Ignore BOC's slide: It'll be a gas in the long run

Imperial still drawing favour; Sherwood's a hold in the tech forest

Stephen Foley
Wednesday 05 February 2003 01:00

There has been more tear gas than laughing gas for investors at the BOC Group in recent years. They have suffered a slide in the share price of the industrial giant – a supplier of gas and related products, anything from welding torch nozzles to nitrogen plants – that just keeps going.

That slide has been unjustified, and BOC is now a very good value share.

The company has responded to the global economic malaise with a raft of job cutting programmes and cost reduction measures that have left it some 12,000 people slimmer (it still employs 43,000 in 50 countries) and able to grow its profits. The growth on offer is not spectacular, but it is solid and the company is well able to manage its debt at current levels and pay a dividend this year that would represent a yield of more than 5 per cent.

Results yesterday, covering the the first quarter of its financial year (the last of calendar year 2002), showed BOC made a profit of £92.3m, up 8 per cent on the year before, on sales up 8 per cent to £1,035m.

The bulk of the business – accounting for 85 per cent of turnover – is making "good progress", the company said yesterday. These businesses – the bulk and industrial gases divisions, in the main – could always be relied on. The "swing factor" in whether BOC earnings soar or stay depressed is the remaining division, BOC Edwards, which sells intricate parts for the manufacturing of microchips. With semiconductor firms still reducing factory capacity, the outlook there is bleak and the troubled division missed the market's profit forecasts in Q1. Although BOC Edwards remains modestly profitable, BOC shares dipped to their lowest levels since 1998.

After downgrades yesterday, the stock trades on 14 times forecasts of the current year's earnings. This is an unjustified discount of about 15 per cent to its global peers, and also a discount to the UK stock market. While a re-rating may prove elusive while BOC Edwards struggles, the shares are a long-term buy.

Imperial still drawing favour

Imperial tobacco was the best performing share in the FTSE 100 in 2002, with investors enjoying a drag on its mix of strong earnings growth and high dividend yield. The stock is by far the most expensive of the three cigarette makers traded in London, so is it time to kick the Imperial habit?

In a word, no. At the company's annual shareholder meeting yesterday, Imperial said it was continuing to expand its lead in the UK over arch-rival Gallaher, and has also stemmed a loss of market share in Germany, the home market of Reemtsma, which it bought last year for £3.6bn. In the UK, its share has risen to 43.5 per cent, with the number one brand Lambert & Butler steady and cut-price Richmond growing fast; in Germany, it should be able to rebound by better marketing of its cheap smokes.

The German authorities' investigation into smuggling by Reemtsma employees will take some time to complete but, having cast a pall over the shares since the company was raided last month, the risk of big fines are already partially priced in.

Meanwhile, there are £140m of cost savings to be had this year from integrating Reemtsma and at least £170m in 2004 – a figure that is nigh on certain to rise. Imperial has a good record in acquisitions and adding its marketing skills to the German company's brands should boost earnings by 30 per cent this year and at least 10 per cent in 2004.

That growth justifies much of the premium to its peers, while Imperial is also fortunate from having no business in the US, where rival British American Tobacco is finding itself at the eye of a storm of price cutting. The markets of Europe and Africa have their problems (European smoking is in gradual decline and Africa suffers from intermittent supply problems, such as Imperial is suffering in the Ivory Coast thanks to the unrest there), but they are much less cut-throat. Down 13.5p to 912.5p yesterday, Imperial shares are a hold.

Sherwood's a hold in the tech forest

The software group Sherwood International discovered yesterday just how nervous investors still are when it comes to technology stocks. The shares dropped 16 per cent after the company uttered the banality that trading might get worse before it gets better within the technology sector generally and the insurance market in particular.

Around 70 per cent of Sherwood's sales come from selling technology and related services to insurers and Sherwood is finding customers are taking longer to sign deals.

That should not come as a surprise, since most tech companies say they are bumping along the bottom of a savage downturn in IT spending. But it overshadowed the company's statement on its results for 2002, which will meet analysts' expectations.

Sherwood is in a better position than many peers, with £11m in the bank and maintenance contracts which mean half its sales are entirely predictable. It has a spread of customers and is confident it can grow strongly in China.

Analysts predict Sherwood's profits will rise to around £7m in 2003, translating to earnings of around 12p a share, putting the shares, at 70p each, on a forward multiple of less than 6 times. That does not seem expensive, and the stock is worth holding.

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