Blue Circle turns up heat with good buy at right price

The Investment Column

Blue Circle and acquisitions have not always mixed, as the overpriced purchase of its heating and bathrooms businesses at the wrong end of the last boom showed too clearly. Yesterday's purchase of St Mary's Cement in Canada, however, had analysts salivating - in its core heavy building materials division, Blue Circle has not put a foot wrong.

The deal brings in 46 ready-mixed concrete plants, 6 million tonnes of aggregates and a handful of other block and brick operations at what industry watchers believe is the bottom of the cycle in North America. Anti-trust considerations meant the family seller had only one serious buyer to deal with and Blue Circle has done a fine deal, offering pre-interest and tax profits of pounds 29m for an annual interest cost on the pounds 200m consideration of about pounds 15m.

The shares closed 12p lower at 403.5p, a reflection of disappointment with full-year figures for 1996, but with all the shortfall in expectations occurring in the difficult Nigerian market, analysts remained unfazed. Pre-tax profits of pounds 297.6m were 9 per cent better than 1995's pounds 272.8m before last year's restructuring charge, and a 6 per cent dividend rise keeps the momentum going since 1993's held payout.

The benefit of a wide geographic spread in the core cement business was evident in a mixed bag of profits from around the world. The US continues to boom with volume and price rises leading to a 19 per cent profit jump and Malaysia remains strong. That made up for a 9 per cent slowdown at home, where a 3 per cent volume decline more than outweighed sub-inflationary price rises and Chile, the former powerhouse, where domestic competition started to eat into returns.

But the real excitement came in heating, where cost-cutting led to doubled profits despite sluggish continental markets keeping the lid on turnover, down 2 per cent on the year. Again that made up for disappointing profits in bathrooms.

Blue Circle's shares have outperformed the market handsomely for four years now, which is no surprise, the stock's fans say, when you consider its lack of European exposure in cement but big presence in fast-growing developing markets.

Even so, on forecasts of pounds 359m this year and pounds 397m next time, the shares trade on a prospective p/e multiple of only 14, falling to 12.9. That compares with a sector average of 12 times but represents a large discount to the rest of the market, which seems harsh given growth prospects and the probability that an eventual sale of the heating and bathrooms side could lead to a substantial return of value to shareholders. Good value.

Slim Inchcape looks attractive

It has been a busy year at Inchcape, the underperforming motor distributor and marketing group. It was almost 12 months ago that Philip Cushing was promoted to chief executive in place of the ousted Charles Mackay. Then, the shares were only just recovering from their low of 206.5p, having collapsed from their 630p high in May 1993 following profits warnings.

Under Mr Cushing and the chairman, Sir Colin Marshall, Inchcape has streamlined its businesses. The testings business was sold to its management for pounds 380m and the Bain Hogg insurance division sold to Aon for pounds 160m.

Those disposals leave Inchcape with pounds 40m net cash and focused on its motors, marketing and bottling businesses with additional interests in business machines and shipping services. It is hardly the leanest portfolio ever devised but it is moving in the right direction. Importantly the City has turned positive on the company whereas 18 months ago there was rarely a positive word said about it. The shares, which have been treading water for much of the past year, rose 13p to 268.5p as analysts upgraded forecasts.

Yesterday's results for the year to 31 December were in line with expectations showing a 12 per cent increase in headline profits to pounds 165m. In the motors division, profits rose by 29 per cent with a two-thirds increase in import and distribution profits making up for an almost identical fall in profits on the retail side. Luxury cars have led the way with Ferrari imports strong and BMW, Mercedes and Jaguar marques performing well.

The marketing division, which is spread across retail franchises for Timberland and a consumer and logistics division, is the next candidate for rationalisation. The soft drink bottling operations were affected by start-up costs in Russia. With analysts expecting pounds 178m profits this year Inchcape shares trade on a forward rating of under 13. With a market value of pounds 1.3bn compared with group sales of pounds 5.7bn, they look good value.

Swings and roundabouts at Morgan

Morgan Crucible, the carbon brushes to ceramic materials group, has established an enviable reputation for reliability in recent years. It has avoided external shocks by combining a focus on a limited number of industrial areas with a diverse customer base. Margins at 12.7 per cent last year are close to the target of 15 per cent and management continues to bear down on working capital.

But sometimes certainty means maturity and the market seemed to be concentrating on that yesterday when it marked Morgan's shares down 5.5p to 469.5p despite news of an 18 per cent rise in pre-tax profits to pounds 100m for 1996. Strip away a pounds 7m first-time contribution from acquisitions and underlying operating profits were up a less-inspiring 5 per cent.

The fortunes of Morgan's four divisions reflected the swings and roundabouts of the developed economies last year. The lengthy strike at General Motors early in the year cost around $12m, with more than half the impact falling on the carbon division. Then came a general downturn in the semiconductors and electronics industries, hitting the technical ceramics business, and European economies started to slow. But towards the end of the year, many areas started to come back. UK and European sales rose 2 to 3 per cent and North America was 6.5 per cent higher than 1995.

With uninspiring growth like that in its main markets, Morgan is concentrating more of its fire on South-east Asia, which raised sales 12 per cent last year, and in continued cost-cutting. With only 9 per cent of sales in the Far East, there is plenty to go for there.

Meanwhile, despite shaving perhaps another pounds 5m from costs last year (for a charge of pounds 4.2m), the company reckons there is still five to 10 years' work to do. So even if profits only scrape to pounds 110m this year, rising to pounds 124m next, the shares on a forward p/e of 15, dropping to 14, are not overpriced. Add in Morgan's relative immunity to sterling and they look fair value.