View from City Road: More profits in Weir's pipeline

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The Independent Online
WEIR Group shareholders who stumped up 250p in a pounds 29.8m rights issue two years ago have been amply rewarded in seeing their shares more than double in value.

The company that nearly died in the 1981 recession, revived only by a capital reconstruction, disposals and wholesale top-management changes, has emerged as one of the bright stars of the current economic downturn.

Weir's pumps and valves are critical components in the five principal markets it serves: power generation, oil, water supply and treatment, naval and marine, and general industrial.

UK power generation orders may be poor, North Sea oil industry demand may have peaked and the privatised water companies may not have yet provided the expected bonanza in supply and treatment work. But Weir typically does more than half its business outside the UK and its markets there are growing strongly.

Interim results yesterday showed a 23 per cent rise in pre-tax profits to pounds 18.5m, accompanied by a 13 per cent increase in the half-time dividend to 3.5p and a 13p rise in the share price to 507p.

First-half order intake at pounds 175m, although well below the pounds 297m seen at the same time a year ago when there were a few very large single contracts, is in line with the second half of 1991. UK water is promising.

Weir remains cash generative. After spending pounds 14.7m, mainly on the acquisition of the US company Peabody Floway, net cash in the balance sheet was pounds 40m at the end of June after an underlying inflow from operations of pounds 8m. In turn this permitted a 75 per cent rise in interest earnings to pounds 1.7m. Associates, including the Devonport dockyards contract, which is due to expire in 1994, rose 25 per cent to pounds 2.3m.

Given the usual bias in favour of the second half, pre-tax profits could emerge at pounds 41.5m, according to Smith New Court, and a repeat 13 per cent dividend rise could mean a 12p total covered more than three times. A p/e of 13.5 and a 3.2 per cent yield still leave room for the benefits of a general economic recovery.