The Investment Column: Fairey suffers in electronics

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The Independent Online
Fairey, the specialist engineer, is a tough company to get to grips with. A whirlwind of acquisitions in the past year means that some 70 per cent of its business is now in specialist electronics - a shift from its traditional, lower-margin defence-related engineering. Unfortunately electronics has been a terrible investment.

Overcapacity and falling demand have rocked the semiconductor market. Added to crippling currency hits in certain areas of the market, electronic sector shares have underperformed the market by some 23 per cent in 12 months. Companies such as Eurotherm, heavily exposed to the semiconductor market, and Bowthorpe, a big exporter to Europe, have suffered repeated profit downgrades. Fairey has been dragged down too. Shares in the group have lagged the market by 33 per cent in 12 months.

Fairey probably does not deserve to be lumped in with the rest of the sector but, given recent acquisitions, measuring the health of its underlying businesses is not easy. The group has spent more than pounds 200m on four deals since January 1996. That, along with foreign exchange factors, makes Fairey's headline numbers meaningless.

After pounds 2.1m of currency losses in the half year to June, operating profits rose 45 per cent to pounds 26m as underlying sales rose almost a third. The figures included the recently purchased Burnfield operation, but were without Fairey's largest acquisition to date - Fusion, the ultraviolet coatings group bought for pounds 81m last August -and PMS of the US, bought last year for pounds 49m.

John Poulter, Fairey's chief executive, puts organic sales growth in the core electronics business at 6 per cent. That is decent enough when compared with rivals. Moreover PMS, which lost sales after the semiconductor slump, should pick up now that market is recovering. If so, Fairey could hit 10 per cent organic sales growth rates by the year end. With 60 per cent of its earnings in US dollars, Fairey is also less exposed to the pound than other companies and should see a smaller second-half hit.

Sue Cox at UBS forecasts pounds 52m for the full year, putting Fairey's shares, unchanged at 567.5p, on a forward multiple of 16. That is a 5 per cent discount to the market which drops to 14 times next year for a 15 per cent discount. Fairey deserves better. Good value.