UK Edition
Questor: buy this materials innovator for its world-leading services and potential for a takeover
Another one bites the dust. Last week the board of Fenner succumbed to a £1.2bn cash offer from French tyre maker Michelin. What is Fenner? It has been a belting business for as long as anyone can remember.
Conveyor belts, that is: first made out of leather for power transmission when Joseph Henry Fenner set up the firm in Hull in 1861, then for coal mining using reinforced polymers, and now across other sectors including oil, gas and medical.
The 31pc premium offered to the previous closing price is hard to grumble with, especially as Fenner shares have moved up smartly as the oil price has recovered.
But it is worrying that the UK’s industrial heartland of unflashy stocks has fast become an industrial wasteland as foreign buyers have picked off unheralded jewels that steadily produce cutting-edge stuff for a global customer base over decades.
It was a similar story earlier this month, when private equity group Advent snapped up Laird, a famous shipbuilding name that now supplies kit to smartphone makers including Apple. Go back a few years, and I can remember a fight over the distinctly unsexy Chloride, a maker of power protection systems, as well as industrial fans firm Charter, which traces its history back to 1889.
Meanwhile, a whole swathe of engineering consultants – Hyder, WS Atkins, Scott Wilson, Halcrow and WSP – have been absorbed into larger entities whose shares and headquarters rarely call the UK home.
Sterling devaluation has not helped, but I have never found these mid-ranking engineers particularly good at telling their story to an investor community that is admittedly more focused on stocks further up the index.
The question is: who is next? It is rarely a good idea to invest in shares in the hope that a company will be taken over. But in this world, the direction of travel is clear.
Market experts say that the size of target the UK industrial and engineering sectors offer is not a problem. For the buyers, such as the conglomerates Emerson or Siemens, a billion here or there is chump change.
What most appeals are companies that have narrowly focused operations – perhaps a single world-leading skill such as conveyor belting. And if their shares are undervalued, all the better.
Which brings me to Morgan Advanced Materials, a world leader in materials science focused on ceramics, carbon and composites since 1856, and now operating 85 manufacturing sites in more than 30 countries. It was known as Morgan Crucible until five years ago but rebadged to signify its focus on technical applications that face less pricing pressure than bog-standard crucibles used in smelters.
That flight to quality has continued under chief executive Pete Raby, who arrived three years ago from defence contractor Cobham. A year ago he sold Morgan’s UK electro-ceramics arm for £47m, preferring to focus on technology-led businesses of scale, and crank up research and development spending.
The company gets excited by its applications that are put to use everywhere from the military to the medical industry: body armour, jet engine turbine blades, lasers and dental implants.
The City appreciates Raby’s efforts but the shares have headed south from a mid-January peak. That is despite annual results that came in ahead of consensus, with improving margins and currency benefits offsetting disposals on the profit line. Morgan has a market value of less than £1bn and low gearing.
Company watchers at Numis were disappointed with organic growth for the year of 1.4pc. However, 2.8pc for the second half suggests an improving direction of travel. JP Morgan Cazenove marked up its earnings forecasts for this year and next by 5pc and believes the positive macroeconomic backdrop could help Morgan progress further.
The shares are trading at 13 times this year’s forecast earnings, which looks cheap compared to the industrial sector’s 18 times average. Could Windsor-based Morgan be sold to a foreign buyer more appreciative of decades of British brainpower than the average institutional investor? There is every chance. Still so disparate are Morgan’s activities, it might be that an enterprising buyer breaks it up.
Such hopes are no reason in isolation to tuck the shares away. But in the meantime, Raby’s self-help programme should feed through into the stock price over the medium term.
Questor says: buy
Ticker: MGAM
Share price at close: 319p