Morgan Crucible has been marked down unfairly by the stockmarket. It is a global player in ceramics and advanced materials whose products range from medical instruments, to aerospace and power generation equipment and systems for body armour, trains and fire protection.
Its main challenges are in China, where revenues fell in the first half. However, its fortunes could be about to change. Mining giant Rio Tinto has predicted a rebound in Chinese demand in the fourth quarter, with falling inflation providing the necessary backdrop for Beijing to further boost the economy, although I appreciate that most of the MoneyWeek team does not share the miner’s optimism.
In the first half, Morgan reported revenues down 4.8% to £533m. The biggest hits came from an oversupply in the solar sector, which hurt demand for its HiTemp graphite. The weak construction market also meant fewer insulating fire bricks were needed. But the chief executive, Mark Robertshaw, said he was pleased by the resilience of profits and margins against a challenging economic backdrop and that his expectations are for a similar performance in the second half. This suggests to me that future analyst upgrades are on the cards if China does begin to show more signs of life.
Robertshaw also expects the slowdown in sales of body armour to reverse in the second half, thanks to growing demand for bulletproof vests. Morgan is on track to deliver its ambitious three-year plan to double profit before tax from £75.7m in 2010 to £150m by 2013, to nudge returns up into the mid-teens, and return on capital employed (ROCE) to 35%.
Morgan Crucible (LSE: MGCR), rated a BUY by Oriel Securities
The City expects 2012 turnover and underlying earnings per share (EPS) of £1.08bn and 28.4p respectively, rising to £1.14bn and 30.1p in 2013. That translates into a price/earnings (p/e) ratio of below ten and a 3.7% dividend yield (2.7 times covered). I would rate the stock on a ten times EBITA multiple. Adjusting for £222m of net borrowings (representinga comfortable 1.3 times EBITDA), and a £151m pension deficit, gives an estimated worth of 360p per share.
There are a few risks. In the short term, results are likely to stay subdued due to the macro backdrop. But if Beijing opens the monetary floodgates, Chinese GDP should improve. Other concerns include foreign-currency fluctuations, competition and rising raw-material costs.
On the plus side, even during the depths of the last recession, Morgan pushed through 2% price increases to protect earnings from rising raw material costs. So it now enjoys EBITA margins of 12.9%, up from 8.2% in 2009. It is also a possible takeover candidate. Robertshaw may agree – in May he bought 35,000 shares.
Rating: BUY at 265p (market cap £750m)
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