Dickinson Legg, the maker of tobacco cutting machines that was spun out of Brunel Holdings, has not had much chance to shine on the Aim market since its arrival late last year. That is because one of its biggest shareholders, Aberdeen Asset Management, has been a persistent seller.

But that selling is now coming to an end. Aberdeen's holding, which was around 12 per cent, is now below three per cent. The tap on the stock is all but gone, and the shares – selling on a lowly, single-figure multiple of earnings – are worth a good look.

Dickinson Legg manufactures its massive cigarette-making machines at its Winchester base and at a joint venture in India. It also owns a maker of industrial drying machines, Spooner Industries of West Yorkshire.

The core business enjoyed a bumper year in 2002, thanks to a £14 million order from Korea. This year has proved slower with the Iraqi conflict overshadowing the cigarette-makers' buying decisions in the first half.

However, the Spooner subsidiary has built up a record order book. With the main business recovering strongly in the second half, this has raised hopes that these orders can be converted into substantial profits. Although earnings will still be lower this year, Ian Spence of house broker Baird believes the stock is trading on a current-year p/e of just 4.5.

The group has long-standing relationships to supply raw tobacco processing equipment to all the major cigarette-makers. It has only three competitors in this area, all of which operate in Europe. The recent weakness of the pound against the euro should make Dickinson Legg more competitive on price in the medium term, says Spence.

Although orders tend to be lumpy, Dickinson Legg has a steady business supplying spare parts. It aims to make extra revenues by introducing new machines with additional functions or improved technology. It has just developed, in conjunction with RJ Reynolds, a machine that allows more of the stem of the tobacco leaf to be reclaimed for use in cigarettes. This reduces waste, making the process more efficient.

One benefit of the demerger from Brunel was that the business was left debt-free. The company aims to expand into fresh territories, initially via agents and then direct. The new managing director, Tom Mackie, and his colleagues recently met representatives of the Chinese state cigarette company. Although smoking may be on the wane in the West, the habit is becoming more popular in developing countries.

Corporate activity is also a possibility. There is a chance that either Spooner or the cigarette machinery business may one day be taken private by management. Alternatively, consolidation among the four tobacco processing equipment makers is always on the cards. Buy.

Dickinson Legg

GCI Recommendation

Buy

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