Weir presents a brighter picture

The Investment Column

Weir Group, the Glasgow-based engineering company which specialises in businesses such as pump and valve production, may finally be on the turn after an extremely poor run.

Weir's shares have underperformed the FTSE All-Share Index by 44 per cent over the last five years as the group was hit by fierce competition from Swiss and German rivals which were prepared to take on low-return work.

The impact on margins and more recent concerns over sterling's strength has led to the City marking Weir's shares down. This seems harsh, as half of the group's turnover is manufactured abroad and large chunks of its UK business is in services rather than exports. Only about pounds 100m of the group's UK sales are exported and the currency effect here is limited as the bulk is shipped to dollar markets rather than to France, Germany and Italy.

The City's view of the company perked up yesterday when Weir reported half-year profits well ahead of expectations at pounds 27.8m, a 44 per cent increase. The group's shares surged 13.5p to 279.5p and analysts upgraded full-year forecasts by around pounds 3m to pounds 58m.

The half-year figures were flattered by a kind comparison with the first half last year which was affected by problems at the Devenport Dockyard, hit by a refitting programme, and Strachan & Henshaw, its materials handling subsidiary, which had contract problems.

The company is sticking to its policy of not taking on low-margin contracts and is finding that German competitors are starting to come back into line on prices. Weir's US order book is strong and the business is throwing off cash.

Net debt of pounds 26m at the half-way stage last year has turned into a cash pile of nearly pounds 10m this time around. Further bolt-on acquisitions are expected, though the company is being deterred by high prices, especially in the US.

Weir's shares have been swinging wildly over the last 12 months but analysts are encouraged that the company may have put the worst behind it. On yesterday's close, the shares trade on a forward rating of 13. At these levels, a safe hold.

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