Profits flowing at Hozelock

FAST disappearing are the days when the contents of the garden shed ran to a few tools, a wheelbarrow, a lawn mower, a can of weedkiller and a hose in a tangled heap in the corner. The late twentieth-century gardener, part of a group spending over £2bn annually on Britain's number one leisure activity, now has a breathtaking array of labour-saving kit to make life easier. Many are also raising their sights to ornamental pools and even sophisticated garden lighting systems.

These trends are excellent news for Hozelock, at 289p a Buckinghamshire company that dominates the market in keeping plants well supplied with water. A glance through the group's catalogue gives a vivid picture of the gadgetry now available. Your tangled hose can be kept neat and easy to use on an array of thru-flow reels, carts, boxes and cassettes like a camera film reel. There are so many accessories that the company also sells a rack for storing them.

The key to this explosion of gadgetry, according to the chief executive, David Codling, is the advance of plastics technology over the past 10 years. Last year, the group introduced 24 new products, and there will be a constant stream of fresh launches.

This proliferation of products has stimulated a sales boom which, allied to tight control of overheads and productivity gains in the factory, has put a gusher under Hozelock's profits. Between 1991 and the year ended 1 October last year, sales grew from £25m to £38.6m, operating profits from £3.3m to £7m and pre-tax profits from £1.6m to £7m. Pre-tax profits grew faster because between 1991 and 1993 the group carried a heavy interest burden from borrowings associated with a management buyout. These were substantially paid off when the group raised money in a flotation at the end of 1993. That flattered the 1994 figures.

In the light of the company's performance, its historical price/ earnings ratio of 14.2 and 3.2 per cent dividend yield seem ungenerous, and the shares are still only modestly higher than the 250p flotation price. Investor enthusiasm may be restrained by fears that, with a 74 per cent share of the UK watering equipment market and last year's boost from a hot summer, life can only grow less exciting.

But my hunch is that Hozelock could do better than suggested by these cautious forecasts. One highly positive development is that on Thursday the company opened a massive new state-of-the-art factory near Birmingham, which will transform capacity and productivity. The demand side also looks promising. The market has been growing fast, by 33 per cent last year, and strong growth should continue.

The biggest potential lies in the group's plans to replicate its UK success in Europe, where its main competitor, German-based Gardens, is handicapped by the soaring mark. Hozelock's sales to Europe fell slightly last year from £8.6m to £8m, but this reflected a combination of recession-inspired destocking and a late start to the summer.

The odds are good that profits will grow significantly over the next two years, with the "wild card" prospect of a developing bonanza if the group can build in Europe. On a prospective p/e ratio of 13 or less for this year, falling to 11 or 12 for 1995/96, the shares look underpriced.

Free cash flow will be strong now that the new factory has been completed, so dividends should also be generous with a likely yield over 4 per cent for the year beginning this October.