Profit from the return of British manufacturing
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Associate Editor
David Stevenson Mar 05, 2010
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Extreme statistics have become the norm since the credit crunch. And most have shown the economy going badly wrong. So news that Britain's manufacturing output and new exports are growing at their fastest rate for 14 years is quite a turn up. And unlike most positive recent data, this may not be a flash in the pan.
February's Purchasing Managers Index (PMI), compiled by the Chartered Institute of Purchasing & Supply (CIPS), shows UK manufacturing production increasing for the ninth month to its highest since September 1996. February also saw a chunky gain in new orders, says the PMI report. That's an increase for the eighth month running. New exports rose at their quickest pace since data were first collected in January 1996.
Better still, the Engineering Employers Federation (EEF), a manufacturers' lobby group that's hardly renowned for sounding over-bullish, has been singing a similar tune in its latest survey. More companies are expecting output and orders to expand than at any time since mid-2007. "The start to 2010 was better than expected," says EEF chief economist Lee Hopley. "More and more companies are reporting signs [of] improving demand, and industry is looking forward with greater confidence." The report also says that many production lines that ground to a halt in the depths of the recession have kicked into action. Small- and medium-sized firms in particular have hired more staff for the second consecutive month.
But all this good news comes with a flipside – inflation is making a comeback in Britain's factories. Input costs and output prices are climbing at their fastest since autumn 2008. The former squeezes margins, while the latter hurts competitiveness. What's more, the recovery isn't showing across the board. There's still caution that "the apparent industrial renaissance is entirely export-driven, pushed by the weakness of the pound, making British-made goods cheaper to sell in the eurozone and elsewhere", says Robert Lea in The Times. Although a net 4% of companies are reporting increased exports, over twice that number say domestic demand is down.
And the bosses of our engineering exporters won't be cracking open the champagne quite yet. Uncertainties about continued global economic expansion and the future availability of finance suggest "caution about predicting a strong rebound", says Hopley. "Recent signs that eurozone growth could be faltering is also a serious concern for UK manufacturers," says Howard Archer at IHS Global Insight, particularly "once stimulative measures start being withdrawn". A sterling rally could also hurt exports. But this time the doomsters may be proved wrong. Sure, growing jitters about the UK's soaring public debt and a possible hung parliament have pushed the pound below $1.50 and e1.10. But that should boost Britain's sales. And there are other reasons to be cheerful. Our historic strengths are showing through.
"Traditional innovation, and research and development products coming out of British industry are helping us to get into export markets," says Tom Lawton at BDO. "UK manufacturers look to be making impressive export gains in both the developed and the hugely growing emerging markets." In other words, it's their product quality that's gaining British engineering firms greater global market shares. Indeed, electronics and precision engineering are now the country's fastest growing manufacturing sectors. Below, we look at one medium-sized UK engineering exporter that's on the way back up.
The best bet in the sector
Birmingham-based Hampson Industries (LSE: HAMP) produces high-performance canopies for fast jets, plus wing seals, glare shields and aero engine covers. It's groundbreaking stuff. The improved strength-to-weight benefits of lightweight composites, says chairman Chris Geoghegan, "are starting to revolutionise the way aircraft are designed and assembled". Some 95% of the company's turnover stems from the aerospace industry and 75% of last year's sales came from outside the UK. So Hampson is ideally placed to cash in on a plunging pound. Why then is the firm valued at a discount to net asset value of about one-third? For one thing, the recession has delayed big aircraft programmes such as the Boeing 787 and the Airbus 350. Meanwhile, Automotive Turbocharger, the only non-aerospace division, has been loss-making. Hampson has also just raised £55m through a new share issue, which has depressed the price.
But "trading is showing signs of improving", says Roger Johnston at Edison Investment Research. "Tooling demand is starting to return, aerospace component de-stocking appears to have ended and the automotive recovery is benefiting the turbocharger business." On a current year p/e of just seven, Hampson looks very cheap.
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