THE INVESTMENT COLUMN
Pilkington has provided its shareholders with more than their share of disappointment through the recession, so yesterday's 7p rise in the share price to 189p, despite a pounds 300m cash call, was a dramatic reflection of the City's change of heart. Roger Leverton, and more recently Nigel Rudd, have taken enormous strides towards dispelling Pilks' image as an inefficient, family-dominated company.
The 70 per cent rise in underlying profits helped, but investors really liked Pilkington's willingness to invest heavily when it sees an opportunity, unfazed by its recent history of over-indebtedness and ill-conceived acquisitions. Buying in the remaining 50 per cent of SIV, the formerly state-owned and hugely inefficient Italian glass maker, is the right thing to do, and funding it with equity the right route.
The deal, which gives Pilks a 36 per cent share of the European automotive glass market and corrects an unhealthy bias towards the mature econ- omies of the Continent's northern countries, stacks up on most measures: a return on investment of 21 per cent, an exit price/earnings multiple of just five or a sixfold increase in Pilkington's share of profits from the venture in the six months to September.
The other acquisition, of the double glazing and glass processing operations of Interpane in Scandinavia and Switzerland, also makes sense, underpinning demand for float glass from the company's European plants. Include the extra sales from that source and the price paid for Interpane looks more attractive than the recent Heywood Williams distribution arm acquisition.
That said, the underlying investment story at the company has not altered massively. The old family culture is changing but Pilks is still a hugely cyclical business, even if its position in the fast-growing economies of the world - eastern Europe, China and South America - are encouraging.
The question is how those cyclical earnings should be rated. Profits in the 12 months to next March should exceed pounds 200m and in 1997 approach the previous peak profits of over pounds 300m. Even after the big issue of shares yesterday, that puts earnings per share at about 15p this year and 20p next time, for a price earnings multiple in calendar 1997 of nine compared with a market average of just under 12. That is quite a discount, but so it should be - until Pilks can lick the cycle, a price/earnings relative of 75 is not overly harsh and compares favourably with the 65 the shares traded on at the peak of the last cycle. Quite rightly the shares have been rerated. At 189p, they look fully valued, even if the rights paper at 155p has been safely priced.
US impasse hits Life Sciences
It has not been a good year for Life Sciences International, the scientific equipment group chaired by Sir Christopher Bland, London Weekend Television's former head. Since reporting strong 1994 results in March, brokers' estimates for this year have tumbled as a succession of problems have emerged, ranging from a disappointing performance from last year's Hybaid acquisition to negative exchange rate movements.
But two new fronts have now opened up against the company, forcing it to warn that second-half profits are likely to be down by a similar amount to the 16 per cent fall reported in the first six months to June. The shares plunged 35p to 87p, a level not seen for nearly five years, as the City took out its red pencil again yesterday.
The most debilitating blow is the current impasse between the US Congress and President Clinton over this year's national budget. This has held up funding of the National Institute of Health, the American equivalent of the Medical Research Council. With a budget expected to be $11.5bn this year, the NHI is Life Sciences' single biggest customer and indirectly has a big influence on spending by other clients of the group in the US, which in total represents around 55 per cent of sales.
The difficulties caused by the financing moratorium have been compounded by consolidation among LSI's customers. Acquisitions have reduced the four big US equipment distributors to two, concentrating buying power in the process. At the same time, takeovers - particularly Glaxo's purchase of Wellcome - are severely denting spending by big drugs groups as research and development departments are merged and rationalised.
Brokers have slashed forecasts to about pounds 23m, which after pounds 28.5m last year, ends an unbroken eight-year run of profit increases since Sir Christopher came aboard. A prospective p/e ratio of 10 looks undemanding for a company with recovery prospects, but Life Sciences will remain exposed in the US and Hybaid puts a question mark over management's ability to handle acquisitions. Fairly valued.
Vero looks to market debut
The number of quoted mobile telephone base station manufacturers will double this month when Vero Group comes to the stock market. And despite attempts to distance it from Rainford, a similar group which floated in April, today's prospectus is likely to reflect the experience of that previous market debut, also masterminded by Warburg.
Vero is likely to be capitalised at around pounds 125m. With post-tax profits forecast at pounds 7.6m, before exceptionals, that suggests a launch multiple of around 16, broadly comparable with the rating on which Rainford was floated. Warburg is clearly hoping to emulate its earlier success: from a placing price of 270p Rainford's shares have soared and now stand at 390p.
Admittedly, Rainford's growth has been of a different order to Vero, with profits soaring from pounds 325,000 to pounds 5.3m in the last four years. By comparison, Vero's record is more pedestrian, with the pre-tax total rising from pounds 1m to pounds 6.6m in the three years to 1994, even if the pounds 11.1m underlying profits forecast for the year to December should bump up the average.
Vero looks the more soundly based group, however. Ericsson, the Scandinavian electronics group, is the largest customer, taking around 15 per cent of sales. By contrast, Nokia, the Finnish group, represents over half Rainford's business, which remains heavily dependent on mobile telephony.
Vero's 42 directors and senior employees who backed a pounds 33m management buy-out from cables group BICC in 1994 will end up with 25 per cent of the enlarged equity after the float, and raise pounds 3m from selling shares. A further pounds 20m or so will go to Candover and Mercury Development Capital, the two venture capital groups which backed the buy-out. Vero's broader customer, product and geographic spread, should underpin the shares and the small intermediaries element (only 3.5 per cent of the enlarged equity) could leave some demand unsatisfied.
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