The Investment Column: Efforts to hoist margins make Hewden Stuart look good value

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The Independent Online
PLANT AND tool hire is not the most glamorous of businesses. Hewden Stuart has found it is not the most profitable either.

The company, which lends hovermowers, cranes and forklift trucks, has suffered following a rush of newcomers into the cranes and lifting equipment business.

As the City expected, the outcome was a 4.6 per cent drop in interim pre-tax profits to pounds 20.7m, as margins came under pressure from the competition.

Since Alistair Napier, the chief executive, issued a warning in May the shares have been in retreat. After topping out at 165p, they now fetch 111p. Fortunately, amid the bad news yesterday there was space for optimism. Group sales were up by 6 per cent to pounds 125m. These gains do not come across the board, however; plant hire and tool hire saw increases but lifting- equipment hire went into reverse.

The cost base has been trimmed, with almost 150 jobs gone. Tool hire's 219 sites have been reorganised into "clusters", cutting overheads. The number of accounting centres has been chopped from seven to two.

The company is meanwhile focusing more on the buoyant south, which it previously neglected. Five new tool-hire centres are to open their doors in the region ahead of Christmas.

More importantly, the strengthening economic outlook suggests that the businesses of Hewden Stuart's customers should grow. The Confederation of British Industry said yesterday that manufacturers' order books are in their best shape for 18 months. On Wednesday, data showed the manufacturing sector growing for the first time in a year.

Even if the Bank of England raises interest rates to cool things off, Hewden Stuart has less to fear than others. Its gearing stands at a conservative 24.5 per cent, and a strong pound raises its buying power abroad when it comes to re-stocking equipment.

Analysts see full-year pre-tax profits of pounds 42.9m, with earnings per share of 10.9p, putting the shares on a forward price/earnings ratio of 10. While the lifting business remains troubled, the steps to arrest the margin decline suggest the shares are good value at these levels.