View from City Road: Senior justifies confidence

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The Independent Online
APART from an 8 per cent profits setback in 1990/1, Senior Engineering has coped admirably with the recession thanks to early cost-cutting and a wide spread of customers in largely niche markets.

Its virtues have been increasingly recognised and Senior shares have outperformed the relatively buoyant mechanical engineering sector by 25 per cent this year.

Anyone who subscribed for Senior shares at 58p in February in the pounds 26.6m rights issue to buy Flexonic, a Chicago-based maker of flexible and tubular metal hose, is showing a 10p profit while the FTSE-100 has fallen by 8 per cent. In the recent retreat of engineering shares on stalled recovery hopes Senior shares have done better than most.

Latest results justify the market's confidence. First-half pre-tax profits show a rise from pounds 8.8m to pounds 10m. This was almost entirely due to the inclusion of acquisitions, principally Flexonic for four months, and earnings were just 1.7 per cent higher.

Unspectacular enough, but then Senior's earnings never collapsed during the recession, unlike many bigger engineers. Even more importantly, it is increasing the interim dividend by 4.3 per cent to 1.2p, is likely to cover its dividend more than twice this year, assuming a similar rise in the final, and has comfortable gearing of 11 per cent.

The specialist construction services division is still improving on its record 1991 performance and has a useful initial pounds 10m contract for Glaxo's mammoth research project at Stevenage, Hertfordshire, under its belt. Tube volume is flat but new products are coming through in the form of doubled power-steering unit sales to Ford and GM. Flexonic is on target for dollars 5.25m ( pounds 2.75m) this year and picking up useful forward car orders. Thermal engineering is slightly ahead, reflecting contrasting economic conditions on each side of the Atlantic. Control engineering is suffering from its exposure to an ever-shrinking British Coal.

On pre-tax profits of pounds 21m an undemanding p/e of 10.5 and a yield of over 6 per cent at 68p will support the shares and may even improve Senior's junior rating against the big boys of the sector.