Charter International a buy at 687p

There is a lagging, laggard engineering share that has underperformed the main FTSE100 index by about ten per cent in the last year. It is Charter International (CHTR) the supplier of welding equipment and materials and industrial fans it designs and engineers for the power, oil, gas, petrochemicals and other industries. So it is a business linked to the competitive, low margin world capital equipment cycle.  

Consequently last year - the company year to 31 December - was pretty punishing. Revenue dropped 12% to £1.66 billion and operating margins fell from 6.3% to 5.6%; enough in combination to push operating profits down by more than half.

The share price that had at one stage reached 855p, fell to a low of 563p. It has since recovered but at 687p last seen, Charter shares have lagged both the wider markets and its engineering sector peers like Weir Group and Rotork. However, Charter’s interims to 30 June 2010 showed significant signs of recovery; things beginning to pick up last spring. By the June interim stage revenue was static and no longer falling. Margins however were improving so that operating profits were up over a third, pre tax profit up by more than three quarters and earnings had increased by 108% to 30.4p. Tellingly, the interim dividend was raised by 7.5% as a token of the management’s confidence in world of double dip economic fears, which the management acknowledged to be a shadow over its full recovery. Although that shadow remains it is decreasing as the bullish factors increase in a mixed bag of economic data. I made the judgement call some weeks ago that we should see no double dip as a result of the evidence building to the  contrary. That is still the view and so I am happy to tip Charter as a buy.

But what do investors now, get for their money. In terms of earnings and dividends it is estimated that sales will recover by 3.6% to £1.77 billion for this year, and a further forecast estimate of £1.8 billion for next year. As a result of that estimated top line progress and improving operating margins, annual earnings should  jump from  55p to a forecast estimate of 65.8p  for the current year and  (up just under 20%) and an estimated 79.7p forecast for the year commencing in three months time  - a rise of a further estimated 21%. Those projected percentage increase in earnings imply a current forward price to earnings ratios of 10.5 times for this year and 8.6 times for next year. That looks good value. Dividends, are also forecast to rise; from 21.5p last year, to an estimated 22.7p this year and 24.2p next year, putting the shares at 687p on forward dividend ields of 3.3% for this year and 3.5%  for the coming year. At 687p Charter is a BUY. 

King Solomon’s Mind

The Chancellor has been chuffed by the arrival of the IMF’s rousing approval of his cuts. So we may all take comfort in that, but bearing in mind the IMF would cheer the slaughter of all first born if it felt that such an extreme policy would reduce a country’s fiscal deficit. Let us hope they are correct in their assessment. King Solomon has beaten them to it by believing that on balance, all things taken into account, there will be no double dip. Towards the west the land is a bit brighter if not exactly bright. The price of Gold is in new territory (a crown of laurels for the T1ps Gold Fund) and the dollar is weaker. With quantitative easing (printing money) the US authorities have the means of securing a devaluation of the dollar to beat off any Japanese style deflation of domestic economic activity. The damage the banking crisis did was prodigeous. The Yuan (another word for the Reminbi and easier to spell) is appreciating a bit and so are other Bric currencies exchange values against the dollar. The Japanese and Brazilians are trying to stop that, but market intervention in my experience, never seems to work unless devaluation policy goes along with economic reality. So Brazil’s and Japan’s attempts to manage their economic life through a managed downward exchange value for their currencies, is most likely to fail. They are spitting against the wind. It is a reminder of the notorious political economic ‘beggar thy neighbour’ policies of the nineteen thirties. Then it was the received wisdom was for fiscal deficit economies, suffering from reduced tax income resulting from a decline in economic activity, to cut that economic activity even more by cutting government spending as well; a risk that the Chancellor’s policies pose in the UK.

I note that the latest industrial production estimates (not GDP growth estimates) ,to mid summer show that industrial production has been growing at 14% in China. 8.7% in Brazil, 14% in India, 20% in Taiwan16% in Thailand, 15% in South Korea. It is 7.1% in Euroland, 7.7% (from a low base) in the US and 1.9% in dear old Blighty. That neatly brings us back to Mr. Osborn and his budget and the appropriateness of its degree of retrenchment.

Updates

Fenner Group: up 13% on May tip. Hold.

Fenner Group, (FNR) tipped at 205p four months ago in May, has just produced a trading statement for its year end. It speaks of sustained momentum in the final months of the trading year, giving rise to results at the top end of expectations. Demand conditions in mining were reported as strong. The management states that it has entered the first quarter of this year with confidence. It will also benefit from the company’s investment in new products and initiatives and enhanced margins. So what does the market expect now? The consensus is for evenue up 8.8% for the year just ended accompanied by a 36% rise in expected earnings per share to an estimated 17.8p and a forecast increase in dividend payout of 9.2%. Thus, a forward estimated price to earnings ratio of 13.4 times for last year dripping to an estimated 11.4 for this year. The dividend for this year is estimated to be 3.1%. The share price last seen had risen to 232p; a useful increase of just over 13% in about three months. HOLD.  

Kingfisher: there has been a capital gain of 11.5% over twelve months plus an annual dividend worth 2.6% of the tip price. Hold.

Kingfisher which was tipped a year ago - on the basis of its management, value and its business in France - has just produced its interim results for the year to 31 July 2010. To use a word that few people seem to use now, they were gratifying. Turnover was down but by only 1%. However, pre tax profit rose 22% and earnings 25%; so a nice improvement in margins. The interim dividend was not increased, staying at 1.925p and current yielding 2.3%.  Like for like sales were down 1.37% in the UK and up 1.4% in France. There were reported efficiency initiates from sales and marketing to operating cost cutting. The net asset value was 216p (net tangible assets of 112p) and net cash of £19 million. The share price got into higher territory following the results suggesting that the trend remains upwards. On prospective estimated earnings  19.25p for this year the shares still look good longer term value on a price to earnings ratio of 12 times. HOLD.

ROBERT SUTHERLAND SMITH