Kidde growth prospects could light investors' fire

Keep a hold on Kensington; Staffware may be through the worst

Michael Harper, chief executive of the fire safety group Kidde, has had some fire-fighting to do within his own organisation. After the terrorist attacks of 11 September, there was a big drop in sales of its hi-tech sensors and extinguishers for use in new and refitted aircraft. Its industrial customers across the globe were already cutting back on investment in new factories (all of which require stringent fire safety fittings). And to cap it all, the company had to pay £11.2m to settle a patent dispute after ripping off its design for a foldable ladder.

Just to keep the business treading water, Mr Harper has had to trim costs and push through some innovative new product launches (such as cigarette sensors for teenage bedrooms and CCTV-based flame detectors). The signs are that it has been enough to tide the group over and yesterday Kidde was able to say it was confident of a return to organic sales growth this year.

The best news was the signs of stability in the aerospace business, despite the war in the Middle East and the downturn in travel in the Far East due to Sars. Kidde has won some useful contracts for its safety systems to be designed into new regional jets. The defence side of the business - where Kidde's systems protect jet fighters and tanks - has continued to do well throughout the downturn.

Kidde was demerged from the old Williams conglomerate in 2000 and has been an erratic performer. A return to normal in the aerospace industry, its biggest area of business, will justify another burst of outperformance for the shares, and the long-term growth prospects are still intact, too. Health and safety legislation is only likely to get tighter and there are big public education programmes to be undertaken in the US to get householders to add Kidde's carbon dioxide detectors and fire extinguishers to their panoply of smoke alarms.

These defensive qualities and growth prospects do justify the current share price, which puts the company on a multiple of current year earnings of 11.

Buy.

Keep a hold on Kensington

Kensington offers mortgages to people who may not get the time of day in their local bank, such as the self-employed, the middle aged and those with a poor credit history. The company floated on the stock exchange in November 2000 with a share price of 225p, and an impressive set of results yesterday sent the stock to 292p, within pennies of a record.

While everyone has been obsessing about a potential collapse of the housing market, Kensington has grown like topsy. In the half-year to May it loaned £860m, double the same period last year, and profits rose 11 per cent.

It is a relatively new business building market share in a relatively new niche of the financial services industry. The self-employed, contractors and part-time workers are sure to continue growing as a proportion of the workforce and Kensington and its rivals have been making more potential customers aware that they can take out a home loan with a specialist lender. Meanwhile, Kensington has stepped up its efforts to make its products available through independent financial advisers, many of whom are moving into mortgage broking as a result of regulatory changes that make them better able to compete.

All of this should outweigh the obvious downer of a slowing housing market. The other worry is that bad debts will rise significantly if the UK economy turns down sharply. Although Kensington has parcelled out some of the risk to bondholders through the securitisation of its mortgage book, it still guarantees the first 2 per cent of its loans. For now, though, bad debts are going down and the historically low interest rates keep mortgage payments manageable. Hold.

Staffware may be through the worst

Upbeat comments from the software firm Staffware suggest it could well be through the worst of what has been a particularly tough stretch for the industry in general.

Its "business process management software" does what it says on the tin - it helps companies manage their business processes. In a bank, for example, it helps automate some of the work needed on loan approvals and mortgage applications. More than half Staffware's sales are to banks.

In the second quarter of the year, revenues were about £12m - a rise of nearly 20 per cent on the same period a year before and an increase of nearly 32 per cent on the previous quarter. Better still, Staffware won its biggest ever contract in the second quarter with a unnamed UK bank, a deal thought to be worth over £1m.

The company also benefits from a healthy balance sheet and had some £21m of cash as at the end of June with no material debt to speak of. But growth prospects, according to analysts' current forecasts, are not that spectacular. House broker Dresdner Kleinwort Wasserstein is forecasting sales of £42m this year, rising to £46m the year after. And the shares, up another 16 per cent at 455p last night, have almost doubled since the start of the year.

Forecast earnings of around 27.4p put the stock on a forward rating of nearly 17 times. That seems steep, but there was talk of forecasts being upgraded yesterday and investor appetite for tech stocks seems to be improving as more positive signs emerge. Hold.