Engineering and electrical machinery repairer Dowding & Mills has endured a turbulent 12 months. There has been a total management overhaul, a dive into losses and a run-up in the debt pile.

But, for all that, the decision by the Isle of Man-based investment group Laxey Partners (prominent for their combative stance over British Land recently) to snap up a 9.5 per cent holding has led to speculation that Dowding is now an intriguing recovery play.

March's interims demonstrated the extent of the company's problems. Sales were static, at £61.5 million, and a 2001/02 first-half profit of £1.99 million had been reversed into a £21.8 million loss. That, however, was after £22.8 million of exceptionals relating to a write-down in goodwill and tangible assets. Debt soared to £35 million.

According to chairman Tudor Davies, who took the helm in November 2002 after Dowding's previous board stepped down en masse, the cause of the company's plight was all too plain. Dowding's previous growth strategy had seen it borrow large amounts to finance 're-organisation, acquisitions, complex computer systems and capital projects' and yet, for all this investment, the anticipated 'corresponding increase in returns' had failed to materialise.

Under Davies, the strategy has changed. The plan is no longer to borrow in order to fund expansion but rather to control working capital, reduce borrowings and generate cash – a switch back to basics, in effect.

But, as Michael Blogg from house broker Arbuthnot admits, there are further issues that need to be considered – not least the continuing decline of UK manufacturing industry.

For all its re-organisation and investment, Dowding's core business remains the refurbishment and repair of machinery such as motors and generators. With the number of UK manufacturers still falling, the company's potential market is getting smaller and smaller. Much depends on its ability to keep existing customers happy and to identify and attract potential new clients.

Bearing this in mind, Laxey's decision to take a near ten per cent stake, bought from Unicorn Asset Management, can be interpreted in two ways: first, the prospects of a return to past profit levels is not yet in the price; or second, Davies and his team have the capacity to deliver real growth against the odds.

The former looks far more likely. Cost cutting has already begun, with three of the company's electronics branches already shut and 160 employees having either left or been made redundant.

The full results of an operating review have yet to be announced. But those subscribing to either view can at least take heart from the fact that the company remains profitable at the operating level.

Dowding is expected to generate sales of roughly £120 million and a pre-exceptional pre-tax profit of around £1.3 million for the 14 months to end-August, in spite of its woes. Languishing just above a three-year low at 11p, the shares are worth backing for recovery.

Dowding & Mills

GCI Recommendation

Buy for recovery