Shareholders in Charter International, the maker of welding equipment, should shield their eyes. Only six weeks after telling investors that trading was on track, Charter admitted yesterday that it had taken a turn for the worse. Sales in May, usually one of its strongest months, were unexpectedly poor. Revenues from so-called consumables - welding materials, such as solid wire, which need to be replenished - were down by 35 per cent on the year, and those of cutting equipment fell by 50 per cent.
With Esab, Charter’s welding division, accounting for two thirds of group sales and current-year profit forecasts heading sharply lower, its shares declined by nearly 16 per cent, the worst fall in the FTSE 250.
Esab is dependent on short-term demand from metal bashers, which means that Charter is more susceptible to such shocks than engineers with longer order books. It also makes it difficult to peer too far ahead. The worry must be that factories undergo longer than usual summer shutdowns. Further out, demand from shipbuilders, which are among Esab’s biggest customers, is likely to dwindle later in the year if present trends in marine orders do not reverse. As with the profit warning in November, Charter accompanied this latest setback with measures that will mitigate the damage of industrial downturn. It is closing two factories and mothballing two others, meaning that it has cut Esab’s capacity by one third on the year. It also reassured that the company has remained profitable across all divisions.
The other encouragement is that Howden, the maker of industrial fans and compressors that forms the balance of Charter’s business, continues to trade as before. This operation is helped by resilient demand from the energy sector and the fact that after-market sales, which are 50 per cent more profitable than those of brand-new equipment, now account for 31 per cent of sales, against 24 per cent this time last year.
If there is a concern it is the recent first-time fall in electricity demand in China, a potential harbinger of slower spending on power-generating equipment, one of Howden’s key markets. Tempus advised “buy” at 348½p in January, since when, even after yesterday’s slide, the shares are up by 37 per cent. Charter has £43 million of cash and provides a 4.4 per cent dividend yield.
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Even so, short-term investors should take profits.
Halfords
Selling cars and selling car accessories are clearly two very different things. The automotive industry may be in turmoil and new car registrations in the UK down 25 per cent last month, but Halfords keeps motoring on. True, yesterday’s full-year figures did not include details on current trading. But what the FTSE 250 retailer did reveal served to reassure: revenues held at last year’s levels, pre-tax profits up 2 per cent and earnings per share ahead 8 per cent. The full-year dividend was raised 5 per cent.
The skew of Halfords’ sales offers a degree of stability. If consumers are not buying new cars, fancy alloys or sat-navs, they are spending more heavily on keeping their old rides on the road. So, while the company’s car-enhancement categories are suffering, maintenance is growing.
The strategy of David Wild, chief executive, has also helped to insulate Halfords from the worst of the recession - not only in cutting costs and securing greater purchasing efficiencies, but also expansion into counter-cyclical niches. That means cycling, where, notwithstanding the company’s abandonment of its standalone Bikehut format, it is targeting children’s and premium bikes. It also means camping, where a combination of the economic incentive for Britons to holiday at home and the promise of a drier summer should work in its favour. Trading in Ireland is dire (if mostly offset by the euro) and Halfords has scaled back its roll-out ambitions in Central and Eastern Europe. But at 343½p, down 2p, or 11 times earnings, and yielding 5 per cent, the shares remain a solid hold.
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Interior Services
Anyone who has worked in the City will be familiar with the work of Interior Services Group (ISG). This AIM-listed company, once part of Stanhope, carries out about a quarter of the fit-outs and refurbishments of London’s commercial offices.
But as demonstrated by yesterday’s contract update, its reach extends far outside the capital. ISG disclosed that its Asian division, where it now has 450 staff, has picked up £40 million of work over the past three months - including a £20 million deal for a resort and casino in Singapore and the £8 million refit of Abu Dhabi’s national football stadium.
That is encouraging when the company’s traditional London market is under pressure. It also provides encouragement that ISG’s domestic efforts at diversification will similarly reward. Through acquisition, it now has a significant presence in UK retail refurbishment, most of which might be considered non-cyclical: for supermarkets, whose roll-out programmes continue apace, and for banks, which are revamping branches as part of their efforts to pull in retail deposits. ISG also has a sizeable business outside London, three quarters of whose work stems from the public sector.
ISG’s order book has so far held up well (it last reported £365 million of work for its next financial year), on which it will provide greater clarity in next month’s trading statement.
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The more obvious draw is what appears an anomalous valuation: a forward multiple of four, a yield of 10 per cent on a dividend that is twice covered by forecast earnings and last reported cash of £22 million - or half its stock market value. At 134½p, up 3½p, buy.