Companies: DCG    EUC    MBY    SCPA    SLM    TET    VCT    ZTF   

A key barometer of economic trends, the manufacturing sector is usually the first to fall at the feet of a recession, and the first to flourish as the shoots of recovery breakthrough.

The sector slumped in the first few months of 2001 as the global slowdown intensified and growth in many regions remained neutral or negative.

In its recent 'Business Trends Survey', the Engineering Employers' Federation (EEF) said the worst affected manufacturing sectors were engineering, textiles, leather and clothing.

This year the EEF expects manufacturing output to fall by 0.9 per cent compared with 2001. But next year it predicts a growth rate of 2.3 per cent, supported by stronger global demand and a (hoped-for) fall in sterling's value against the euro.

On this note, investors willing to put their money into the sector now might be pleasantly surprised by the quality of some of the companies lurking in the manufacturing shadows.

Chemical Imbalance

Of all the sub-sectors, chemicals has been particularly hard hit. In recent memory, full-year profit warnings have emanated from the likes of Zotefoams, which manufactures cross-linked polyolefin block foam, Scapa, a maker of technical tapes and cables, and European Colour, the pigments and performance coatings play.

One stock making positive sounds is Victrex, sole manufacturer of PEEKa polymer – a high-performance thermoplastic with uses in the industrial, automotive, aerospace, medical and food sectors. It recently issued a bullish trading update for the first-half to March 2002, reporting a recovery in volume sales to 550 tonne, meaning it should unveil sales of 1,200 tonne for the year to September

With house broker Cazenove suggesting pre-tax profits of £20.3 million and earnings of 18.4p for 2002, the 316.5p shares (£251.5 million) are trading on 17.2 times prospective earnings. This is roughly in line with its peers, but the stock has the potential to out-perform them.

The household goods and textiles sector has suffered its share of pain, but investors should not overlook ladies' clothing manufacturer and designer Slimma. Back in December, chairman Alan Webb unveiled 'another exceptionally good set of results' for the year to September. Pre-tax profits jumped 60 per cent to £1.52 million on soaring sales of £26.4 million, driven up 45 per cent on the previous year by the March 2001 acquisition of Frank Usher.

In February, AGM attendees were told that order books for spring/summer 2002 were well ahead of last year. Brown Shipley analyst Craig Cowan expects £1.9 million profit for 2002 and earnings of 12.2p a share, rising to £2.45 million and 15.8p in 2003. This means the 80.5p shares £8.4 million) are trading on a low price earnings ratio of 6.5, falling to 5.0 in 2003. A substantial discount to its peers.

Manufacturers in other sectors are also trading at attractive discounts to their peers. Take food producers and processors, for example. Like Slimma, FTSE 250-listed chilled dairy foods group Dairy Crest's interim figures to September showed the benefit of its summer 2000 merger with Unigate. House broker ABN Amro forecasts £73 million pre-tax profit for the year to March 2002. This figure should push on to £85 million for the year to March 2003.

At 508p, they are on a forward multiple of 11, falling to 9.7 for the year to March 2003. This compares with a 17.3 sector average. Analyst Julian Hardwick explains: 'This is still a cheap stock, even though it has performed well over the last 18 months or so. We've had a £5 target price on the stock, which we'll certainly be reviewing'.

Sector sister Treatt also looks a snip, although forecast growth is somewhat muted. Situated in rural Suffolk, Treatt manufactures flavour and fragrance ingredients. It enjoyed a 'very satisfactory' year to September. Pre-tax profits perked up 4 per cent at £2.8 million, sales rose 15 per cent to £27.6 million and shareholders saw a 4 per cent jump in the total dividend to 8.1p. At 225p (£22.7 million), the shares are trading on just 11.4 times 2002 and 2003 earnings.

Mayborn Again

In the personal care and household products sector, Mayborn recently received some press attention, but still looks a strong recovery play. The baby accessories and fabric dyes group pleased investors in March by announcing a return to form in the year to December. A £485,000 pre-tax loss was converted into a £3 million pre-tax profit, on sales of £56.8 million, as cost-cutting and a shift in manufacturing to the Far East came up trumps.

Finance director Ian Hartley says: 'We've traditionally been a profitable company, but we ran into problems in our baby products division; mainly operating problems at our UK manufacturing plant. So we decided to move three quarters of production out to our factory in China'.

What does that say about the future of UK manufacturing? 'There is still a place for certain processes in the UK, but you've got to be focused', he reasons.

Analyst James Middleweek, of Collins Stewart, is a devotee. He has pencilled in £3.6 million pre-tax profit for the year to December, giving 11.5p of earnings and leaving the shares trading on a multiple of just 7.7. 'There's no reason why the stock shouldn't be double the current price, and there's certainly plenty of upside', he booms.