View from City Road: Chubb looks like a safe bet

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The Independent Online
After going nowhere for several years within Racal, whose management was arguably distracted by the Vodafone goldmine, Chubb Security's transformation since the autumn of 1991 under a dedicated management team is remarkable.

Following demerger from Racal last September, Chubb shares have outperformed the stock market by 30 per cent and commanded a premium rating. Chubb's first post-flotation results, showing a 64 per cent rise in pre-tax profits to pounds 64.2m, go a long way towards explaining why.

What is more, there is considerably more value to be unlocked from Chubb in the next two or three years. No wonder Williams Holdings, in its last futile attempt to land a big acquisition, was so keen to prise the company away from Racal.

In the face of broadly unchanged sales revenues of pounds 674m Chubb has lifted overall operating margins from 8 per cent to 11.2 per cent in the space of a year, and increased operating profits by 42 per cent to pounds 76m.

The self-styled Phase 1 cost-reduction programme, begun in the previous year and generating annualised savings of pounds 23m against a target of pounds 21m, contributed pounds 14m to profits. Disposal of European loss-makers chipped in another pounds 3.6m, and exchange rate changes were worth pounds 3.5m to profits. Improved margins and a pounds 15m assault on working capital helped to generate pounds 55m of surplus underlying cash flow. This almost wiped out March 1992 pro forma debt of pounds 60m, and helped to cut Chubb's interest bill from pounds 8.3m to pounds 3.6m.

Treatment of the formerly ailing patient did not stop there. An unnecessarily high tax rate of 46.8 per cent has been pulled down to 38.6 per cent, leading to almost doubled earnings per share of 13.3p, and a further dose of tax management will cut the rate again this year.

Margin improvement is still a high priority. But from now on the drive at Chubb will begin to shift towards increasing turnover by taking a bigger share of the pounds 7bn security market place.

The target of David Peacock, the chief executive, is to increase Chubb's overall 9.5 per cent share by 2 percentage points over the next two to three years, mostly in the larger electronic security market.

Potentially, this could enhance profits by even more than the Phase 1 programme, which has not yet made its full impact. Assuming that the group can earn an incremental margin of 30 per cent on the extra pounds 140m of sales it plans to generate by 1996, this would add pounds 40m or more than 50 per cent to current operating profits.

It looks a secure enough bet. A prospective multiple of 17 at 310p, assuming growth in pre-tax profits to pounds 80m this year, is therefore not demanding. One to lock away.