THE INVESTMENT COLUMN

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The Independent Online
Cash haemorrhage dulls T&N

T&N, the automotive components maker formerly known as Turner & Newall, is still struggling to improve its image in the City, where a haemorrhage of cash in yesterday's half-way figures revived age-old fears of a rights issue and contributed to an 8p mark-down in the shares to 186p.

There is little to be done about T&N's other image problems, dating back to its days as an asbestos producer. But last November's warning of the need for substantial new provisions to cover injury claims came as a timely reminder that, in this group, cash is a more than usually valuable commodity. The cash-preserving dividend cut to 3p had been flagged earlier this year.

Capital expenditure of pounds 64.7m and acquisitions totalling pounds 62.3m pushed gearing from 58 per cent in December to 78 per cent at the end of June. T&N remains relaxed, suggesting early disposals from a pounds 100m two-year divestment programme and an attack on working capital could take 20 points off the gearing figure by the year-end.

But the cash issue took the shine off what were otherwise impressive results. All three divisions are moving ahead strongly, lifting group operating profits before exceptionals by a third to pounds 120m in the half. Even after taking account of a pounds 25m charge for asbestos claims, earnings per share were up a healthy 11 per cent.

Margins advanced from 9.2 to 11 per cent, putting the group within sight of reaching its target of a 12.5 per cent return on sales at the peak of the cycle. The only fly in the ointment was in the US, where operating profits slipped from pounds 30.6m to pounds 28.2m.

The automotive after market has been bloody recently, with Federal Mogul, a big competitor, slashing prices. With the US representing about a quarter of T&N's business and the possibility that German demand might start to flag, the short term looks uncertain.

Further out, T&N's strategy of building distribution in growth markets such as the Far East and Latin America looks soundly based, even if its dogged pursuit of Kolbenschmidt, a German piston maker, is harder to justify, given the group's other distractions. The option to acquire a 49.9 per cent stake in KS has already cost pounds 12m and pounds 4.5m in financing costs in the first half. T&N says that at current market prices, the value of the option will cover its outlays, but it is hard to see how it can escape being blocked by the German authorities.

Profits of pounds 135m this year would put the shares on a prospective multiple of 12 and a yield of 4 per cent. They will languish until T&N proves it can deliver cash as well as profits.

Problems show in small print

It always pays to scour the small print of the prospectus when a company comes to market. Never more so than with Universal Salvage, which plans to float next month at a value of about pounds 40m and yesterday provided potential shareholders with a host of reasons to tread extremely carefully.

On the face of it, Universal has been an enormously successful company in the 27 years since its chairman, Clifford Bassett, founded the business. Buying written-off cars from insurance companies, storing them and selling them on has been lucrative work, especially in the past five years when profits have soared from pounds 553,000 to pounds 3.38m on doubled turnover of pounds 40.4m.

Certainly, Universal has secured a good niche, with 13 per cent of the 500,000 cars written-off each year passing through its collection and auction system. It makes sense for the insurers, too, who can't be bothered with handling crumpled vehicles.

That said, and despite being extremely cash generative, the quality of Universal's earnings is not high. It relies on five insurance companies for almost 60 per cent of its business and on 10 companies for three quarters of turnover. The loss of a major customer at the start of the year contributed to a 5 per cent decline in units sold in the first quarter.

The other worries about the company are less tangible but none the less real for that. Tucked away in the notes to the prospectus are several indications that Universal could have difficulties adapting to the high levels of scrutiny faced by public company.

There are loans to Luton Town football club, where Mr Bassett is a director, transactions with an insurance company in which he and another director have an interest, and a written off loan to a property company where, again, Mr Bassett was a director.

Five years ago, no director earned more than pounds 90,000. Last year five earned more than pounds 150,000 - although the finance director had to get by on pounds 43,000.

None of these is, in itself, a reason not to invest in the company - maybe not even the aircraft the company has recently decided it no longer needs - but taken together they suggest much too much risk for a pretty indifferent reward: a market average p/e of between 13.4 and 15.5 and a yield of just over 4 per cent. Avoid the issue.

Psion on brink of big league

Yesterday's 3p fall in Psion's share price to 489p was a grudging, if hardly unexpected, response to a 76 per cent rise in pre-tax profits for the six months to June. It would have been surprising if the shares had not taken a breather after doubling since April and rising more than 10-fold in four years.

Psion is that rarest of flowers, a British high-technology company that has managed to convert design and technical excellence into commercial success. Better still, after a number of false starts, it is also managing to crack the export markets of Europe and North America. This could really take the company into the big time and preserve its viability as an independent.

During the first six months, sales jumped 40 per cent to pounds 39.8m and, thanks to success in selling higher specification, higher margin products such as the 2Mb Series 3A electronic organiser, margins widened from 10 to 13 per cent. That sent profits soaring from pounds 2.92m to pounds 5.15m, leaving full year forecasts of pounds 7.5m for the whole year looking dreadfully out of date.

Successes have been scored across the board, with sales of the Series 3 flagship product up 48 per cent to pounds 24.7m and doubled turnover at Psion's modem manufacturing business, which increased sales from pounds 3.69m to pounds 7.55m.

Demand is not a problem in any of Psion's markets and capacity is also plentiful after expansions. The only cloud on the horizon is the shortage of semiconductors that is dogging the whole industry. Psion is rightly spending heavily on research and development to ensure it maintains its edge but it also has a firm grip on overheads. Debtor days fell sharply, working capital actually decreased during the half while cash flow was strongly positive.

American buying has boosted the shares this year to a level where they look expensive on normal measures - on the basis of forecast profits of pounds 10.5m, they trade on a prospective p/e of 16. This column said the shares were high enough in April at 290p (on the basis of much lower forecasts) and missed out on a spectacular four months, but our caution looks ever more sensible as the price rises.

COMPANY RESULTS

Turnover pounds Pre-tax pounds EPS Dividend

Baynes (Charles) (I) 97.1m (67m) 8.4m (5.6m) 3.17p (1.97p) 0.9p (0.7p)

Burnfield (I) 22.4m (19.7m) 2m (1.5m) 4.1p (3.1p) 1.3p ( 1p)

Dominick Hunter (I) 21.7m (17.6m) 2.25m (1.7m) 3.93p (4.03p) 2.4p (2p)

Johnston Press (I) 49.5m (44.3m) 8.1m (6.7m) 4.05p (3.48p) 0.75p(0.69p)

Nurdin & Peacock (I) 792m (685m) 9.5m (8.7m) 10p (5.4p) 2.27p (2.16p)

Pentland Group (I) 331.5m (280.9m) 17.6m (16.8m) 3.1p (2.7p) 1.35p (1.25p)

Provident Financial (I) 219.5m (208.9m) 41.1m (30.7m) 20.5p (15.4p) 11p (6.5p)

Psion (I) 39.8m (28.2m) 5.15m (2.9m) 14.97p (8.65p) 1.5p (1.1p)

Serco Group (I) 150.2m (120m) 7.35m (6m) 7.2p (5.6p) 1.45p (1.25p)

Stoves (I) 48.9m (41.8m) 3m (1.5m) 14.2p (7.1p) 14.2p (7.1p)

T & N (I) 1.07bn (985m) 73.2m (61m) 8.3p (7.7p) 3p (7.5p)

Vardon (I) 15.3m (12.7m) 1.8m (1.5m) 1.6p (1.5p) 0.4p (0.375p)

Q) - Quarterly (F) - Final (I) - Interim

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