Companies: BBI    DPLM    HYC    MXM    PTS    RUR    WHY   

Specialist distributor Diploma, recommended at 735.5p in late 2005 and now 927p, is one of a number of our Company Profile picks trading at healthy premiums. Despite dollar headwinds (the group has significant exposure to North American markets), Diploma delivered underlying profits growth for the half to March and remains on the hunt for acquisitions.

Chief executive Bruce Thompson announced a ten per cent profits push to £10.7 million boosted by interest on a substantial cash pile, and a seven per cent sales rise to £68.2 million. Dividends increased by 12.5 per cent to 9p, reflecting Thompson’s confidence in scoring improved annual figures, with the market expecting growth in profits from £20.4 million to £21.6 million and in earnings to 65.3p (62.8p).

Top-line growth was driven by the controls businesses, which distribute wiring, connectors and fasteners and are benefiting from buoyant European defence and aerospace markets. Controls sales burgeoned by 18 per cent to £30 million, more than compensating for slower growth in the North American seals operations, supplying hydraulic seals, gaskets and cylinders for heavy mobile machinery. Seals suffered flagging sales due to weakness in US construction markets and the strength of the pound against the dollar.

Within life sciences, where Diploma supplies consumables and instruments to the research and environment sectors as well as to laboratories, sales crept four per cent higher, boosted by October acquisition CBISS, a supplier of environment monitoring and control equipment.

Boasting £28.9 million cash at the half-year, Thompson says acquisitions ‘remain an area we are paying a lot of attention to. We’re looking at small bolt-on deals and medium-sized acquisitions, and we have a pipeline of six to 12 at any one time.’ Our view is that Diploma remains well positioned for long-term growth, with acquisitions likely to add the spice. Trading on an undemanding prospective p/e of 14.2, the shares are not to be sold.

Hyder’s healthy pipeline
It could be worth adding to your investment in engineering design venture Hyder Consulting, backed here at 310.75p in August/September. The group has proved an ongoing strong performer and commands a £175.2 million market value at 488.75p a share. Management recently announced results for the year to March 2007 would beat forecasts, though not all brokers who follow the business have factored this into estimates.

Furthermore, investors have been focusing on what June’s finals might reveal, but next year’s forecasts should have more bearing on valuation considerations. Dresdner Kleinwort, one of a handful of independent brokers following the company, has Hyder delivering 29.8p of earnings this financial year (a 17.3 per cent increase over 2006) and 34.1p of earnings in 2009 (a 14.4 per cent increase).

At current levels, the shares are trading on only 10.4 times and 9.1 times 2008’s and 2009’s earnings, so earnings growth rates alone suggest the company is great value.
Meanwhile, Hyder continues to trade at a discount to peers such as White Young Green (recommended by GCI at 193.5p in July 2004 and presently riding high at 452p).

Hyder sports a very healthy pipeline of work, with its last set of results showing that its order book had improved 13 per cent by the end of September to £246 million (which is more than a year’s revenues). Results are scheduled for release later this month and existing investors might consider topping up holdings ahead of the figures.

As for White Young Green, readers yet to pocket some profits should do so now, while retaining meaningful exposure to this ‘consultant to the built, natural and social environment’. The company recently announced the appointment of former British Nuclear Group boss Lawrie Haynes as successor to well-respected chief executive John Purvis.

February saw White Young Green unveil stellar half-time figures, posting a 26 per cent rise in revenues to £99 million and a 28 per cent surge in profits to £6.9 million. For the year to June, analysts await profits of £15.7 million and 23.9p of earnings, placing the shares on 18.9 times forecast earnings.

BBI buoyed by Theratase
Decent gains have been delivered by AIM-quoted BBI, the Cardiff-based diagnostics outfit whose investment allure we profiled at 147.5p in April. The shares now trade 26 per cent above our recommendation level at 176.5p, buoyed by the recent purchase of fully listed peer Theratase. This deal was mostly funded by a convertible loan agreement with Nasdaq-listed Inverness Medical Innovations, which now owns 12.2 per cent of the enlarged group with the option to increase its stake to 22 per cent.

Cash-generative Theratase, being bought with cash and shares at a price equivalent to £24.1 million, has posted flat profits for the past five years and the company even warned on profits late last year. Despite this, analysts see the acquisition as providing ‘a very good fit’ since the businesses are geographically close and both supply key materials into the diagnostics industry. Forecasts in the market for this year, issued before the acquisition, pointed to pre-tax profits of £4.5 million and almost 10p of earnings for BBI, placing the shares on a forward p/e of 17.7 times. That doesn’t look overly expensive with BBI growing fast and Theratase likely to bring substantial benefits. We consider the shares to have good long-term appeal.

Negative goodwill drives power play gains
February 2006 recommendation Rurelec has raised its annual profits by 740 per cent to £17.7 million thanks to value enhancement on one of its Latin American power acquisitions. Recommended here at 49p in 2006, the shares have powered up to 61.5p, aided by an investment in the AIM-quoted business by funds managed by Tudor Capital.

Rurelec, a specialist in developing rural power generation projects in Bolivia and Argentina, increased pre-tax profits last year from £2.1 million to £17.69 million on turnover up from £1.9 million to £20.7 million. Rurelec owed the sales expansion to the acquisition of a controlling stake in Empresa Guaracachi, Bolivia’s largest power generation company, while the profits surge was the result of a £13.3 million ‘negative goodwill’ contribution arising from developing new power generation capacity at recent acquisitions at below the open market value.

International financial reporting standards required Rurelec to take this ‘non-cash item’ in as a profit. Earnings more than doubled to 21.17p and assets rose from 26.7p to 50p a share, while year-end cash rose from £424,000 to £3.2 million.

Management argues that expansion opportunities abound, not only in Argentina and Bolivia but also in Chile and Peru, with US and other international power groups having largely departed from South America, leaving Rurelec well placed to seek deals with the local groups and US hedge funds that are replacing them. We remain convinced that the group offers long-term speculative possibilities.

Maxima makes ninth move
Since half-time numbers in February, IT services consolidation star Maxima has agreed its eight and ninth acquisitions as an AIM company, with the latter its biggest yet. March saw construction sector specialist SevenThree snapped up for £1.1 million in cash and shares. On May Day, the group announced the £18 million purchase of 3net, funded through the issue of £4 million of new shares, an £11.5 million placing with institutional shareholders at 260p, and existing bank facilities.

SevenThree, which made £130,000 pre-tax profit on £1 million revenue in the year to March 2006, has been bolted onto Maxima’s existing construction software business, adding its customer relationship management (CRM) software expertise to the division’s capabilities in enterprise resource planning (ERP).

3net is quite different, bringing infrastructure to the offering so that the group can offer customers networking and security backbone as well as its consultancy services. It made £1.7 million profit on £6.1 million sales in the year to January. ‘3net is very high growth and has very good margins,’ says Maxima’s chief executive Kelvin Harrison.
‘3net was missing out on winning bigger contracts last year as it was seen as not big enough. We’re confident we will remove that obstacle,’ he explains.

House broker Cenkos now sees earnings coming in at 29.6p in 2008 and 36.1p in 2009, placing the 284.5p shares (flagged up as a buy here at 160p in July 2005) on modest forward ratings of 9.6 and 7.9. Investors should consider boosting their holdings. Add.

Technology group goes gangbusters
Chief executive David Webber is really starting to deliver excitement for investors at derivatives trading technology supplier Patsystems, recommended by GCI four years ago at 6p and finally starting to fulfil early promise. Now worth £52.3 million at 31.5p a share following a successful turnaround – profits soared more than 350 per cent north to £1.63 million in 2006 – a wave of upbeat announcements, including the sign-up of the US’s biggest independent futures brokerage as a client, have got the market talking.

Webber, who has just acquired 80,000 shares at 29p, has managed to snare R.J. O’Brien as a new client, with the brokerage set to take a ‘full installation’ of the AIM-quoted group’s technology. As well as building on a burgeoning client base in the States, the win sends a clear signal of intent to the derivatives trading sector.

Another recent ringing endorsement was Man Financial’s selection of Patsystems’ Risk Informer product as its global risk managing solution ‘across all asset classes’.
Despite a strong run, the shares still look great value given growth opportunities available to management and further deals to come. Buy.