Stoves coming to the boil

SHARES in the recently floated Stoves have begun stock market life well, quickly bubbling up to 181p against a placing price of 163p. The issue was reportedly oversubscribed five times, so few private investors will have been able to buy at the placing price. But prospects for the company look excellent, so there should be plenty of further share- price progress to come, making the shares still worth buying.

The short history of the group since 1989 is of an extraordinarily successful management buy-in. A team led by 58-year-old chief executive John Crathorne bought the Valor gas cooker business from Yale & Valor. At the time, it had turnover of pounds 17m and was making a loss of pounds 3m. Since then, the UK market for cookers, whether free-standing or as built-in hobs and ovens, has dived by more than a quarter from pounds 420m to nearer pounds 300m. Yet the new team has built the business to a point where sales are expected to have reached pounds 50m for the year to 31 May 1995, with pre-tax profits of pounds 3m after interest of pounds 442,000.

This achievement reflects a wholesale repositioning of the business. The old, rather down-market Valor range has become profitable, but with minimal promotional support. Sales growth has come from a new brand, Stoves, (actually a revived brand name from the 1920s and 1930s) aimed at the middle and upper price ranges. A weak pound has helped against competitors from Germany, but the group's marketing is not price-based. Instead, it competes on range (a huge choice of configurations versus a handful from most rivals), high-quality service back-up from a 50-strong team of service engineers and tempting special features. These include doors that are said to be stronger, easier to clean and easier to manufacture, a Powercool system that keeps the oven casing at no more than blood temperature when in use, and a self-cleaning gas ceramic Maxigrill, in which the heat source is external to the oven cavity behind a sheet of ceramic glass.

The new Stoves has been a dramatic success, supporting accelerating sales growth between 1990 and 1994 with turnover growing from pounds 17.8m to pounds 34.8m for the nine months to 24 February. In the three months from late February to 31 May, trading was described as strong. Sales were running 2-5 per cent ahead, which augurs well for the current year to end May 1996.

A further boost should come from a recently launched mid-price range, Stoves Newhomes, which accounted for 4 per cent of sales to late February and which has been extended, from January this year, to free-standing cookers as well as built-in hobs and ovens.

One reason for feeling so optimistic about the group's prospects is that it has only recently begun to make significant profits. Operating margins in the current year are likely to be around 7 per cent, which is not high for a manufacturer of branded goods. It seems reasonable to expect the group to keep that margin structure. If the group keeps sales growing strongly and adds up to another percentage point annually to the margin on the way to 10 per cent in three or four years' time, profits, earnings and dividends could grow with impressive speed.

Backing the group's aspirations is an innovative approach to manufacturing, which has reduced costs and increased flexibility. Since 1989, the group has invested pounds 10.2m in plant and equipment and now has an almost unique facility, at least according to the prospectus.

Because of its origins, the group's strengths have been with gas-fuelled equipment. It is increasingly targeting the sizeable chunk of the market for electric products. Stoves does well in the UK, partly by developing products specifically aimed at the home market where, for example, eye- level grills are popular. A similar locally specified approach will be adopted for overseas markets and should enable the group to maintain strong sales growth as it moves towards maturity in the UK.

Finance director James Bates says one clue to prospects for the group is that the directors sold few of their own shares in the placing. As with all new issues, one must be cautious about the claims in the prospectus, but the fact that the management is hanging on to so much stock gives grounds for optimism. One stockbroker is forecasting profits of pounds 4.8m for the year to 31 May 1996. This effectively compares with pounds 3.7m for 1994/95 if adding back interest paid in that year that will not be payable in 1995 because of the funds raised and one-off costs in putting together a nationwide force of sales engineers.

On a prospective p/e of around 15, the shares should find plenty of buyers. Sales and profits could be headed for pounds 100m and pounds 10m respectively in the not-too-distant future.