Vosper steering steady profits course

Investment Column
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Vosper Thornycroft, now one of only two warship building yards left in the UK since the demise of Swan Hunter, has fared significantly better than its land-based peers in the construction industy. Management has proved much more adept at making money from long-term fixed-price contracts. Profits have risen steadily as a result, locking in healthy gains for investors who bought the shares at 160p when the group was privatised in 1988.

Despite the fall in half-year turnover announced yesterday, current volumes of work are similar to last year. It is only because of Vosper's conservatism in booking profits towards the end of a contract's life that it was able to lift profits by 11 per cent to pounds 11.4m in the six months to September as ships for Saudi Arabia, Qatar and Oman come well on the way to completion.

But as Lord Wakeham, the former Conservative energy minister who now chairs the company, suggests, a company in Vosper's position also needs to maintain a strong order book with the Royal Navy to remain in contention as a serious shipbuilder. That is why the imminent decision on the follow- on order for three Type 23 frigates for the Navy, worth perhaps around pounds 400m, could be crucial.

Vosper's order book has already fallen from over pounds 600m last year to pounds 450m. Although work does not run out completely until 2001, Vosper needs new contracts to keep the yard fully occupied over the next few years.

Management is in discussions with the Saudis to supply a further three minehunters, plus support vessels, following an initial deal to supply three under the Al Yamama 2 arrangement with British Aerospace. That could be worth several hundred million pounds and is the most attractive potential overseas contract from a number of current possibilities. These include tenders outstanding for offshore support vessels for Brunei and missile ships for Kuwait and a frigate order expected to come from the United Arab Emirates in 1997.

Any of those would be enough to secure Vosper's future, but the Type 23 deal would re-establish the company's credentials in the large warship market and help maintain work on steel-hulled vessels at Southampton. Vosper is confident it can beat off the challenge from GEC's Yarrow yard on the Clyde, builder of the first batch of Type 23s. Failure could cost 500 jobs, but would not be disastrous for the company, which anyway should see 40 per cent of its profits come from non-traditional work within two years.

NatWest Securities' forecast of profits of pounds 27.5m this year would put the shares at 865p, up 5p, on a prospective price/earnings ratio of 15. Fair value, given Vosper's strength.

The components

for success

Electrocomponents may not be a glamorous business, but it has been one of the most reliable performers on the market in recent years.

Since 1990 its shares have more than trebled and are up by more than 30 per cent this year alone. It has also increased its dividend every year for the past 28 years.

The company has secured a profitable and secure niche, delivering electrical parts to industrial customers who want fast, efficient service and are prepared to pay a premium for it.

Any order placed by 8pm one day will be delivered to the customer by the following morning. The company's technical help lines take 2,000 calls a day and new trade counters are being opened so that customers can pick up orders if they prefer.

As well as ensuring fat margins, that level of efficiency requires expensive logistics and warehousing systems which erect high barriers to entry. Electrocomponents and its main competitor, Farnell Electronics, have between them tied up 80 of the UK market.

Electrocomponents is now following its rival in taking the concept of rapid overnight delivery overseas, where this kind of service is a relatively novel idea.

The results speak for themselves. Pre-tax profits in the six months to September were up by 18 per cent to pounds 42m. Sales were up a similar amount to pounds 257m.

Far from being a mature market, the UK division is going like a train. Sales at RS Components increased by 16 per cent and the company now has 170,000 British customers.

Net cash stands at pounds 50m despite a prodigious investment programme. The group is spending pounds 40m on a new warehouse in Nuneaton. It is also buying in its overseas distributors and has added Spain and Singapore in the past two months.

Credit Lyonnais Laing is forecasting full-year profits of pounds 98m.

With the shares down 3p at 325p yesterday, that would put the shares on a lofty forward rating of 21, a hefty premium to Farnell.

Electrocomponents is a quality company as the record shows, but at the current level the shares are high enough.

Smokers set BAT

profits alight

Investors who believe tobacco is a dying business should think again in the light of the latest quarterly results from BAT Industries. Operating profits from tobacco soared by pounds 100m to pounds 388m in the three months to 30 September, lifting the nine-month total from the weed from pounds 761m to pounds 1.05bn.

The company's daily sales, topped up by last year's purchase of American Brands' US business, American Tobacco, exceed 1.8 billion cigarettes. While smoking may be on the decrease in more developed nations, there are more than enough markets opening up to keep BAT busy for years.

Even the health-conscious US is yielding better returns. Recent price rises are the first for two years and there are signs that hostilities in the discounting war are beginning to wane. For investors in BAT this will come as welcome news, with the company's giant financial services arm - encompassing Eagle Star, Allied Dunbar and Farmers - now finding the going slightly tougher.

Third-quarter operating profits from financial services rose from pounds 213m to pounds 249m, increasing the nine-month total from pounds 620m to pounds 730m. Allied Dunbar is struggling harder than most in BAT's camp, mainly because of the tough conditions in the pensions and life businesses. The Eagle Star general insurance side is bouncing back, reclaiming ground lost to Direct Line. The company has more than 500,000 policyholders through its own direct insurance operation.

More financial services acquisitions look likely. BAT has hardly kept it a secret that it would like to buy a building society, and there are still plenty to choose from. The possible acquisition of Gartmore, the fund management business, is looking increasingly unlikely.

After a 22 per cent rise to pounds 1.81bn in the nine months, full-year group profits are set to hit pounds 2.34bn. With a prospective yield of 5.5 per cent, the forward multiple of under 12 still makes BAT look cheap, even following yesterday's 14p rise in the shares to 547p.

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