The Guide to Investing in Stocks and Shares

Eavesdropper's Dogged Investment

By Alan Watson - A Shareworld Contributor

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March 2011 - Issue 7

Contents at a Glance

1. Market Comment & Strategy
2. Share of the Month:Senior Engineering
3. Share of the Moment:600 Group
4. Sniffing Around:ELEMENTIS, TITAN EUROPE, SINCLAIR PHARMA
5. Update:AMINEX, PROMETHIAN WORLD
6. Straight from the Kennel:Segro

Market Comment & Strategy

Markets have been sliding over the past few weeks as investors' confidence has been hit by negative news. It started with worries over the state of Portugal's economy and alarm over unrest in the Middle East and now investors have to deal with the news of extensive damage to Japan from extreme weather conditions.

The worry is that stock markets over the next few weeks could plunge to the lower levels over the next few weeks. We think that this may not happen or at least that the effect on share prices may not be as great as some commentators would have it. It is worth considering that the general economic recovery which began late last year is still with us. It may not be quite so obvious in the UK, which has its own problems, but recovery is there nevertheless. The Japanese are a resilient people and may surprise us with the rate of their recovery from the damage.

Longer term we think that the Middle East is the major worry. A stable situation may ultimately emerge from the violence, which will be to the benefit of everyone but, in the meantime, markets are likely to have to absorb a great deal of worrying news from the area.

Share of the Month

Senior Engineering

Senior is a long established company. It traces its history back to the 19th century with the business of Henry Hargreaves & Sons (now Senior Hargreaves Limited, based in Bury, Lancashire). Senior is now an international manufacturing group with operations in 11 countries. It designs, manufactures and markets high technology components and systems for the principal original equipment producers in the worldwide civil aerospace, defence, diesel engine, exhaust system and energy markets.

On turnover up 5% from £540.1m to £566.9m pre-tax profits rose 5% from £49.2m to £52.1m in the year to 31/12/10. Earnings per share rose by 14.7% from 6.06p to 11.85p. The annual dividend was lifted by 20% to 3.12p. Driven by increased sales to the land vehicles, semiconductor and military markets, this was a good set of results. It was revealed in the Chairman's report that, in order to put operations in a stronger position to deal with an expected increase in orders from Boeing and Airbus, that expenditure would be increased from £14m in 2010 to £25m in 2011.

Both Boeing and Airbus are planning to boost aircraft production over the next few years. In 2011 Boeing intends to increase its build rate of 737 airliners from 31 a month to 38 by 2013. Senior's order book should begin to pick-up in the second half of this year. This news would have been welcome at any time, but it is especially so now, given that military budgets are being reduced. The extra business is also arriving just as the group was beginning to feel the benefit of the cost cutting and efficiency measures undertaken in the past 4 years.

In the year to 31/12/11 pre-tax profits are expected to rise from £52.1m to around £70m, with earnings per share rising from 11.8p to 12.2p, which puts the shares on a prospective PER of around 11. The dividend could be lifted to 3.3p, a prospective yield of 3.3%. Given the potential the shares look cheap at current levels - Buy..

Mid Price: 137.4p; Sector: Aerospace & Defence; Market Capitalisation £550.9m; Epic SNR Next Results: Interims 28th April

Share of the Moment

600 Group

The 600 Group is a diversified engineering group with a world class reputation in the manufacture and distribution of machine tools, precision engineered components, laser marking systems and mechanical handling and waste management equipment. It operates these four areas of business from locations in Europe, North America, Australia and South Africa selling into more than 180 countries worldwide. The company moved into loss after the implementation of its 2009 strategic review, which involved the sale of some activities. However, the results for the six months to 2/10/10 indicated that the measures taken have improved the group's performance and continue to have positive effect. There are also signs that the group's main markets could be picking up. Following a fund-raising exercise and the acquisition of a manufacturing facility in Poland, the Group currently looks set for further recovery. We think that pre-tax profits for the year to 31/3/11 could emerge at £2.9m compared with a previous loss of £5.8m. Earnings per share should be around 2.9p, a prospective PER of 9.0. On current trends, pre-tax profits look set to rise to perhaps £3.5m in 2012, a forward PER of 8.0. Buy..

Mid Price 27.2p; Sector: Industrial Engineering; Market Cap: £15.6m; EPIC SIXH Next Results: Finals 10th June

Sniffing Around

ELEMENTIS

The shares currently stand at 146.5p after reporting good results for the year ending 31/12/10. Sales rose 24% and operating profits by 183% as demand for speciality chemicals grew strongly. The figures were improved by the absence of restructuring costs which held back performance in 2009. Pre-tax profits for the year were £61.31m compared with losses of £29.3m previously. Sales grew form £348.63m to £445.42m and earnings per share rose from 3.19p to 10.54p. The annual dividend was maintained at 2.9p.

The Chairman said that the positive momentum and market demand experienced in 2010 has continued into 2011. He also pointed to the group's robust order book. The shares continue to look good value. The group is right for current markets: it is focusing on the Far East further profits growth looks likely in the current year.

On the back of the figures just published we think that pre-tax profits for the year to 31/12/11 could be set to rise from £61.3m to perhaps £65m, suggesting that the shares could be trading currently on a PER of 15.1 and a yield of 2%. The share price has risen strongly and in these markets it's never wrong to consider taking a profit. However, we think that the shares could have much further to go. Strong Buy..

Mid Price 146.5p; Sector: Chemicals; Market Cap: 657.8m; EPIC ELM Next Results: Interims 2nd August

TITAN EUROPE

Having studied the company's recently issued 3rd Quarter progress report, we think that the shares are worth a look.

The Company is principally a manufacturer of wheels and undercarriage track assemblies for off-highway vehicles. It serves the construction, agricultural and mining industries through manufacturing and distribution facilities; for Wheels, in Europe, Australia, South America and with associates in India and Turkey; and for Undercarriage, in North America, Europe, Brazil and China, and also through a wide distribution network for replacement components.

The third quarter 2020 report revealed that sales were £255m compared with £200m in the same period of 2009. Third quarter sales were £89m only £6m less than those in the second quarter, despite the effect of the European holiday season.

The Undercarriage Division was 42% ahead year-on-year, boosted by strong sales to the Construction sector which is picking up, as well as continuing strength of the South American and Asian markets. The EU market also remains strong. The recently opened Chinese Undercarriage factory has full order books. Margins continue to recover as volumes increase.

Business in the Wheels Division has been hit by the relatively slow move out of recession by the Agricultural sector. Nevertheless, revenues are ahead by 10%. There has been strong demand from the Construction sector. Overall trading performance has exceeded forecasts contained in the plan on which the banking arrangements are based - which soundly underpins group finances. We believe that Titan could be set to announce pre-tax profits of around £3.5m for the year to 31/12/10, with earnings per share of 2.8p which implies that the shares could be trading currently on a PER of 25.0. However, we anticipate a significant profits increase in 2011 to between £14m and £14.6m. If achieved, this suggests that the PER could fall to around 5.7, which looks undemanding. We regard the shares as a strong buy..

Mid Price 70.9p; Sector: Industrial Engineering; Market Cap: £60.6m; EPIC TSW Next Results: Finals 20th April
(Titan Europe is quoted on the higher risk Alternative Investment Market. See Importent Investment Notes on page 4.)

SINCLAIR PHARMA

The company recently announced the intention to merge with IS Pharma, an international speciality pharmaceuticals company focused on hospital medicines in the areas of critical care, neurology and oncology. The intention is to create a fully integrated pan-European speciality pharmaceutical company. IS Pharma shareholders, if the deal goes ahead, would receive Sinclair shares. The resultant group would be 62.4% owned by Sinclair shareholders, the 36.6% balance by IS Pharma shareholders. It would be headquartered in London with direct commercial operations in the UK, France, Germany, Italy, Spain and Ireland. Considerable cross-selling opportunities would be created.

Meanwhile, Sinclair posted good interim results for the half year to 31/12/10. Revenues increased 28% to £14m, a 37% increase at constant currency rates, with like-for-like revenues up by 9%. Gross profit rose 16% to £7.8m. Operating loss reduced from £13.7m to £2.6m During the period debt was reduced from £15.2m to £2.4m at 31/12/10. Recovery in the French operations contributed strongly to profits growth. The group's emerging market partnership strategy remains on-track with first Asian launches expected mid year. The chairman said that, following last year's comprehensive restructuring, he believes that Sinclair now has a platform for sustainable and profitable growth, coincident with renewed equity interest in the 'speciality pharma' business model.

This is an exciting phase for Sinclair. The merger with IS Pharma looks a good move. A strong buy..

Price 36.25p; Sector: Pharmaceuticals & Biotechnology; Market Cap: £84.63m; EPIC SPH Next Results: Finals 9th September

Update

AMINEX

We tipped the shares at 12p in February. They currently stand at 10p. Aminex produces oil and gas in the USA, with ongoing exploration activity in Tanzania, North Korea, Kenya and Egypt. Its aim is to build a base of exploration and production around the world, balancing high risk-high reward exploration activity with steady growth core producing areas. Based in London, a world centre for oil and gas transactions, Aminex encounters a large variety of international opportunities, only a minority of which it is able to pursue alone. For this reason it is continually on the lookout for international joint venture partners to participate in its projects.

In the year ending 31/12/09 the company cut its losses from US$9.7m in 1998 $2.9m. There was a muted response to what was basically a good recovery, as investors focused on revenues which were down 23% to $7.8m because of lower gas and oil prices, although physical production was higher.

The company is now due to report its figures for the year ending 21/12/10 on 2/3/11. The good news is that oil and gas prices have been rising on the back of problems in the Middle East. This could be set to continue until stability returns which could take many months. Meanwhile, the figures to be announced could show the company in the black, with pre-tax profits of perhaps £1m.

Looking ahead, we anticipate a significant uplift in asset value in the current year, which ends 31/12/11. Consider the shares as a speculative buy .

Mid Price 10p; Sector: Oil & Gas Producers; Market Cap: £71.46m; EPIC AEX Next Results: Finals 1st April

PROMETHIAN WORLD

The company, which makes interactive white boards for schools, revealed pre-tax profits for the year to 31/12/10 up 11.7% from £15.4m in 2009 to £17.2m. Revenues increased by 15% to £235.3m. The company is to pay a total dividend of 2.4p - the interim dividend amounted to 1.05p.

2010 was a year of two halves: there was a strong first half and a slow down in the second half as austerity measures in the US resulted in tighter education budgets. Around 64% of revenues arise in North America.

Management reaction was quick, it cut costs; launched new products to reinforce its technology lead and entered adjacent markets, which helped profits performance.

The current year, ending 31/12/11 is likely to be tough for the company. We think, however, that the actions taken could result in pre-tax profits of perhaps £20m, which is fairly close to the market's original expectation.

The shares could be trading currently on a prospective PER of 8.4 and a yield of 5.5% assuming a maintained dividend. This does not look expensive. We continue to regard the shares as a buy .

Mid Price 59.12p; Sector: Technology Hardware & Equipment; Market Cap: £121m; EPIC PRW Next Results: Interims 24th August

EAVESDROPPER - Straight from the Kennel

Frustratingly, I'd taken a wrong turning and had lost my way. I was now spending my time wandering down long grey streets, hoping to find my way back. To my surprise a large rat came strolling towards me. He was as big as, well, a cat.

"Hi," he squeaked in a friendly tone. "I'm Ben. You must be the famous Eavesdropper."

I suddenly found myself liking the guy. "Yes," I said modestly. "Is Ben short for Benjamin?"

He shook his head. "It's short for Debenture. My parents were into investments, especially bonds. They also considered themselves great wits." He sniffed. "They were half right about the last part."

"So you're investing in fixed interest stocks?" I asked.

He looked puzzled. "Oh, because of my name? No, I'm looking at property shares. The sector is still well down after the crash, but it can only be a matter of time before there's a recovery. My rodent instincts tell me that Segro is worth looking at. Two years ago the shares hit a high of 780p. A year later they sank to a low of 114p. Wish I'd bought them at that point and they're currently standing at 315p."

He paused for breath. "Incidentally, thought you were nuts tipping Dechra at 505p last month, but it appears to be working out - the shares have held up quite well in difficult markets. They were 515p just as I came out."

"Thanks," I said. "I'm looking for 550p in the shorter term."

With that, we parted friends having agreed to meet again soon. He gave me directions back to the kennel It's always nice to speak to fellow investors.

Segro: Mid Price 315.14p; Sector: Oil & Gas Producers; Market Cap: £2.35bn; EPIC SGRO Next Results: Interims 8 Sept