Pound hides TI's strengths

The Investment Column

The TI engineering group has seen its share price ride a roller- coaster over the past few months. The shares fell sharply to 456.5p in July on concerns that a strong pound would hit profits and a sneaking suspicion that the Budget changes to dividend tax credits would mean it would be forced to top up its pension fund. TI quickly allayed fears about the pension charge. And its shares rallied again along with the rest of the engineering sector this week when sterling showed signs of weakening. But TI's shares took another 24.5p lurch downwards to 544.5p yesterday as the pound surged through the DM3 barrier again.

These wild share price fluctuations look unjustified. TI claims the only currency hit is through translation, in other words its overseas profits are worth less in pound notes, but its underlying business remains unaffected, as the bulk of its products are produced in domestic markets rather than exported. Even though analysts believe currency probably still has some effect on sales, the overall impact is likely to be minimal.

The currency issue has diverted attention from the fact that TI is in solid businesses with good growth potential. Underlying profits rose 8 per cent to pounds 112m for the year to June. Ignoring the currency hit of pounds 7.8m, underlying profits grew by 15 per cent.

The star performer was the Dowty aerospace business, where earnings leapt 97 per cent. It cashed in on the strong upturn in plane orders around the world. There are problem areas. John Crane, the mechanical seals division, fared poorly due to difficult European markets, but overall TI is moving in the right direction.

Hoare Govett is forecasting profits of pounds 221m this year, somewhat below the consensus, putting the shares on a prospective p/e ratio of 16. It believes John Crane may take time to sort out, while the outlook for UK manufacturing industry is uncertain. That said, TI shares still look good value.