The Investment Column: Virtuous Cookson steals ahead

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The Independent Online
Cookson, the electronic materials to refractory products group, received a beating at the hands of the stock market last year. The worldwide slowdown in the electronics industry brought a halt to the recovery programme being engineered by chief executive Richard Oster and the shares plunged from the high of 327p in April 1996, casting the group out of the FTSE 100 index after only a year.

But a positively ebullient Mr Oster, who is replacing Robert Malpas as chairman in October, heralded the group's return to virtue yesterday, with better-than-expected results for the six months to June. Stripping out a loss on a disposal last time, pre-tax profits came in flat at pounds 85.4m - not bad going given that they had to bear a pounds 12m hit from the strength of the pound. More important was clear evidence that electronics is moving rapidly out of the woods.

Profits there edged up only 4 per cent to pounds 32.8m, but sales have grown every month since January, with the rate of growth accelerating from 2 per cent in the first quarter to 13 per cent in the second. Orders are running at record levels in Cookson's assembly equipment side and, although prices remain under pressure, the industry is seeing growth rates of up to 10 per cent.

Even so, advanced refractories, which makes the pipes and valves for smelting steel, was the real star of the period, recording a 34 per cent jump in profits to pounds 25m, beating expectations. Even excluding an acquisition, sales and profits are growing at 15 per cent, three times the rate of the market's growth. Cookson's long-time strategy of getting close to the steel makers seems to be paying dividends.

As is the way with conglomerates, there is always a black spot. But Cookson's problems with the zircon market, which caused profits in Cookson Matthey Ceramics to halve to pounds 4.8m, were well-flagged in last month's results from Johnson Matthey, the other side of the joint venture.

With industry margins in zircon, a key ingredient in tile-making, at a 20-year low, the general expectation is that a recovery must come next year.

Cookson has been guilty of over-optimism in the past and it is lumped in the still unfashionable conglomerates sector, so the market may take some convincing, but with strong order books and many commanding market positions, the future looks set fair. Meanwhile, it has the scope to spend around pounds 100m a year on bolt-on acquisitions, particularly after the imminent disposal of the antimony and plant pot moulding businesses, expected to raise a total of up to pounds 100m.

Full-year profits of pounds 180m would put the shares, up 8.5p at 223p, on a forward p/e of just 12. Reasonable value, despite continuing currency worries.