Superb management skills push Siebe profits higher

The Investment Column
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The Independent Online
Siebe, Britain's biggest engineering group, has proved its management skills in spades over the past few years and has also shown it is no slouch at acquisitions. This year's pounds 520m deal to buy electronic controls group Unitech is already proving well up with expectations.

A substantial chunk of the 32 per cent rise in profits to pounds 190m for the six months to September was the result of a maiden five-month contribution from Unitech. The power supply converter group chipped in pounds 21.3m to group operating profits, which rose from pounds 166m to pounds 216m in the period. Unitech's underlying 12 per cent rise was impressive against the background of a still-depressed semiconductor industry, which, with telecoms, accounts for around a fifth of sales.

Siebe believes the electronics market is at last on the turn, although it may take 18 months to return to the heady days before last year's collapse in prices. Any further damage to sales caused by the weak yen should be more than made up with synergy benefits and cost savings, still on course to deliver pounds 15m in a full year, with close to 1,200 people expected to be taken out of the business this year.

Meanwhile, Foxboro, an earlier purchase, continues to sparkle. Its I/A process control systems for managing large plants such as oil refineries and chemical plants has seen its market share more than double this decade and now stands just one percentage point behind market leader Honeywell.

But the real story at Siebe remains management. Having built world-beating positions in industrial and consumer appliance control equipment, sales have grown ahead of the market, which, combined with relentless cost-cutting, has pushed group margins from 13.8 to 14.7 per cent in the six months.

Bettering that will be tough, but Siebe is rolling out an ambitious and pioneering project, dubbed Six Sigma, to slash manufacturing defects from typical levels of 5,000 per million units of output to little more than zero. This US concept, already being used by Motorola and Texas Instruments, could deliver net benefits of around pounds 50m in two to three years' time.

Apart from Europe, most of Siebe's markets are growing, with the controls business alone quoting for business worth pounds 1bn. The only cloud is the potential translation impact of a strong pound, but on unchanged forecasts of pounds 430m for the full year, the shares, up 10p at 950p, deserve their forward rating of 18. A firm hold.

Wessex shares remain steady

Wessex Water's interim results yesterday seemed strangely low key after its two-way struggle to take over neighbouring South West Water earlier in the year. With Wessex and rival bidder Severn Trent now effectively prevented by the Government from ever buying rivals, the question on shareholders' minds was what the water groups would do with their cash mountains. Severn Trent led the way yesterday, buying back 10 per cent of its shares. However, in typically conservative fashion, Wessex Water, which has net cash in the bank of pounds 75m, said it had still not made up its mind how to hand back money to investors.

Reading between the lines, the likelihood is that there will be some kind of buyback or special dividend, coupled with earnings-enhancing acquisitions in the unregulated waste management businesses before next spring. But shareholders will have to wait for the details.

In the meantime, yesterday's half-yearly results were pretty much what analysts had expected, emphasising the stock's enduring quality as an uninspiring "hold". Pre-tax profits in the six months to the end of September rose by 10.4 per cent to pounds 75.5m, while turnover increased by a strong 7.1 per cent to pounds 128.9m. However earnings from Wessex's 50 per cent owned waste management operation grew by just pounds 0.2m to pounds 6.2m after a collapse in prices of recycled paper. The 14 per cent rise in the interim dividend to 5.7p was at the lower end of the range for recent water company announcements.

Profits for the full year should reach pounds 144m and be accompanied by a 14 per cent rise in total dividends to 17.3p, giving a forward yield of 6.1 per cent, with the shares down 1.5p at 352.5p. There should be organic growth in the waste business, but investors should look elsewhere for real excitement.

Marston faces three problems

Marston, Thompson & Evershed had a reputation as a steady regional brewer until its surprise purchase of the trendy Pitcher & Piano bar chain in the summer. The pounds 20m price tag, which worked out at pounds 2.2m per outlet including development costs, had analysts spluttering in their pints.

Yesterday's results were the first to include a contribution from the purchase, although group profits just edged ahead 5 per cent to pounds 14.7m in the six months to September.

There are eight Pitcher & Piano outlets, with 11 to open next year and 15 more in each of the following two years. Management says the chain is trading ahead of expectations, with like-for-like sales 16 per cent ahead, driven by better margins and tight cost controls.

But making the Pitcher & Piano deal pay its way is just one of Marston's problems. Its core Pedigree cask ale has been hit by the decline in the sector caused by the rise in popularity of the smooth and creamy nitrokeg beers such as Caffrey's and John Smith's Extra Smooth. Pedigree's volumes were down by 8 per cent in the period in a sector off 10 per cent. Pedigree's own nitrokeg version, Bitter Smooth Brewed, has only partly limited the damage. Sales of Pedigree's Draughtflow cans have also suffered.

There also seems to be a problem in the managed part of Marston's pubs estate, where like- for-like profits grew by only 1.9 per cent against the 7 to 8 per cent being enjoyed by the brewing majors.

Marston's shares have fallen sharply since their 352p high in May. Down a further 5.5p at 276.5p yesterday, and with analysts forecasting full- year profits of pounds 28.6m, they trade on a forward rating of 12. A justified discount to the sector.