David Brown’s German risk recedes

Results came in better than expected with David Brown’s German rivals lifting prices to restore margins

The strong pound is not taking as big a toll on David Brown’s German business as the City had feared. Instead of cutting the engineering group’s market share with cheaper prices, German rivals are lifting prices to restore margins.

`The Germans aren’t turning the screw as much as I had expected,’ said analyst Michael Blogg of stockbroker Charterhouse Tilney, who last January sliced £2m off his 1997-98 David Brown profits forecast on currency grounds.

Chris Cook, the David Brown chairman and Chris Brown, its chief executive, in presenting the results last week, told analysts that the City undervalued their company.

Analyst Paul Spencer of broker Granville thought they had a point. `If David Brown’s shares had the rating they deserve, growing the company by acquisition would be a lot easier,’ he said.

On Spencer’s sums, the shares sell on only 11 times current year’s earnings, and he reckoned them undervalued by some 25%.

As it is, scope for using the lowly valued paper for acquisitions is limited and a cash call on shareholders – the last was two years ago – is likely for any sizeable deal.

The company is particularly keen to grow its American interests – which last year accounted for 14% of group sales by destination.

David Brown has made a few bolt-on acquisitions in the last year or two, but the strong growth has chiefly been organic, achieved through investing in new products and plant and developing the company’s structure globally.

This effort was reflected last year in sharp increases in sales, pre-tax profits, and earnings, up respectively by 13% to £182m; 19% to £18.2m; and 16% to 17.7p – and another year of good progress is promised for 1997-98.