Chubb locked into flat markets; The Investment Column

Chubb Security had a brief moment of glory after being demerged from Sir Ernest Harrison's Racal Electronics empire in 1992. Shares in the locks to electronic security group soared on hopes for a four-year revitalisation programme, but after an initial cost-cutting drive it became clear that Chubb would not emulate the success of Vodafone, another of Sir Ernest's "babies". A year ago, the group announced plans to step up its expansion through an acquisition and investment programme, but disappointing figures yesterday suggest the group still has to convince the City of its growth prospects.

Pre-tax profits edged up just under 4 per cent to pounds 46.1m on turnover an eighth higher at pounds 427m in the six months to 11 October. But despite a 10 per cent uplift in the interim dividend, the shares sank 9.5p to 321p. The main drag on growth was in the traditional locks and safes to fire protection physical security division, which saw profits sink from pounds 21.5m to pounds 20.8m. Europe alone accounted for more than the total shortfall, with the pounds 1.5m fall there split equally among locks, fire protection and safes.

South African locks and fire protection have also proved problematic, hitting results from businesses outside Europe, the US and Australia. Chubb does not see much recovery over last year in the second half in Africa.

Looking further out, Chubb has work to do after having sunk pounds 182m into the business over the past 12 months. Most went on two Australian acquisitions: the pounds 22m purchase of MSS Security in June and James Hardie Industries, picked up last week for pounds 107m. A pounds 2.5m restructuring programme means the former is on course to make a pounds 1m loss this year, while shaking up Hardie and financing costs will lead to earnings dilution of around pounds 2m in 1996-97. It will be next year and the year after before both start to really contribute to the bottom line.

But all that said, Chubb's strategy in unexciting markets remains credible. Electronic security continues its solid performance, recording organic growth of 10 per cent in a market increasing at 4-6 per cent a year, while the figures from physical security were respectable, given 2 per cent or so world-wide growth and nothing at all in Europe. Hardie will strengthen Chubb in a number of areas, roughly doubling its market shares in access control and fire detection and taking it to 19 per cent in the pounds 1.2bn fire protection market.

But with brokers knocking pounds 3m off forecasts for this year and next, it will remain a hard slog for Chubb. Full-year profits of pounds 100m, followed by pounds 115m, would put the shares on a forward multiple of 15, falling to 13. Fairly valued.