The Investment Column: Eurotherm chief is feeling the heat

Electronic parts manufacturer Eurotherm grabbed the headlines last summer when the chief executive, Claes Hultman, resigned after a messy battle with fellow directors, only to be reinstated weeks later by admiring institutional investors. The debacle was followed by a boardroom bloodbath, with Mr Hultman's detractors, including founder and chairman Jack Leonard, being forced out.

But Mr Hultman is going to have to work hard to repay the institutions' faith in him. Since he regained control, Eurotherm's share price has fallen by a third to 376p, down 6.5p yesterday, and underperformed the stock market by 44 per cent. Its interim results did little to lift the gloom. Profits fell by over a fifth to pounds 14.7m.

To be fair, Mr Hultman is not to blame. Underlying profits were flat but Eurotherm was clobbered by the rise in the value of the pound, which wiped pounds 4m off the bottom line. Strong sterling creates two problems for Eurotherm.

First, it sells almost half of its UK products, including temperature control equipment, drives which regulate motor speeds and gauging equipment, to domestically based exporters. But a rising pound has hit these customers hard and Eurotherm's domestic sales have been blighted. It has reacted by pioneering products which have, on the whole, been successful. But it is having to work hard to stand still.

Second, foreign producers are now much more cost competitive. Central European manufacturers especially have flooded Eurotherm's main markets with cheap imports. Poor demand on the Continent, induced by faltering economies in France and Germany, has added to its woes.

Pressure on margins is intense. Eurotherm's operating margin fell by more than two percentage points to 14 per cent. It would have dropped more but for the fact that it has decided not to slash prices to win custom, though this has had an adverse effect on sales which slipped nearly 3 per cent. Mr Hultman summed up the situation by saying: "We have a horrific situation with currencies."

One solution is to expand its businesses in North America and the Far East. But most sales over there are done through distributors and Eurotherm admits it does not stock enough products to win contracts with middlemen. To get them it will have to expand its product range by making more acquisitions. With pounds 28m in the bank it can afford to do so, but penetrating these markets could prove to be a lengthy process.

Broker Henderson Crosthwaite has downgraded current year forecasts from pounds 34m to pounds 29.5m, putting the shares on a prospective p/e ratio of 17. Eurotherm could make an attractive bid target but Mr Hultman denies he has received a telephone call from anyone. Eurotherm is also considering returning cash to shareholders or launching a share buy back. Even so, the shares are best avoided.

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