View from City Road: Chubb valuation may disappoint

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SIR ERNEST HARRISON looks like being disappointed when Chubb Security starts trading on Monday. The company is likely to have a valuation of pounds 550m, or pounds 50m less than Sir Ernest was hoping for. But in these times valuations are difficult to forecast 24 hours ahead, let alone six months in advance.

The arguments for demerging Vodafone were clear and should have been grasped by Racal Electronics much sooner than they were. The cellular telephone company was far too big for Racal Electronics to cope with. In the year since the demerger Racal's shares have outperformed the rest of the market by 77 per cent.

The arguments for demerging Chubb are less clear-cut. Sir Ernest says that Racal is no longer contributing to Chubb's growth and that the two groups are competing for resources. Odd, then, that both David Peacock, chief executive of Chubb, and David Elsbury, his opposite number at Racal, say there have been no conflicts over resources.

But they warn there could be difficulties in the future if they did not demerge. Both have plans to expand, Racal by acquisition, Chubb through increasing market share.

Sir Ernest, who bought extra shares last year, believes the demerger will boost the value of his company. He even hints that he could demerge other businesses - what price Racal Radio? - if the Chubb float is successful.

Chubb's growth prospects are unexciting, even with a higher profile for its brand name. Though first-half operating profits are forecast to grow by 35 per cent to not less than pounds 28m, pre-tax profits will be nearer pounds 21m after charging pounds 2m interest and about pounds 5m of rationalisation costs. Both items will be lower in the second half, leaving full-year profits up from pounds 35m to probably less than pounds 60m in the full year.

That sounds impressive, but it reflects belated cost-cutting and other management action last year. In the medium term growth is likely to be slower, though still enough to give Chubb a small premium over Racal. If the gap stretches to more than 30p, buy Racal.

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