Williams spin-off to float to the top


RECENT American research suggests MBOs and corporate spin-offs are a good bet for investors. The change from the protective parental embrace often emboldens management, while the fact their own money is tied up in the business means they are unlikely to take too many unwise risks.

For these reasons, keep an eye open for the flotation of Cortworth, a small engineering group, set for mid-November. It has three arms: specialist engineering, plastics and controls. The group has stormed ahead since management bought itself out of Williams Holdings in late 1993. Profits last year hit pounds 6.4m on sales of pounds 58.3m. The directors are forecasting a 1995 operating profit of pounds 8.5m. The issue should raise over pounds 30m.

UNDER the title "McCheap", broker BZW rates property company Scottish Metropolitan a strong buy. Analyst David Nighy says the company has all but finished a retrenchment to its home turf in Scotland and the north of England, where its local ties should give it a competitive edge.

Healthy profits should see the dividend grow at 10 per cent a year over the next two years. At 73p, the shares trade at a 27 per cent discount to the net asset value, against a sector average of 18 per cent.

WHEN City Talk previewed Smiths Industries' (574p) results last week, analysts expected good figures in a range of pounds 135m to pounds 139m. In the event, the figures came in at the top end, with pre-tax profits of pounds 138m.

What sets the medical equipment-to-aerospace group apart from most of its peers is a remarkable ability to generate free cash. For example, it began the year with net debt of pounds 21m but ended it with net cash of almost pounds 1m, having spent pounds 52m on acquisitions. Assuming profits of pounds 160m next year, a prospective p/e of 16 times is not cheap. However, the shares remain a buy.

A BOUT of profit taking hit Danka Business Systems this week as it announced the pounds 109m acquisition - its biggest ever - of Infotec, a Netherlands photocopier and fax machine distributor.

The shares fell 67p to 489p, before recovering to 514p on Friday. That cast a shadow over a 28 per cent rise in interim pre-tax profits to pounds 27m. Some analysts felt the share price drop was overdone, but even so, the shares are still trading on a steep historical multiple of around 30 times earnings.

The assumption that profits will continue to grow at the heady rate of the past puts a lot on trust. Take profits.

VIDEO and computer games retailer Rhino has charged back to the market, seeking pounds 9m from its shareholders through a five-for-six rights issue at 8p for each new share. At the current share price of 10.5p, that may seem a reasonable discount, but investors who piled in two years ago near the high of 67p are hardly on to a winner. Do not take up the rights.

CONVERTIBLE bonds - loan stock issued by a company that can be swapped into its shares some time in the future - is a specialist, not to say a somewhat esoteric, market. But they offer several attractions.

For a start, there is the promise of a fixed yield. Broker Panmure Gordon's research team likes two convertibles at present: British Airways 9.75 per cent, redeemable in 2005, which yields 4.7 per cent against the current 3.5 per cent on the ordinary shares; and Reckitt & Colman's 9.5 per cent bond, also due for redemption in 2005. The yield in this case is 6.25 per cent, against 3.7per cent on the ordinaries.

Panmure points out that neither bond would be affected by any change in advanced corporation tax rates, a fear often rumoured in the run-up to the Budget.

TIME to take a second look at insurance broker Fenchurch, out in the cold along with its peers in the insurance sector. Since floating in November 1993, it has underperformed the market by 35 per cent.

But unlike some competitors, Fenchurch actually has a fine track record. Profits and dividends have continued to climb at a time when trading has been tough. Full-year results to the end of September, due next month, should see a further improvement on 1994's level of pounds 7.79m.

In addition, Fenchurch is not over-reliant on any one source of business, including Lloyd's of London. Nor does it have much exposure to the US retail market, while its balance sheet is free of long-term debt. At 137p, the shares trade at a fairly undemanding prospective p/e of eight times earnings for 1996. Buy.

DWR CYMRU - or Welsh Water (754p) as it is known in the City - seems to have missed out on the bid fever engulfing the sector. But its gearing remains low for the industry, suggesting that there is plenty of room for special payouts to investors.

The scope for dividend growth is also good. Buy.

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