London-listed since 1983, for most of its quoted life Oxford Instruments has been admired more for its science than its investment attractions. But that has changed under CEO Jonathan Flint, who is successfully implementing a five-year plan to double its size and expand margins. While the wider economy falters, Oxford Instruments offers investors exposure to defensive end markets where demand is being driven by environmental and safety issues.

The company designs and makes high-technology tools for sectors including industry and research, education, space, energy, defence and healthcare. It also aims to be the leading provider of tools and systems for the emergent nanotechnology and bioscience markets. Customers typically need to ‘observe and manipulate matter at the smallest scale’, and its products, delivering increased efficiency and productivity, are in demand in industries where environmental and safety concerns are paramount.

‘We are in quite narrow niches and our customers need to buy our products in order to stay compliant,’ assures Flint, pointing out that Oxford Instruments’ spread of high-margin products and systems represents a key strength.

On the analytical side, measurement and fabrication instruments are supplied to industry and research clients, as well as Formula 1 teams, who use its tools for testing on the next generation of racing cars. Demand from the industrial sector remains strong, driven by requirements for environmental monitoring, quality control and materials identification – recent concern over lead contamination of toys provides just one example of how such issues drive the market.

Within ‘superconductivity’, Oxford’s materials, tools and systems range from superconducting magnets to cryogenic systems, for industrial and government customers ‘working at the frontiers of science’.

Recent results for the year to March came in at the top end of analysts’ forecasts. Sales grew 9.2 per cent to £176.5 million, despite US dollar headwinds (at constant currency rates, sales growth was 11.6 per cent). ‘Adjusted ‘pre-tax profits increased by £2 million to £9.5 million, with a total dividend of 8.4p proposed from earnings lifted 22 per cent to 11.7p.

The second full year of Flint’s five-year plan to double Oxford Instruments’ size and expand margins by ten percentage points was one of organic and acquisitive growth. Two years in and trading profit margins have improved from three to six per cent, with returns of 15 per cent now targeted.

Contributing £6.9 million to the top line, acquisitions included the £9.3 million takeover of WAS, a German maker of instruments used to analyse metals’ chemical properties, which ‘gave us access to the buoyant metals recycling market’. Strengthening the range of industrial spectrometers in markets driven by rising quality control and safety requirements, WAS’s technology can identify elements such as carbon, nitrogen and sulphur, which is vital for clients in the nuclear and petrochemical industries, where use of the correct metal alloy is critical.

Meanwhile, VeriCold Technologies, acquired for up to £5.7 million, strengthened the offering in the area of cryogen-free refrigerators (refrigerators that work without liquid helium). Elimination of the need for liquid helium has given the NanoScience operation access to growing markets outside of academic research, including airport security and quantum computing.

Analysts see pre-tax profits rising to £13.4 million as turnover moves past the £200 million mark this year, while a further profits advance to £20.4 million is forecast for 2010, from £233 million of sales.

Based on forecast earnings, the shares are swapping hands for undemanding multiples and offer prospective yields of around four per cent. In our view, the current rating is too low for a world-class technology tools maker offering robust earnings growth.

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