Tomkins opens Gates to growth

THE INVESTMENT COLUMN
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The market likes nothing more than a good reason to sell Tomkins, the guns-to-bread-to-lawnmowers conglomerate it admires but always from a suspicious distance.

Yesterday's half-year figures for the six months to October were as impressive as ever, continuing the relentless rise in earnings per share and dividends since 1984, but the shares closed 10p lower at 269p.

Although profits rose 10 per cent to pounds 126.1m and the interim dividend was increased 11 per cent to 2.7p, the market had expected a touch more. After last year's outperformance of the market (following three years of stagnation) the temptation to take profits proved too much.

Worse, the "technical and highly complex" hitches to the final completion of the recently announced Gates acquisition gave investors the jitters.

Gates, a manufacturer of belts and hoses for the car industry, is widely viewed as the key to changing City sentiment on Tomkins, which has struggled to shake off scepticism about the 1992 acquisition of the baker RHM. The company has always claimed that RHM is nothing more complex than a manufacturing business and it has confounded the deal's harshest critics by unexpectedly pushing through two price rises in less than a year.

But investors, simple souls, are able to see that Gates is the sort of manufacturing business at which Tomkins excels and are therefore happier that Tomkins can make a profitable fist of running it.

The company is currently gagged by confidentiality clauses and so cannot say as much, but worries that the deal might not go ahead look way wide of the mark.

Once that concern is out of the way, attention will return to Tomkins's core businesses, which in the first half all registered increases in margins despite a patchy market in a number of sectors. There were downgrades to forecasts yesterday, but they were extremely modest.

As ever, the steady businesses such as plastic mouldings, conveyor systems and plumbing fittings allowed Tomkins to have problems in its US bicycle arm, for example, and still remain on the rails. They also provide the backing and cash flow for the company to be able to consider longer-term projects such as raising milling and baking margins to acceptable levels.

At 4.1 per cent there is still a way to go at the old RHM, but up from 3.3 per cent a year ago the return from bread is heading the right way.

On the basis of forecast profits of pounds 330m this year and pounds 369m next (without any contribution from Gates), the shares stand on a prospective priceearnings ratio of only 12 - cheap for a company of this quality and, with the backing of a 4.5 per cent yield, the shares should have another good year.

Ten years' grind pays off for TI

The appointment to TI's board of Rudolf Mueller, the respected head of UK operations at UBS, confirms the coming of age of the seals- to-wheels engineering group. One of the highest-rated engineering stocks during the 1980s boom, its reputation slipped a bit in the early 1990s as its aggressive approach to accounting rules came under the microscope.

But unlike other acquisitive groups, which ran out of steam when the music stopped, the recession has only served to prove the soundness of the TI strategy. Sir Christopher Lewinton, the company's chairman and former chief executive, has spent the last 10 years building world-leading positions in three areas: John Crane for engineering seals, Bundy for small-diameter tubing for the car industry and Dowty Aerospace, the landing gear-to-propellors group acquired for pounds 510m in 1992. The results have come through strongly since profits before exceptionals bottomed at pounds 105m in 1991. By 1994, the pre-tax figure had soared to pounds 153m and NatWest Markets forecasts a further rise to pounds 180m last year and pounds 203m this time.

The omens are now positive for all the group's three areas. TI suffered a deal of indigestion after the Dowty deal, but the pounds 30.2m chalked up before interest in 1994 showed a reasonable return on an acquisition cost reduced by around pounds 80m of disposals. The 50:50 joint venture with the Messier business of Snecma of France has created a world leader in undercarriage systems and there is scope for rationalisation improvements.

The recent huge potential order for 77 Boeing 777s for Singapore Airlines spells good news for Dowty as a supplier, as will any orders for Airbus if British Airways moves in the direction of the European plane-maker. Elsewhere, worries over US and European motor vehicle output, which accounts for much of the 35 per cent of group sales sold into automotive markets, look overdone. Both may now be at or near the bottom and TI has shown its ability in the past to add value to its tubes by supplying complete systems, rather than just the commodity product.

Finally, the 40 per cent of sales that go into heavy industrial process markets should do well at this late stage in the world economic cycle, while TI is placing itself well by extending its reach in the Far East, where many of the projects are being sited. On a prospective p/e of 16 for this year, the shares, up 2p at 470p, stand on a well deserved premium rating. Hold.

Encouragement at Hillsdown

With Hillsdown Holdings' pounds 121m deal to buy Hobson declared unconditional yesterday, attention now switches to the company's plans for its new acquisition and whether the company is turning the corner after a poor 1995.

On the first point, the Hobson deal looks encouraging for Hillsdown. It was achieved on a relatively attractive price and there are obvious potential synergies. Like Hillsdown, Hobson manufactures biscuits, sauces and ready-made meals, which are sold as own-label products to supermarkets. Hillsdown will be looking for cost savings in logistics, packaging and the purchase of raw materials.

Hobson's London head office is likely to be closed and there may be further rationalisation in the factories, although nothing has been announced so far. Other parts, such as the wine and spirits, soft drinks and cereals business, look surplus to requirements and it would be no surprise if they were sold.

This is all good news but a recovery at Hillsdown still depends on a number of external factors that conspired against it last year. The company suffered more than most from the hot summer last year, which hit demand for Hillsdown's tea bags, hot drinks, biscuits and ready-made meals. On top of this, the continued rise in raw material prices wrecked the company's margins. After a good run earlier in the year the shares collapsed from an August high of 200p to 151p in December.

This year should be better. Barring a recurrence of another mercury-busting summer, demand should be back to normal and raw material pressures are now easing. The company is also likely to offload more of its peripheral businesses and its red meat operations are tipped for disposal soon.

One persistent problem, however, is supermarket pressure and Hillsdown is still finding it difficult to push price increases through. .

BZW is forecasting pounds 150m profits for the current year. With the shares unchanged yesterday at 174p, that puts them on a forward rating of 10. Food manufacturing may not be the most exciting sector at the moment but at these levels Hillsdown looks good value.

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