Minerals unit helps Weir lift profit forecasts

Published on Thursday 9 October 2008 21:20

A BULLISH Weir Group yesterday boasted that its full-year profits would be higher than expected after an improved performance and a resurgent dollar.

In an interim statement the Glasgow-based engineering services firm predicted that pre-tax profits would be closer to 170 million, up from August estimates of 165.4m.

The group's bullish outlook was partly accounted for by positive foreign currency effects – most notably the dollar position against the pound – which boosted the company's bottom line by 3m in the latest quarter. But the company also pointed to improved performance in its minerals division, which would add 2m to the group's bottom line.

"We picked our sectors very carefully. These long-cycle sectors are least exposed to short-term consumer cycles," said Mark Selway, chief executive.

"Power generation, mining and oil and gas are three areas where population growth, the industrialisation of China and beyond that India require that these commodities are going to continue to be in absolute demand."

In the past six months Weir's share price fell by more than 36 per cent to a low of 478.75p, although it has shown good signs of recovery, with analysts saying they now expect the shares to go "nicely better".

Since Selway took over at Weir he has sold several of its traditional business – including its long established Weir Pumps, which he offloaded to multi-millionaire industrial magnate Jim McColl in a 45m deal last year.

As a result of Selway's restructuring of the business over the past five years, more than 50 per cent of Weir's revenues now come from after-market service and spares business.

In the 13 weeks to 26 September covered in yesterday's statement, Weir Group sold two further "non-core" businesses – a historic foundry in Manchester for 10m and its Canadian distribution arm for 13.7m.

"The Manchester foundry has a huge history to it but it was a very old operation," said Selway. "If we had kept it it would have required substantial capital investment. Putting that into a non-core activity is just not a logical thing to do."

Following Weir Group's update yesterday, RBS analyst Andrew Douglas said the company's share price was "fundamentally too low" .

Although the company's growing Australian businesses mean it also faces downside risk with the wobbly Australian dollar, Selway is confident foreign exchange will continue to benefit Weir. "It is very difficult to predict but forex has benefited the group to about 7m in the year to date. Depending on volatility there should be some further upside at the year end," he said.

Selway said a 16 per cent growth in the minerals division would contribute to the improved profits.

The company also said it had negotiated a new 625m banking facility provided by a banking consortium including RBS and HSBC.

"We have the financial headroom to do the things we need to do," Selway said.