Company Watch News

Fire training equipment designer IFTE re-ignited last month on news of two new large contracts worth US$5.6 million.

Its US arm, Symtron Systems, has clinched a deal for a Saudi Navy project worth $2.25 million, and the recently acquired ICS mobile trainer business has won a mystery simulator trainer deal 'from Marseille in France' worth $3.35 million. Both are sensitive contracts.

'These large awards go some way towards confirming my view that we'll be back on track to produce a significant profit in our next financial year beginning 1 May,' roared David Williams.

Williams is in defensive mood because IFTE recently warned the current year to April 2003 would not be as profitable as hoped due to contract delays and reorganisation carried out to integrate recent acquisitions. Something of a surprise, the warning was the first time since flotation IFTE had disappointed the market.

To reassure investors of his belief in the group, Williams was active in the market a few weeks back, snapping up 200,000 shares at 34.75p.

We first recommended the company as a long-term buy at 91.5p back in May 2001. The stock hasn't performed exactly as planned as it now trades at 35.5p, a big drop from its 52-week high of 137p. At this level, the price does no justice to the company's true value. Hold your shares if you're still in.

EMH overtakes City estimates

Despite claims that the rampant car market will cool off in 2003, business at motor distributor European Motor Holdings – our Company Profile in October – continues to motor on.

Recommended at 124p, the shares have been as high as 149.5p, although they are currently at 116p.

This values the BMW, Volkswagen and other brand dealership at £61.3 million. Considering the achievments and drive of Richard Palmer and his team we still rate EMH as a strong buy.

In a pre-close update ahead of preliminary figures, Palmer confirmed that the company traded ahead of budget and ahead of the previous year in the second half. This means EMH's results for the year to February 2003 will be above market expectations.

In its last financial year to February, EMH accelerated pre-tax profits (before exceptional items and goodwill) by 23 per cent to £10.4 million, giving earnings a 25 per cent hike to 13.1p, on turnover of £441.1 million.

Even before Palmer's bullish statement, analyst Graeme Summers at joint broker Brewin Dolphin was an ardent fan. He estimated 2003 profits of £10.8 million and earnings of 14p per share, scored on £417 million of sales. EMH will top these targets when the annual figures are announced on 29 April. Even on these numbers the shares are trading on an undemanding rating of 8.3 times.

Future looks bright at publishing play

International consumer magazine group The Future Network continues to impress, having trodden some painful paths over the past couple of years.

The stock trades ahead of our original October recommendation price of 47p, but at 51p (valuing the full-listed media play at £164 million) they should be a lot higher and are not to be sold.

March's final results to December were well ahead of forecasts thanks to a dramatic rise in margins and lower than expected tax. Normalised pre-tax profits, before a £2.2 million one-off VAT rebate, were £18.5 million, ahead of the £15 million predicted by Investec Securities. Earnings reached 4.4p, topping the forecast 3.2p. Headline pre-tax profits hit £10.7 million, against a £121 million deficit for 2001.

These numbers prompted analyst Meg Geldens to modestly upgrade 2003 forecasts. Investors should now look for normalised profits of £21.2 million rising to £25 million, with earnings set to boost to 4.6p this year and 5.4p by 2004. The shares are on a none-too-pricey 11.1 times earnings for 2003, falling to 9.4 for 2004.

On the strategic front, Future's plan is to build a bigger, more diverse business with specialist and technology magazines at the core, centred in the UK, solid in the US and building in Italy and France. Indeed, subject to French competition clearance, the company is set to buy a subsidiary of Hachette Filipacchi Presse S.A for £3.5 million cash. The magazines included in the Hachette deal are Official PlayStation 2 Magazine, Joystick, Joypad and DVD Magazine.

K3 to evolve once more

After reaching a year's peak of 18.5p, shares in K3 Business Technology have slid away steadily to 8.5p, a 3.5p decline from our recommendation price in May 2002.

The supply chain software provider has come a long way over the past three years, but with the manufacturing sector (where it sources most customers) in the doldrums it's preparing to exploit other areas.

The latest full year figures showed a £266,000 pre-tax profit for the 12 months to December 2003, against a £1.4 million loss a year earlier, and revenues within continuing businesses powered ahead from £6.4 million to £7.9 million.

Andy Makeham, chief executive, accepts that software businesses starting out would be foolhardy to pin hopes around the manufacturing sector – but he claims K3 might easily adapt its software for distributors. He is also looking into the radio frequency tagging market, an area that might revolutionise certain issues of stock control across numerous industries and would be a good fit for the group.

Now trading profitably, little growth is expected from K3 this year. But profitability among small software firms is a rare animal and the group generates much of its revenues from maintenance contracts. Clearly focused on the next step, this a stock worth sticking with for now. Hold.

Keep faith in asset plays Ennstone and Freeport

Shares in the gravel and sand quarrying group Ennstone have slipped back lately from our initial recommendation price of 34.5p (in April 2002), having achieved a 52-week peak of 40.75p. But the construction and building listed outfit enjoyed another good year in 2002, with pre-tax profits increasing 11 per cent to £5 million on turnover boosted 22 per cent to £77 million.

In a busy 12 months it added a welter of small acquisitions in Scotland and the US – as well as an additional investment in Aim-quoted Enneurope, spun out in December 2001 in order to snaffle aggregates businesses in Poland and central Europe. Concurrent with the results, Ennstone announced the placing of 7.7 million shares at 32.5p with fund management group Artemis, giving it an extra £2.5 million of acquisitive firepower.

Profits and net assets (down from £75.2 million to £74.2 million) were both hit by exchange rate losses on the company's American operations in Northern Virginia and Pennsylvania.

Management explained that heavy snow in these areas slowed down the start to the year. Though overall the group performance is in line with expectations, executive chairman Vaughan McLeod admits that 'the current political uncertainties make it more difficult to predict the outlook for 2003 with any certainty.'

City analysts have the group making £7.5 million in pre-tax profits this year, which equates to 3.3p a share. With the shares switching hands for 33.25p a piece, Ennstone trades on a forward p/e of 10.1, and its market value of £53 million is at a discount to net assets.

In October we advised readers to buy/hold. The advice remains the same.

Smallcap real estate play Freeport has witnessed a steady decline in its share price over the past year from the £5 52-week peak to the current 200.5p. Down from our 366.5p recommendation price in the August Growth Company Investor, the business has a market value of just £109 million. But there's plenty of latent value in this owner, developer and operator of European 'factory outlet' retail villages.

As of 4 January, (its half time accounting date), fully diluted net assets were 534p, up from 520p at year-end, a healthy premium to the market price — Freeport carried out a two-for- seven rights issue back in March 2002. And this is a firm that makes serious profits. The recent interim figures showed profits 11 per cent ahead at £6.02 million on turnover up three per cent to £9.32 million. Fully diluted earnings were up five per cent to 8.91p.

All its sites added to profits, including Freeport Kungsbacka, its Swedish development. In the UK, it has received planning consent to expand its mall near Stoke-on-Trent by 2,200 square metres and planning applications to expand villages at Fleetwood and Castleford are in the planning process. Its new designer outlet mall on the Czech Republic/Austrian border (Freeport Excalibur) will open in the Autumn and Freeport Lisbon opens in Spring 2004. In its last financial year it made £10.2 million at the pre-tax line. For the full year 2003, HSBC Securities suggest pre-tax profits of £14.7 million and earnings of 23.05p, for a 2.25p dividend. Heavily discounted to assets and on a forward price/earnings ratio of 8.7, Freeport looks good value. In a recent Company Update we advise readers to sit tight. Keep the faith in Freeport. Hold your shares.

Galliford Trying harder

We first recommended construction and building-listed Galliford Try in May last year at 38p, and the shares are trading lower at 20.25p. On broker estimates following recent interim numbers, the group's forecast yield is fairly enticing. For 2003, Williams de Broe predicts profits of £17 million and a 1.5p dividend pay out – this yields 7.4 per cent. And this should rise to £18 million and 1.6p for 2004, for a yield of nearly eight per cent.

In the half to December, underlying pre-tax profits fell to £5.6 million from £6.6 million on sales of just £298 million, a fall from the prior year's £312 million. Headline pre-tax profits dropped to £3.6 million from £6.6 million but the board managed to maintain the half time pay-out at 0.5p.

Chairman Tony Palmer says the board has taken action to restructure its troubled construction division and these activities should return to profit in the second half. The house building arm usually achieves good profits and growth, reaping the benefits of the group's geographic spread across the South East, the South West and the eastern counties of England. There's no point selling with the share price at this level (the forward rating is a mere four times earnings), and new investors should be attracted by its yield prospects.