View from City Road: Tomkins' trigger finger itches

IT IS HARD not to sympathise with Greg Hutchings, chief executive of Tomkins. He is clearly thirsting for an acquisition to keep him and his board occupied, but his ambitions are thwarted by what he regards as inflated multiples of quoted companies on the one hand and unrealistic expectations from corporate sellers on the other.

His only consolation is that, for most of the market, things are likely to get much worse - and that could introduce a bit more realism into the more optimistic expectations. Judging by the recent spate of profit warnings, the interim reporting season in September will be grim and there is a growing fear that many of the companies which determinedly held uncovered dividends in 1991 in the hope that the long- awaited recovery was about to start will be forced to cut payments. Dividends, rising at an annual rate of 5 per cent six months ago, are increasing at just 1 per cent, making analysts' forecasts of 4 per cent growth for the year look optimistic.

This will underline Tomkins' attractions - acquisitions or not. As it was keen to point out yesterday, it has already put many of its recession-hit competitors to shame. In the year to 2 May, profits rose 5.2 per cent to pounds 132.1m while earnings increased 5 per cent to 27.63p a share compared with the market average of a 13.5 per cent fall. The dividend was lifted 15 per cent to 11.34p, still more than twice covered by earnings.

The advance was due to a full year contribution from Philips Industries, the US industrial group acquired in August 1990, but Tomkins managed to increase profits at two-thirds of its companies which, for suppliers to bombed-out areas like commercial property, automotive and housing, is an impressive achievement. It also generated pounds 125m of cash, increasing its balances from pounds 46m to pounds 112m.

Although it is keenest to expand in the UK - if only because of a looming advance corporation tax problem - it was fortunate last year that more than 70 per cent of its business is generated in the US, where there have been faint stirrings of recovery. In the UK, even the fasteners business, one of the first to respond, has yet to see any sign of life. That is reflected in current year forecasts of about pounds 143m and 29.7p of earnings, while the dividend should rise a further 15 per cent.

At yesterday's closing price of 470p, up 11p, that puts it on a prospective multiple of 15.8, a 20 per cent premium to the market amply justified by its record.

(Photograph omitted)