last year, though down by 60 per cent to pounds 451m, were not as badly hammered as some had feared.
Indeed, add back in pounds 60m of unanticipated restructuring provisions and the bottom line begins to look almost healthy.
This year there will be more pain. In 1996-97 British Steel achieved an exchange rate of DM1.46 to the pound. This year it expects the rate to be more like DM1.75.
With 60 per cent of sales denominated in deutschmarks and profits cut by pounds 10m every time the pound appreciates by one pfennig, it is easy to see why the company is screaming from the rooftops for a little less emphasis on interest rates as the mechanism for keeping inflation in check.
In fact British Steel has been just as badly, if not worse, hit by soft prices.
Taking hot-rolled coil over the past 18 months, for instance, the price has slumped by around a quarter to DM480 a tonne.
The stainless business, Avesta, has been hit hardest. Although prices have moved off the bottom, encouraging the company to describe the trading outlook as one of "cautious optimism", prices have a long way to go to get back to their peak two summers ago.
The company's answer to the short-term phenomenon of a strong exchange rate has been to axe jobs - 1,500 last year and more than 2,000 already announced this year - and look for opportunities to increase its presence overseas.
Its US steelmaking businesses are just coming on stream and it is in advanced talks to take a majority stake in a $900m Indonesia mini-mill. In five years' time British Steel could see a quarter of production coming from abroad.
Given the company's high operational gearing and huge sensitivity to small price movements, accurate forecasting of profits becomes a lottery.
The mid point this year is around pounds 250m, but prices only have to soften or harden by 2 per cent for these to move pounds 150m in either direction.
Assuming pounds 250m for this year, the shares, down 5p to 158.5p, are on a forward multiple of 18 times earnings. They are also yielding a thumping 8 per cent.
The dividend was held last year and looks safe again this year, backed by a strong cash position. Hold for the income, but not much else.
Britax earnings set to take off
Shareholders of Britax, formerly called BSG, have had to fasten their seatbelts over the last few years as chief executive Richard Marton has set about revamping the aeroplane galleys to car accessories group.
Earlier this year Britax ended its long association with selling cars by disposing of its Bristol Street dealerships for pounds 72m. Now it has spent most of the proceeds, a net pounds 64m, on German group Buderus Sell. The purchase, its biggest ever, makes Britax the world's largest provider of aircraft toilets, cookers and coffee makers.
The logic of the deal is hard to fault, expanding Britax's presence in a business which typically earns margins of around 9 per cent, compared with the 1 to 2 per returns made by car dealers.
And it is a neat fit. Britax already has a long-term contract to supply Boeing, while Bulderus serves Airbus. Together the new partners will control up to 40 per cent of the market.At first glance Britax looks to be paying a hefty price. The German group made a profit of just pounds 3.7m in the year to last September on sales of pounds 37.3m. But world-wide aircraft orders are booming and should continue to grow strongly in response to the 6 per cent annual growth in airline passenger numbers the industry has enjoyed over the last few years.
With cost savings to be had from increased purchasing power, analysts reckon Britax's profits could double this year. That means the deal will be earnings enhancing from day one.
Elsewhere sales of new products such as first class seats for British Airways' aircraft, dubbed "flying beds", have taken off and a new seat designed especially for the US carrier United Airlines is about to be unveiled shortly.
Its child car-seat business is also going from strength to strength, helped by ever more stringent international safety standards, and Britax is looking to expand the business in Malaysia and Singapore.
It is likely to cash in on this success by making more, but smaller, acquisitions. Albert E Sharp has upped current year forecasts from pounds 37.8m to pounds 39.5m, putting the shares, up 2.5p at 99.5p, on a prospective price- earnings ratio of 12. Good value.
Wainhomes builds up profits
Wainhomes has bounced back from last year's problems, including a police investigation into irregularities at its Lancashire arm. Bill Ainscough, the founder and main shareholder, has moved quickly to tighten up management at the Chester-based group since retaking the helm 17 months ago.
Pre-tax profits more than tripled from pounds 2.08m to pounds 6.68m in the 12 months to 4 April, on turnover raised from pounds 96m to pounds 106m. The largest boost came from the loss-making northern and Midlands regions, which, labouring under the impact of a pounds 3m hit for over-valuation of work in progress in the previous year, staged a pounds 3m turnaround to profits of pounds 2m in the latest period.
But management, which has been changed in both the troubled regions, played a full role in the recovery. The steady march of the group southward - it now wins 51 per cent of its business in the North-west compared with 90 per cent five years ago - means it is charging more for its houses, while the mix is moving upmarket in the North as well. Last year's pounds 24.5m deferred acquisition from English China Clays in the South-west made a profitable first-time contribution and has already met half this year's budgeted sales in the first quarter.
But management really showed through in the pounds 24.5m operating cash inflow last year, reversing a pounds 4.8m outflow, and in gross margins lifted from 15.8 to 18.3 per cent. That broke through 19 per cent in the second half and probably has further to go. Meanwhile, the order book is strong and the housing market recovery is trickling north.
Profit forecasts raised to pounds 10.5m would put the shares at 150.5p on a forward price-earnings ratio of 13. Reasonable value, although the market is tight with Mr Ainscough and fellow director and leisure mogul Trevor Hemmings sitting on approaching 50 per cent of the equity.
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