Survivors of the business Ice Age

RECESSIONS for companies are rather like ice ages for the world of nature. The weak go out of business or become extinct; the strong remain to dominate the industry or their part of the planet. Huge profits can be made from identifying such companies and buying them early in the recovery phase when they can enjoy startling profits growth and make cheap acquisitions of struggling rivals.

Two examples are environmental consultancy RPS, at 115p, and steel erector Severfield-Reeve, at 207p. The latter's shares have doubled since I recommended them at 100p last September but I confidently expect them to double again.

RPS, too, has just reported a 71 per cent increase in profits to pounds 2.23m and 32 per cent increase in earnings per share to 9.5p for 1995. This is a far cry from 1991 when the group reported a pounds 500,000 loss and the shares plunged to a low of 23p to capitalise the business at just pounds 2.8m against pounds 22m now. The latest profits are a record for the group and the earnings equal the earlier high point achieved in 1990. The share price, though, is little more than half its peak leaving large scope for further recovery. On stockbrokers' forecasts of 1996 profits reaching pounds 2.8m to pounds 3m and earnings, held back by a rising tax charge, reaching 10p the prospective p/e is still an undemanding 11.5.

But those forecasts could be left well behind if, as I expect, the company keeps making acquisitions. RPS employs 350 people, mostly fee-earning, in 17 branches throughout the UK and Ireland. Its chairman, Alan Hearne, claims that RPS is the biggest player in a fragmented industry and has the opportunity to become "a major force". Many smaller rivals are struggling and eager to sell. Last year the group paid pounds 2m, financed by a share placing at 79p, to buy two companies with annualised turnover of over pounds 4m, which contributed pounds 370,000 to profits in the six months since acquisition. Helped by RPS's financial strength and operating systems, these acquisitions could be contributing pounds 2m to profits in a year or two. It is also evident that more deals are likely.

Much of RPS's opportunity comes from growing pressure on companies both to operate in an environmentally sound manner and also not to take on potentially disastrous environment-related liabilities. Its clients already include Nuclear Electric, the property firm MEPC, TI, ICI and Ministry of Defence. Work on the proposed Heathrow Terminal 5 alone brings in pounds 700,000 plus a fee income.

As the environmental agencies come on stream with huge budgets, the pressure on companies to be environmentally responsible is going to add to the group's workload. A combination of steady sales growth and incremental margin improvement means earnings could advance by at least 15 per cent a year even without acquisitions. These prospects are not recognised in a rating at a discount to the overall stock market.

Severfield-Reeve is also using acquisitions to give what could be a powerful fillip to an already fast growth rate. It has just announced the acquisition, for pounds 800,000 in cash, of Rowen, a substantial southern-based steel erection business. The modest price belies an important deal for the group. Last year Rowen produced 20,000 tonnes of structural steel against 35,000 for Severfield-Reeve and had a turnover of pounds 31m against pounds 39m.

The big difference is on the profits front: pounds 493,000 for Rowen against its new parent's just reported pounds 2.2m. If Rowen's profitability can be improved, the potential is obvious. Stockbroker ABN Amro Hoare Govett is forecasting profits for the enlarged business of pounds 4m for 1996 and pounds 5.8m for 1997, to drop the p/e to around 10.

Apart from rapidly expanding its structural steel business, Severfield- Reeve also has a potentially exciting diversification called Manabo. This is a new business, 25 per cent owned by its founder, Richard Hawley, which has acquired the UK and world rights, excluding parts of Europe and Scandinavia, to a range of cleaning machines for use in the meat and poultry industry. Investors have reacted with a certain amount of caution to the group's plans but John Severfield and John Reeve are sufficiently impressed to be spending pounds 2.3m on a new factory for Manabo's products.

The various expansionary moves are being financed by a placing to raise pounds 6.6m with a clawback facility for shareholders on the basis of one share at 180p for every four shares held. If Manabo lives up to expectations, there is an opportunity for the group to multiply its market capitalisation severalfold before the end of the decade. Prospects look very attractive.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Attenborough with the primates
tvWhy BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
News
Campbell: ‘Sometimes you have to be economical with the truth’
newsFormer spin doctor says MPs should study tactics of leading sports figures like José Mourinho
Sport
football
Life and Style
Agretti is often compared to its relative, samphire, though is closer in taste to spinach
food + drink
News
Kelly Osbourne will play a flight attendant in Sharknado 2
people
News
Down-to-earth: Winstone isn't one for considering his 'legacy'
people
News
The dress can be seen in different colours
i100
Sport
Wes Brown is sent-off
football
Voices
Lance Corporal Joshua Leakey VC
voicesBeware of imitations, but the words of the soldier awarded the Victoria Cross were the real thing, says DJ Taylor
Life and Style
Alexander McQueen's AW 2009/10 collection during Paris Fashion Week
fashionMeet the collaborators who helped create the late designer’s notorious spectacles
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Recruitment Genius: Office Manager / Financial Services

£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

Jemma Gent: Year End Accountant

£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

Jemma Gent: Management Accountant

£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

Day In a Page

War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
Yvette Cooper: We can't lose the election. There's too much on the line

Yvette Cooper: We can't lose the election. There's too much on the line

The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

It's not easy being Green

After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

Gorillas nearly missed

BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

The Downton Abbey effect

Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
China's wild panda numbers have increased by 17% since 2003, new census reveals

China's wild panda numbers on the up

New census reveals 17% since 2003
Barbara Woodward: Britain's first female ambassador to China intends to forge strong links with the growing economic superpower

Our woman in Beijing builds a new relationship

Britain's first female ambassador to China intends to forge strong links with growing economic power
Courage is rare. True humility is even rarer. But the only British soldier to be awarded the Victoria Cross in Afghanistan has both

Courage is rare. True humility is even rarer

Beware of imitations, but the words of the soldier awarded the Victoria Cross were the real thing, says DJ Taylor
Alexander McQueen: The catwalk was a stage for the designer's astonishing and troubling vision

Alexander McQueen's astonishing vision

Ahead of a major retrospective, Alexander Fury talks to the collaborators who helped create the late designer's notorious spectacle
New BBC series savours half a century of food in Britain, from Vesta curries to nouvelle cuisine

Dinner through the decades

A new BBC series challenged Brandon Robshaw and his family to eat their way from the 1950s to the 1990s
Philippa Perry interview: The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course

Philippa Perry interview

The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course
Bill Granger recipes: Our chef recreates the exoticism of the Indonesian stir-fry

Bill Granger's Indonesian stir-fry recipes

Our chef was inspired by the south-east Asian cuisine he encountered as a teenager
Chelsea vs Tottenham: Harry Kane was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope

Harry Kane interview

The striker was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope
The Last Word: For the good of the game: why on earth don’t we leave Fifa?

Michael Calvin's Last Word

For the good of the game: why on earth don’t we leave Fifa?
HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?