Share tips: A play on European industry
By
Paul Hill Jan 13, 2012
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Here’s an upbeat prediction for you – the worst of the European debt crisis will be solved within six months. That might sound hopelessly optimistic, but believe it or not, it’s a real possibility.
Last Thursday, a €7.5bn issue of new shares from Italy’s largest bank, Unicredit, flopped. This means other challenged banks are now locked out of the equity markets, at a time when they’ve been told to raise €115bn in fresh capital. The banks now have little option but to go cap in hand to their governments.
But they can’t afford to bail them out without support from the European Central Bank (ECB). To avert economic disaster, the German chancellor, Angela Merkel, will have to allow the ECB to begin printing money (quantitative easing – QE). And when it does, it’ll be great news for stocks such as Brammer, which have been punished as investors fret about their exposure to the single currency area.
Brammer is a pan-European distributor of industrial components – largely bearings, seals, tools and power transmission systems. It derives 70% of its business from the continent, and the rest from Britain. Its specialist parts – it offers an unrivalled range of 4.3 million products – are essential to about 100,000 customers (including EDF Energy, Heinz and Kraft) for keeping factories running.
Already the biggest player (with a 3% market share) in a €25bn industry, it operates 300 service centres in 15 countries. These are complemented by 244 onsite teams, whose staff handle all aspects of a customer’s spares and stores management. That builds robust barriers to entry for competitors.
In the four months to October, sales per working day rose 14.6%, helped by cross-selling initiatives and £60m-worth of new accounts secured in 2011. Brammer also spent £27.6m buying British peer Buck & Hickman in September, which should deliver £7.5m a year in cost savings in due course.
Brammer Group (LSE: BRAM), rated a BUY by Peel Hunt
Chief executive Ian Fraser aims to lift earnings before interest, tax and amortisation (EBITA) margins from 5.6% now to 8% over the medium term. The City expects revenue and earnings per share (EPS) of £567m and 19.6p respectively for 2011, rising to £718m and 25.8p in 2012. I value the stock on a prospective EBITA multiple of ten (assuming 6% margins). Adjusted for net debt of £45m, a £13.7m pension deficit and £7.8m of deferred payment on the recent purchase, I get an intrinsic worth of 300p a share.
Brammer is not recession-proof. Sales tumbled 10% in 2009 as demand dropped in cyclical areas, such as automotive and construction. But reassuringly, cash flow rose by a similar amount. Currency issues need watching too, although most of its debt load is denominated in euros and therefore hedged by its large volume of European sales. Broker Peel Hunt has a price target of 400p. Preliminary results are due out in February.
Rating: BUY at 240p (market cap £280m)
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