US Edition Morgan Crucible
128¾p
Questor says BUY
Industrial material specialist Morgan Crucible's markets have been hit hard by the downturn. However, last week's first-half results were reassuring and Questor feels the shares are now a buy.
The company makes materials and ceramics that are used in a wide variety of applications – from medical instruments, aerospace, power generation and satellite communications to body armour, trains and fire- protection systems. Its major markets are in defence and aerospace.
The company does have a significant amount of debt – and there had been worries that a rights issue would be needed to shore up its balance sheet. However, a cash call now looks unlikely. The company made better-than-expected progress on reducing its net debt, which came in at £282.9m – down from £290.4m six months ago. Morgan continues to be cash-generative and it even managed to make a profit in the first half of the year.
Although management is not complacent, there are signs that the fall in business activity might be stabilising and the trough in its business could be near. With the company managing to take a significant amount of costs out, the operations are much leaner than before and the company is highly geared to a potential upturn in activity during 2010.
The group has reduced it headcount by 16pc, which should save it £40m in employment costs. Other operational measures are estimated to achieve savings of £12m a year for a one-off cost of £15m.
Pre-tax profits in the six-month period to June 30 came in at £15.3m – 61pc lower than in the first half of 2008. But posting a profit in these turbulent times is some achievement in itself. Even more impressive were the group's margins, at 9.8pc, although this was down from the 12.8pc seen in the equivalent period last year.
The group has moved rapidly to cut costs and the majority of these benefits should be seen in the second half of the year. So, if trading does not deteriorate further, the second half is likely to be brighter than the first half. Restructuring costs came in at £8.2m and revenues rose by 23pc to £492m, reflecting positive currency translation. Once currency effects are stripped out, revenues slid by 7pc – which is a respectable performance.
Another sign of management confidence that the group was close to the trough in earnings – implying a rights issue would be unnecessary – was the fact that Morgan maintained its interim dividend payout at 2.5p. The shares do not go ex-dividend until December 2, so there is plenty of time to get in before this payment, which will be made on January 12 next year. The group has also renegotiated its debt on what appear to be reasonable terms.
The shares are trading on a December 2009 earnings multiple of 9.6 times and yielding a respectable 5pc. The shares are now a buy at this level.
BAE Systems
307p
Questor says BUY
A jump in the pension deficit at BAE Systems prompted the shares to fall after its interim results announcement. A fall in asset prices caused the deficit to jump by more than £1bn – and this spooked investors. Obviously, this is not great, but asset prices should recover. The company does not believe it will have to make an imminent contribution. In fact, concerns over the deficit have created a buying opportunity for new investors in the shares.
What's more important is that trading is holding up well and the company has shown it can continue to win new orders. Revenues were up 28pc in the period, or 6pc on a like-for-like basis.
The company upped its dividend payout by 10.3pc to 6.4p a share and it will be paid on November 30. The ex-dividend date for new buyers to make a purchase and be eligible for this payout is October 21.
Net debt was £316m, compared with a net cash position of £39m at the start of the year – but this is small beans for a company like BAE. The group is well financed, having raised $1.5bn (£908m) in the US bond market earlier this year.
Since its exit from its Airbus stake, the company is less exposed to the cyclical airline industry and is a pure defence play. The company now generates 51pc of its business from the US – and this is an important position for future growth.
The shares are trading on a December 2009 earnings multiple of 7.6, which appears derisory for a company such as BAE. The shares are down by 10pc since their initial recommendation in November last year – but the stance is unchanged. The shares are yielding a solid 5pc and are a buy.
Tate & Lyle
367¾p
Questor says BUY
Sugar and sweetener group Tate & Lyle has had a roller coaster year – and the shares plunged after a series of warnings and the loss of a patent case. Questor recommended a purchase on June 12 at 314¼p because the shares were yielding 7½pc. The share price has continued recovering and the shares are now about 18pc above this level, but they are still yielding 6.3pc. The shares remain a buy at this level.
The company is in the process of getting a new executive team in place and this should be a catalyst for recovery.
The business has suffered three years of falling profits – and you should not expect a stunning performance with the interim numbers after a relatively strong first half last year when commodity prices were high.
The share price has had a good couple of weeks. At its AGM 10 days ago, Tate & Lyle was at pains to point out that the outlook is cloudy, but the company revealed an upbeat performance in the first quarter.
The company said profits were ahead of expectations and cost- reduction measures were having a positive effect. Then, on Friday, house broker Citgroup upgraded its stance on the share to buy from hold, boosting the shares further.
The broker has been downbeat on the shares for two years – but it thought that the valuation was now "compelling". It said the key issue was whether or not the group was now at an earning trough. Citigroup argued that it believed the company was now at the bottom of the earnings cycle.
The shares are trading on a March 2010 earnings multiple of 10.2 times, falling to 9.3 in 2011. The yield is well worth having and Questor believes the new management team will be reticent to make any significant cuts to the payout. The shares remain a buy.