Share tip of the week: A punt on the growth of mobile phones in China

By Paul Hill Aug 15, 2008

Paul Hill
Electronic components

Laird is ramping up its presence in China

This week's share tip is the world leader in electromagnetic shielding. The group also develops specialist electronic components, such as mobile-phone antennae, and counts some of the biggest names in communications and IT among its clients

This week's share tip is the world leader in electromagnetic shielding (EMS), which stops interference from affecting the performance of electrical goods, such as computers and flat-screen TVs. The group develops specialist electronic components, such as mobile-phone antennae, and counts some of the biggest names in communications and IT among its clients, including Nokia, Samsung, Dell and HP.

Laird (LRD), rated a BUY by Goldman Sachs

Mobile phones account for 54% of revenues, a sector that research group Gartner predicts will grow by around 10% this year and next, driven by rampant demand in emerging nations and the introduction of new technologies such as iMax and machine-to-machine communications. Laird is also raising the number of parts it supplies within each phone, and so the group should expand even faster still, particularly as it ramps up its presence in China and India.

CEO Peter Hill delivered a set of strong results for the half year. Organic revenues rose 19%, while underlying earnings per share (EPS) climbed 22%, despite a £2.2m foreign exchange loss and a 41% jump in research and development spending. To protect its technology from becoming commoditised, the group employs 769 engineers in its technology team and has over 1,250 registered patents. The interim dividend was also hiked 10%, offering a 4.5% yield.

Hill said that "while economic uncertainties persist... we believe that our advanced technologies... and our well-established low-cost manufacturing base, position us well to make further progress" for the rest of the year. Analysts have pencilled in 2008 sales and underlying EPS of £676m and 40.7p respectively, rising to £745m and 42.8p in 2009. That puts the stock on earnings multiples of 8.1 and 7.7, good value in view of its number-one or number-two positions in most of its niche markets.

The board is also confident it can deliver organic top-line growth over the medium term of between 15% and 20% while maintaining its double-digit operating margins. The finance director seems to agree, having snapped up 12,000 shares at 287p last week.

So are there any catches? Firstly, Laird is a relative minnow compared to several of its customers, so its pricing power is limited. Deflation is also a key feature in its markets, so unless it continues to innovate then it's possible that its 12% operating profit margins could be squeezed, especially if the dollar falls further against sterling. Next, the business's prospects are tied to the health of the consumer electronics industry. Although this is largely buoyant at the moment, it could be derailed in the event of a savage global recession. Lastly, the company has £94m of net debt that needs to be watched. However, interest payments are comfortably 11 times covered and well within banking covenants.

Recommendation: BUY at 334.5p

Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.

Published in Tips & advice | More articles by Paul Hill

Related articles

FREE - MoneyWeek's daily investment emailJohn Stepek

Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.