The Investment Column: Charter on track with Esab

Click to follow
The Independent Online
Jeff Herbert, chief executive of Charter, has a problem on his hands. His 1994 deal to buy Esab, the world's biggest welding products group, was just too successful. Bought at the bottom of the cycle, that acquisition was perfectly timed. For an outlay of pounds 445m, including debt, the business chipped in extremely healthy profits of pounds 74.6m in 1995, its first full year with the group it now dominates.

The effect on Charter's results for the 12 months to December was magnified by Esab's partial contribution in 1994, when there was also a change of year end, but the Swedish group clearly had a large impact. Group pre- tax profits soared to pounds 97.5m in the latest 12 months from pounds 54.8m in the previous nine.

Mr Herbert and his team have done everything they said they would. Rigorous management has helped lift like-for-like profits at Esab by 22 per cent and underlying margins have grown 2 percentage points, when the windfall benefits from a bonanza in Brazilian sales of welding rods at the end of 1994 are stripped out.

Meanwhile, Charter's remaining businesses, mainly the separately-quoted Cape building insulation group and Pandrol railtrack fastenings, have not been neglected. Cape has done well to shrug off the UK's building malaise to raise profits 29 per cent, while a $5m (pounds 3.3m) turnaround into the black at the US track maintenance operation helped push up returns from the rail equipment division by 56 per cent.

But the big question for Mr Herbert and his team is how to maintain the momentum. Last year, economic growth meant volumes rose between 8 and 15 per cent in Esab's businesses, pushing margins through the 10 per cent target. The harder task will be to hold that level through the cycle, as hoped. Further cost cutting, shifting more production to low cost areas and a push into the Far East will help, but the test will be the next recession, admittedly some way off.

A bigger hurdle for Mr Herbert will be to repeat Esab. With gearing cut to an impressive 17 per cent from 91 per cent in 1994, he is ready to spend anywhere between pounds 100m and pounds 500m. Similar targets are being sought among European conglomerates but the market waited for Esab and Mr Herbert is not about to be rushed.

In the meantime, profits of pounds 108m this year would put the shares, up 14p to 893p, on a forward p/e of 12. Undervalued.