BULL POINTS:
■ Exposure to developing economies
■ £140m spending programme set to bear fruit
■ Diversifying into services
■ Likely news about acquisitions
BEAR POINTS:
■ Some parts cyclical
■ Debt burden
The basic business of Fenner is flogging heavy-duty conveyor belts to coal-miners, particularly in the Asia-Pacific region. That makes its shares a play on rising energy consumption in the developing world. China relies on coal for about 80 per cent of its power generation, sourcing it both from its own Shenhua Group - the largest coal miner in the world - and from Australian extractors. As Shenhua's exclusive supplier of high-tension conveyor belts and a major player in Australia, Fenner's growth looks secure.
The company hasn't always been popular with investors because of its high debt and poor cash generation. But those were mainly the result of a £140m three-year capital spending programme it started in 2006. That's now complete, with new conveyor-belt factories built closer to customers in Australia, South Africa and China. Cash generation is already improving, which should help Fenner pay down debt before its loan agreements come up for renewal in 2012.
| IC TIP RATING | |
|---|---|
| Tip style | Growth |
| Risk rating | High |
| Timescale | Long term |
| What do these mean? Find out in our | |
There is also scope for profit margins to rise because unit costs should be lower in the new plants. James Tetley, an analyst at broker Brewin Dolphin, says manufacturing efficiency gains could well allow the company to beat the City's earnings forecasts for 2009-10.
Fenner's mining business proved resilient during the recession, partly because demand for coal is steadier than demand for oil, and partly because 80 per cent of its sales are replacement belts for existing mines. But the group also makes conveyor belts for other industrial processes, and this side suffered heavily as investment projects were put on ice and distributors failed to replenish stocks. Management reported the first signs of improvement in February, which should lend the belting division an operationally geared recovery kick over the next year or so.
| ORD PRICE: | 223p | MARKET VALUE: | £428m | |
| TOUCH: | 222-223p | 12-MONTH HIGH: | 238p | LOW: 91p |
| DIVIDEND YIELD: | 3.0% | PE RATIO: | 13 | |
| NET ASSET VALUE: | 121p | NET DEBT: | 80% | |
| Year to 31 Aug | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2006 | 379 | 29.3 | 13.0 | 6.00 |
| 2007 | 381 | 33.6 | 15.0 | 6.23 |
| 2008 | 438 | 36.3 | 15.5 | 6.60 |
| 2009 | 499 | 5.6 | 2.6 | 6.60 |
| 2010* | 525 | 34.9 | 17.4 | 6.80 |
| % change | +5 | +523 | - | +3 |
Normal market size: 3,000 Matched bargain trading Beta: 1.3 *Panmure Gordon estimates (EPS not comparable with previous years) | ||||
The same is true of the group's other division, advanced engineering products, which sells an eclectic range of high-tech components ranging from drive belts - the product Fenner started with back in 1861 - to seals for the oil and gas industry and speciality fabrics for medical implants. The unit was severely hit by destocking, but struck bottom at the end of last year and is now recovering strongly.
Acquisitions are also likely to boost growth. Fenner raised £36m of equity in April, which chief executive Mark Abrahams stressed would be used to fund bolt-on purchases rather than pay down debt. Back then, Mr Abrahams was in discussions with five companies, and the first deal, for a US medical polymer specialist called MRI, was announced last month. Another acquisition in conveyor belt services is expected imminently. Servicing belts is an opportunity for the company, which currently makes only a fifth of belting revenues from the more lucrative business of installation, monitoring and repair.
