After-market growth

Published on Tuesday 24 November 2009 21:25

Charter 762.5p +3.5p Scotsman says BUY

CHARTER operates two international engineering businesses. Esab (which generates 67 per cent of revenues) supplies welding and cutting equipment and consumables, while Howden (33 per cent) designs and makes compressors and fans for the power generation industry.

Customer destocking and a sizeable drop in end-user demand for steel caused Esab's first-half 2009 earnings to fall sharply. The company has been swift to implement an aggressive restructuring programme, which is designed to reduce Esab's cost base by more than 50 million during 2009. More recently, the company reported that pricing has stabilised and volumes have begun to show some signs of improvement as automotive demand has begun to pick up.

With an increasingly efficient cost-base, an improving operating environment and a focus on consumables, the guidance for the second half looks overly conservative.

Howden has proved to be more resilient over the previous year and has delivered revenue growth during the first half. Order intake, however, declined significantly. But it is encouraging to note new build power plant projects are once again attracting finance.

Howden has the potential to grow its after-market revenues. These account for less than a third of Howden's sales but deliver a far higher profit margin. Howden's installed base has grown rapidly over the past few years and will deliver good aftermarket profit growth in the years to come. Management believes that trading at Esab is "probably" past the worst, and expects orders to pick up at Howden during 2010.

Charter is trading at a considerable discount to its peer group.

&#149 This article is for information and discussion purposes and does not form a recommendation by the manager to invest or otherwise.