It’s been a long time coming, but it looks as though Invensys has completed its turnaround from failing firm in 2002 to well-run industrial technology company. Six years ago, the company had burdened itself with a colossal £3.5bn debt pile after its ill-conceived £7.6bn merger of BTR and Siebe in 1999, and its cavalier purchase of Baan, a loss-making software house, in 2000.
Invensys (LSE:ISYS)
Today, after a series of asset disposals, a £2.4bn debt-and-equity rescue package, and a couple of new CEOs along the way, Invensys is now back on track, declaring itself “effectively debt free” in May and being restored to the FTSE 100 index. The group runs three divisions: Rail (representing 25% of sales), providing signaling equipment to the likes of Network Rail; Process Systems (45%), making products for power stations, the oil and gas sector and other industrial businesses; and Controls (30%), manufacturing devices such as thermostats for property.
For the year ending March 2008, revenues were £2.1m (£2.0bn), generating an adjusted operating profit of £254m (17.5%) and underlying earnings per share of 17p. Performance was strong across the board, buoyed by sales to the robust energy sector and investment in rail infrastructure – with a healthy closing order book of £1.3bn. Even the cyclical Controls division, which has a large exposure to US consumers, lifted operating margins from 8.9% to 11.1%, despite an uncertain market for home appliances.
The same solid performance has been sustained into this year with first-quarter results in line with expectations. The rail and process units are benefiting from their “long cycle” end-markets and results in Controls have remained difficult but on track.
As far as the financials go, the City is forecasting 2008/2009 revenues and underlying earnings per share of £2.3bn and 25.3p respectively, rising to £2.4bn and 27.8p in 2009. That puts the stock on miserly forward earnings multiplesof 9.5 and 8.6.
So what should we watch out for? The potential flies in the ointment are the cyclical nature of the controls unit, rising raw material costs, exchange-rate risks and the usual dangers of managing long-term contracts. But overall, Invensys now looks worth taking the risk for.
Recommendation: BUY at 216.5p
Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. Phone 020-7633 3634 for more information.