Tomkins finds big is still beautiful

The Investment Column
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The Independent Online
Greg Hutchings, chief executive of buns-to-guns conglomerate Tomkins, looks more and more like a laid-back Californian as his hair heads towards his shoulders but he was on a short fuse yesterday discussing the City's persistent refusal to recognise his company's achievements and potential.

Twice a year Tomkins wheels out an impressive set of data to back up its argument that, despite the range of its products from Hunter wellies to Smith &Wesson handguns, from loaves of bread to bicycles, it is no Hanson or BTR and should not be rated as if it were. To an extent, investors have cottoned on and Tomkins shares have outperformed the diversified industrials sector by 45 per cent over the past three years. Against such a dismal backdrop, however, that does little to distract from the fact that the shares trade on a sceptical multiple of earnings.

Figures for the half year to October were flattered by an extra week compared with last year and boosted to an extent by the strength of the pound, especially against the dollar, but they were yet another very impressive performance, with earnings per share up 18 per cent and a 13 per cent rise in the dividend, completing an unbroken sequence of increases since 1984.

The figures were another snub to cynics who questioned the Ranks Hovis McDougall acquisition five years ago and suggested that the latest big purchase, of automotive hose maker Gates, is going to be a much quicker and easier integration than the bread maker. It is proving a long education process but analysts are finally getting the message that, despite its apparent rag-bag of businesses, Tomkins really does have a focus - on manufacturing.

The City is quick to call on Tomkins to bend to the latest business school fashion and the company doggedly refuses to be swayed by the argument. Its refusal to follow Hanson down the break-up path has been vindicated by the failure of that demerger to create any shareholder value, and the latest refusal to hand money back to shareholders has more than a ring of common sense about it.

Tomkins reckons it generates a return on its capital of getting on for 20 per cent compared to the cost of that money of between 12 and 13 per cent. Plainly there would come a point when its share price was so depressed that a buy-back was the best use of the company's pounds 370m cash pile, but it is not now. The restrictions it would place on any cash-funded acquisition would be unacceptable.

Tomkins' problem is that, despite the steadiness of its earnings growth, the scale of the rise is so pedestrian. Profits of pounds 425m in the year to April would imply an 11 per cent increase and the forecast for the following 12 months is even less exciting. A p/e ratio of 12 is harsh but does not represent a massive valuation anomaly. Solid value.