Charter sells welding equipment to the oil/gas, pipeline, infrastructure, wind turbine, ship and car industries. It’s a good place to do business. Yet this astute commercial positioning doesn’t seem to be appreciated in the City. Regardless of the fact that the stock has fallen 15% from its 52-week peak over fears of input cost inflation and a slowdown in China, the fundamentals are still intact.
Charter owns two world-beating divisions. Its largest, ESAB (67% of revenues), is the joint number-one player – with a 13.5% share – in the steel-cutter market. Its main rival is Lincoln Electric. Its other division, Howden (33% of revenues), is the global leader in heavy-duty fans and heat exchangers and controls almost a quarter of the sector. Together, these two units provide a nice balance of early and late-cycle engineering expertise, coupled with the added spice of a 42% exposure to emerging markets.
Despite recent hikes in steel prices and concern over the moribund European economy (36% of sales), demand at ESAB is expected to be robust over the next decade. According to AME Mineral Economics, global steel consumption will grow 51% from 1.14 billion tons in 2010 to 1.73 billion tons by 2020. This positive macro backdrop should compensate for any temporary blip in margins or slack demand in southern Europe.
Better still, Howden has a £424m order book and is being boosted by the construction of new power stations and implementation of stricter environmental legislation. Its flagship air handling systems help generate electricity and reduce environmental pollution. It also derives 36% of revenues from servicing its extensive installed base. This provides excellent visibility, along with a reliable income stream.
The City is anticipating 2011 turnover and earnings per share (EPS) of £1.8bn and 77.6p respectively, rising to £1.9bn and 90.0p in 2012. Consequently, the stock trades on undemanding price/earnings (p/e) ratios of 9.5 and 8.2 for this year and next – this looks like good value to me. Charter also has positive net funds and pays a 3.2% dividend yield.
Charter International (LSE: CHTR), rated a BUY by Singer Capital
I’d value the group on a sum-of-the-parts basis – ascribing earnings before interest, tax and amortisation (EBITA) multiples of 12 and ten times for the ESAB and Howden divisions. After adjusting for the £139m pension deficit and annual central costs of £11m, the total intrinsic worth comes out at around 870p per share.
So what are the possible pitfalls? Well, Charter operates in cyclical sectors and would be affected if demand for steel subsided, or if the board was unable to push through price increases to reflect its higher steel costs.
However, the board “expects further progress in 2011”, thanks in part to sterling’s ongoing devalution. With an ungeared balance sheet and excellent exposure to Brazil, Russia, India and China, the shares are still a long-term buy.
Lastly, it’s worth pointing out that, at current down-trodden levels, I wouldn’t be surprised if a bid materialised from a large industrial player in China or India. I’m sure someone would love to acquire the firm’s coveted technology. Singer has a target price of 915p.
Recommendation: LONG-TERM BUY at 741p