Suppliers back in top gear

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The Independent Online
THE remarkable renaissance of vehicle manufacturing in the UK is good news for local equipment suppliers. The day is now confidently expected when the number of cars made in the UK will once again top 2 million a year, and there is surprising buoyancy at the heavier end of the vehicle market.

Truck demand is booming, and even sales of agricultural and construction equipment are not doing badly, helped by strong exports. And there is the prospect of an eventual improvement in UK demand for construction equipment.

Among companies benefiting from this recovery are Morris Ashby, which makes pressurised aluminium dies, and Airflow Streamlines, which makes cabs for trucks and tractors and prototype bodies for cabs, trucks and vans. Neither company is closely followed by the investment community, leaving room for awareness to grow and the share prices to improve.

Some idea of the optimism about prospects at Morris Ashby comes from the plans for its UJP Tools subsidiary. UJP makes tools which are used by Morris Ashby to mass-produce brackets, transmission parts and many other items for such big car and part makers as Ford and Lucas. Morris Ashby acquired UJP in 1992 and is building a new factory to take capacity from pounds 1m a year to pounds 2.5m. Not only is much of this increased toolmaking capacity expected to be taken up by the parent company, but management also wants protection against the possibility that if demand really picks up, toolmaking capacity could be in short supply.

A key factor in the group's success has been its sustained investment programme through the recession. It is half-way through a five-year, pounds 15m project to add capacity and improve productivity. Such programmes are possible because Morris Ashby and other suppliers have become more closely involved with their customers early in the design and planning process.

These "partnership" arrangements have also encouraged the car companies to concentrate their business on fewer suppliers, helping the selected ones to gain market share. Morris Ashby does well because it has a reputation for innovation and technical expertise. Aluminium has been gaining market share, especially for under-bonnet applications, because it is lighter than iron and steel and helps fuel-efficiency.

Morris Ashby's sales have risen from pounds 6.5m in 1987 to an expected pounds 30m for the year to March, due out in July. A 1993 rights issue has diluted the growth in earnings per share in the latest year, but as the rights issue money is deployed, full benefits should come through, taking current- year earnings from 14p to 19p, dropping the price-earnings ratio to just over 12 at 233p. The growth should continue, supported by the investment programme. Over five years, sales and profits could repeat the twofold to threefold rise of the past five years.

Airflow Streamlines has significantly bigger sales than Morris Ashby, but has a lower stock market profile. The shares are tightly held and thinly traded. I wrote about them last November, when the price was 153p. Since then the shares have shot up to 240p, reflecting a near quadrupling of profits from pounds 1m to pounds 3.7m for the year to February. The proximate reason is that the factories, which normally tail off in December and January after a strong quarter, just kept on booming.

The deeper reason for the buoyant demand is the impressive performance of such customers as JC Bamford, Caterpillar, Ford New Holland (the tractor division of Ford) and ERF, the UK truck manufacturer. Indications are that the surge in demand is continuing.

Meanwhile the group's other main business, body engineering, is also doing well. One analyst close to the company expects first-half profits to double from pounds 1m to pounds 2m. Full-year prospects depend on whether last year's amazing second-half performance can be repeated or exceeded. Even on a cautious view, profits should reach at least pounds 4.5m to drop the p/e ratio to an undemanding seven.