The Investment Column: Hepworth targets costs

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WHEN a company takes six months over a strategic review under a new chief executive, investors are entitled to expect root and branch reforms, otherwise, why take so long? But at Hepworth, the heating and engineering group that has been the subject of recent bid speculation, shareholders are being treated to little more than fiddling around the edges.

Jean-Francois Chene, the Frenchman who returned to Hepworth last year to lead the review, has preferred to leave the structure of the business unchanged while taking the axe to the cost base. This disappointed some in the City who had hoped he might decide to off load some of the peripheral businesses to concentrate on the core heating and building materials products such as Glow-Worm boilers.

On top of this, the City was hoping for news on takeover speculation, which has centred on a possible pounds 650m bid from Vaillant, the German industrial group. But the company knocked these on the head yesterday, saying it has received no approaches.

Though the company is not ruling out disposals at a later date it is, for now, concentrating on improving efficiencies. Of the pounds 69m of exceptional charges which pushed Hepworth pounds 11.7m into the red last year, pounds 51m related to costs relating to the overhead reduction programme. Management says these will yield annual savings of pounds 16m-pounds 17m.

It remains to be seen as to whether all this will be enough to revive Hepworth's continuing businesses, which fell from pounds 62m to pounds 56m before the exceptional charges. The chief culprit was Saunier Duval, the French heating business, where profits were hit by a difficult domestic boiler market and the impact of sterling. But combining it with the UK operation into one heating division should increase efficiencies. In the home market, Hepworth did much better with profits up by 19 per cent in a UK boiler market that grew by 5 per cent last year.

The pounds 16m cash pile is likely to be used for acquisitions in the heating and building products sectors rather than returned to shareholders.

Hepworth shares have jumped from their five-year low of 180p in February to 259p, down 5p yesterday. But with analysts forecasting full-year profits of pounds 58.5m, the shares trade on a forward rating of 16. Consolidation looks inevitable in this market but, after the recent rise, the shares are only a hold.