Over the past 25 years UK manufacturing has been in decline. With the relentless fight against cheaper imports and falling profit margins, machine and consumer goods producers have wilted. The fittest players have either moved up the value chain or set up abroad, while many others have gone bust. Yet this week’s tip is emerging as one of the few winners
600 Group (SIXH), tipped as a BUY by Altium
600 Group is the UK’s largest maker of machine tools (such as lathes), which are used for cutting metals. These machines are sold to around 100 countries worldwide, the biggest markets being in the UK, North America and South Africa. In response to foreign competition, 600 Group continues to invest in research and development while outsourcing production to nations such as China.
600 Group has also successfully moved into developing specialist laser-marking equipment. This niche sector is expanding at between 5% and 10% a year, driven by the need for traceability, anti-counterfeiting measures and tighter environmental laws. The machines etch unique identifiers on to car and aeroplane components, to help customers keep track of whether their parts come from recognised sources or have been copied. In healthcare, if an artificial joint turns out to be defective – perhaps years after surgery – then 600 Group’s tiny imprint will denote exactly who made it and when. Although this unit’s turnover is not reported, it’s thought to represent around 10% of group sales.
House broker Altium expects revenue and earnings per share for the year ending March 2008 to come in at £80m and 3.7p respectively, and £85m and 4.9p in 2008/2009. And at last week’s results announcement, chief executive Andrew Dick was cautiously optimistic. He said “demand for machine tools and laser marking is forecast to continue”. The board sees “another year of good progress with solid underlying growth”.
Assuming these estimates are achieved, the shares trade on undemanding p/e ratios of 15 and 11 for this year and next, and also on a low enterprise-value-to-sales multiple of 34%. If operating profit margins can also be widened to 5% or more from their present 1% levels, then the current share price will seem very cheap. Finally, the balance sheet is strong with £4.4m of net funds, while the company’s pension scheme was in a £5.1m surplus as of March 2006.
So what are the potential pitfalls? Being a relatively small operator – albeit one executing a turnaround – there is a chance that 600 Group will be squeezed by larger competitors. And if there is a cyclical downturn in the world economy, this could adversely affect future demand. But with a strong order book and a healthy cash position, the stock offers good value and could even become another target for private-equity groups.
Recommendation: speculative BUY at 53.75p (market cap £31m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments