T&N undergoes a sea change

The Investment Column
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The Independent Online
The flurry of excitement yesterday over the possibility that T&N might be about to lose its option to buy German pistons manufacturer Kolbenschmidt serves to underline the sea change that has taken place at the former asbestos producer. The attempt to take over Kolbenschmidt has been a long saga and the lapsing of the option over a quarter of the shares held by Commerzbank was not being seen yesterday as a serious set-back to T&N's ambitions. But it is significant in that for the first time in ages the investment focus has switched back to its engineering business rather than the asbestos-liabilities that have dogged the group for so long.

The thanks for that go to November's ground-breaking insurance deal, the pounds 92m premium for which was paid on Thursday. Along with close to pounds 500m of provisions, it is hoped that the resulting pounds 1.2bn cover for future liabilities from those suffering from asbestos-related diseases will cap what had seemed like an open-ended responsibility.

The net result is that the market can increasingly focus on the company's main automotive components businesses, ranging from brake linings to engine parts. Paradoxically, it is the group's previous underperformance here that could make it more attractive to investors for two reasons.

Firstly, there should be benefits in the share price as management focuses all its attention on improving cash flow and the performance of some of its manufacturing operations. Cash flow has been abysmal for years, but management are now getting to grips with the underlying problems. Working capital at the half year in June had been slashed from pounds 84.9m to pounds 50.9m, although with stocks still at well over two months' supplies there is clearly plenty to go for.

The second reason for hope about T&N is that a rival like GKN will now do the recovery job itself by taking it over. Either way, releasing time and resources from asbestos should allow the group to concentrate on expanding its operations overseas.

If profits hit the pounds 164m forecast by Charterhouse Tilney this year, the shares at 174.5p, up 3.5p, look good value on a forward p/e of 9. The danger remains that T&N is being guilty of the over-optimism that has been its hallmark in the past, but the omens here are better than for some time.

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