Engineers seek a different skyline

The City and the engineering sector have traditionally regarded each other with suspicion. Some companies, such as GKN, enjoy good ratings from City analysts, but these are exceptions. Many more in the engineering sector suffer low ratings. They complain that the City does not understand them or their priorities. Mutual dissatisfaction has reached such a […]

The City and the engineering sector have traditionally regarded each other with suspicion. Some companies, such as GKN, enjoy good ratings from City analysts, but these are exceptions. Many more in the engineering sector suffer low ratings. They complain that the City does not understand them or their priorities.

Mutual dissatisfaction has reached such a pitch that a trend to de-list is developing.

A problem for companies trying to improve ratings and attract money from the City is that investors want growth. Advisers stress that candidates must have the management team to achieve this. But the strong pound and high interest rates are affecting perceptions of growth prospects for engineering companies, and investors are becoming nervous of the sector.

Some analysts argue that the London Stock Exchange is only appropriate for companies worth more than £150m. Mark Wrightson, managing director of Close Brothers Corporate Finance, goes further: he reckons companies smaller than £300m £500m should look elsewhere.

He stresses engineering companies need ‘quite a crisp growth story’ to attract funding. They must be able to show they are in a growing market. Engineering companies must change from ‘concentrating on cost-cutting to funding revenue growth’, he says.

Another option is the alternative investment market (AIM). It was set up three years ago principally for smaller and emerging companies, and was designed to be more accessible than the main stock market. AIM now has about 300 companies trading on it, with total capitalisation of more than £6bn.

Graham Spooner, national director of corporate finance at chartered accountant Kidsons Impey, suggests companies worth less than £25m could consider joining AIM.

He says that among the 14 flotations his firm has been involved in over the past two years ‘none were real manufacturing’. However, he adds: ‘Now is a good time to plan a float. It is a good opportunity to take stock for next year. Engineering firms know which part of the business cycle they will have reached by 1999.’

For those companies which are wary of stock markets, Spooner suggests another option: ‘There is a wall of money available through venture capitalists.’ Investment buyouts, where institutions take a controlling stake, are popular.

If engineering companies are unloved by the City of London, they only have themselves to blame, according to some. Graham Jennings, a management consultant at accountant Robson Rhodes, says: ‘The West Midlands in particular is an insular, traditional marketplace. Engineering companies can have a naive outlook.

‘Some managements even take the stance I will not tell you what I do because it is a secret based on 50 years of experience. This winds up the City.’

Jennings believes most engineering firms fail in presenting themselves. By contrast, ‘GKN has a visible chief executive. It tells the City what it is doing, it has a clear strategy.’

Dissatisfaction has led to the fashion for de-listing: ‘In the late 1980s and early 1990s, floating was the fashion. Some companies regretted it, and now the fashion in the engineering sector is to undo it,’ says Jennings.

But Bob Hale, corporate finance partner in Robson Rhodes’ Birmingham office, thinks the companies are misunderstood.

‘The City is very unforgiving,’ he says. ‘If you do not perform as expected, maybe for reasons beyond your control, they are likely to issue a profit warning.’

The current strength of sterling is a case in point. It can be difficult to get back in favour even if performance has improved, he adds.

Hale reckons a principal reason for the stock exchange de-listings in the engineering sector has been frustration at low rating.

‘Companies believe they can deal with difficulties in the way they want if they de-list,’ Hale says.

For example, a business with a shortage of orders because of a strong pound can decide to stop production, lay off workers, or change direction. ‘It is extremely difficult to take such steps if the impact on the share price would be disastrous,’ he says.

As for AIM, it has ‘all the drawbacks of the stock exchange’, Hale says.

By contrast, ‘private equity investors seem to be more supportive and aware of the issues’. But they generally want to turn over their investment in three to five years, and this could mean seeking an exit through a float.

The venture capital route can be good preparation for a float, according to Melvin Pedro, head of corporate finance at City law firm Manches & Co. But he agrees engineering firms are not appreciated by the City. ‘To some degree the City reflects the general mood. At the moment, the focus is on high tech.’

He adds that time horizons in the City and industry are different. Engineering companies tend to take a long-term view, but City fund managers have a short to medium-term horizon.

According to Hale, most engineering companies are good on public relations and spend time and effort on their approaches to the City.

‘Every half year they spend more than a week presenting their case,’ Hale says. He admits some do not. ‘But maybe they feel there is no disadvantage to being misunderstood if the City does the engineering sector no favours.’