Just as Glasgow now has its new bridges, riverside walkways and street café culture (yes really!), how times have changed on the business front. 30 years ago the Scottish commercial scene was dominated by the omnipresent whisky and, mainly, manufacturing industry, steel making (Corus – now owned by Tata Group), vehicles (Rootes + Albion Trucks), textiles (Coats Patons), rail locomotive (North British and Caledonian) and of course shipbuilding (Upper Clyde, John Brown’s and Fergusons). This was fleshed out by Edinburgh’s then very healthy financial and banking scene: Bank of Scotland (now part of Lloyds Banking Group), Royal Bank Of Scotland Group Plc, Scottish Equitable, Scottish Widows (now part of Lloyds Banking Group).
Whisky is still with us but now largely owned by multi nationals like Diageo but with the exception of a lingering presence of shipbuilding – frigates for the British Navy - at Govan on the Clyde and now a subsidiary of BAE Systems, all of the above companies have either disappeared or been absorbed into other groups.
Electronics was seen as the way to absorb the loss of heavy engineering and moving the Scottish economy forward and many multi national companies (mainly American) were encouraged by financial incentives to set up manufacturing facilities in Scotland. Certain locations (dubbed “Silicon Glen”) within EC development areas were a magnet:
- East Kilbride: Motorola and Honeywell Greenock: IBM and National Semiconductor
- Glenrothes: General Instrument and Elliott Automation
At its peak the electronics industry in Scotland employed near 50,000 but was very much a ‘branch economy’ and it did not survive the world wide collapse of this sector in the late 1990’s. Over recent years, Scottish Enterprise has pushed the electronics sector towards software development, a move which has been successful in terms of the economy as a whole but is employs far fewer people than did the manufacture of semi conductors and electronic circuits. [1]
The financial presence still remains with the Royal Bank Of Scotland Group Plc easily Scotland’s largest publicly quoted company (Edinburgh is still the sixth largest investment management centre in Europe and the 15th largest in the world [2] but the recent travails of the financial sector and particularly the Scottish financial sector, are well documented elsewhere.
Nevertheless, despite these changes (of which some are very critical seeing it as a hollowing out of an excellent manufacturing base [3] , there are still many excellent Scottish companies in public ownership. To select a few the writer has some knowledge of, Cairn Energy Plc, Firstgroup, Aggreko and Weir Group are respectively, as measured by market capitalisation, presently Scotland’s fourth, fifth, seventh and tenth largest publicly quoted companies. This article discusses also two smaller plc’s Forth Ports and Barr’s to round things out. [4]
Cairn Energy Plc (CNE)
Since arriving on the stock market twenty years ago this oil company has, up until the last couple of years, always been in the nearly there stage, constantly being refinanced on the basis of confirmed oil finds awaiting commercial development. From 2010 onwards the company could be set to deliver in a big way.
For the past two years oil has been extracted from the company’s fields in Bangladesh and Nepal and the cash flow from this together with newly arranged loan finance of £400m and a 5% share placing in 2008 raising £100m is providing the funding for delivering from the company’s giant (combined area of New Delhi + London) Rajasthan field on the Indian sub continent. Rajasthan came into production during the last few weeks and expects to produce 125,000 barrels per day by mid 2010 and develop to 175,000 per day. All of this compares to Cairn’s average during 2009 so far of 12,000 barrels per day. There is further promising exploration work in Africa and Greenland.
The profit and loss accounts for recent years do not tell us a great deal, aside from a still developing oil flow there are ‘one offs’ going both ways and the company has never paid a dividend. The real story for investors is forecast pre tax of £340m in 2010 putting the shares at 2580p (18.09.09) on a prospective p/e of 11.
The share price is vulnerable to short term fluctuations in oil prices but look set fair to deliver over a two/three year time frame. [5]
Firstgroup (FGP)
Aberdeen based FSP is the largest UK transport group with a market capitalisation of over £2,000m and interests in bus travel , rail passenger and freight and also in the USA with First Capital Connect yellow school and greyhound bus services.
It is predominately a people business with 137,000 employees and group turnover for the year to 31 March 2009 of £6187m. Over the years £FSP have proved themselves very efficient operators of the UK rail franchises Great Western, Trans Pennine, Railfreight and Scotrail. Group turnover segments fairly evenly between UK Bus, UK Rail and USA.
The shares at 436.40p (17.09.09) are attractive on a P/E of just over 7 and dividend yield of 5.3% . Pre tax profits for the current year are forecast to increase to £314m (£200m year to 31.03.09) and this will probably make the presently calculated P/E and dividend yield historic. [6]
Aggreko (AGK)
This global provider of rental power, temperature control and compressed air systems and one time subsidiary of Christian Salvesen (floated off ten years ago to maximise value for CS’s shareholders) is now a massive company, market capitalisation near £2,000m, with operations in 120 locations and 28 countries. Still based in and around Glasgow group turnover for the year ending 31 December 2009 is expected to be near £1,000m and pre tax profits a very healthy £200m.
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AGK has a solid record of increasing turnover and profits each year and such is the present world wide spread of its operations that much suggested dependence on ‘one offs’ , e.g. in 2008 the Beijing Olympics and storm damage in USA, is nearly always going to happen in some form or another. However the shares at 709.5p (17.09.09) are at a peaky looking P/E of near enough 13 and not on my buy list at the present time. [7]
Weir Group (WEIR)
Glasgow based engineers who specialise these days in pumps, turbines, valves and oil exploration pipework. WEIR employ 8,000 across five divisions are covered in my earlier article on British Engineering and shareholders in this company have seen a tripling of their capital over the past five years to the present 691p (18.09.09).
A very recent change of Group Chief Executive will create some uncertainty, the very successful Mark Selway returning to a top job in his native Australia and being replaced by the Group Finance Director Keith Cochrane. A Scottish company that will continue to thrive in world markets but at 691p (18.09.09) WEIR shares yield a market average of under 3% and are on a prospective P/E of near 11 and whilst far from being one to avoid there are probably now better bargains out there. [8]
Forth Ports (FPT)
Following the sale of Clydeport to Manchester’s Peel Holdings Forth Ports is now Scotland’s only major port group indeed Forth Ports is the second largest in the UK behind the worldwide Hutchison Group who in the UK, operate through Felixstowe, Harwich and London’s Thamesport.
Forth Ports, capitalised at £574m, operates six ports on the east side of Scotland stretching from Dundee to Grangemouth and Leith. It is Leith which has been the group’s bete noir in recent times following the, with hindsight, badly timed foray into commercial property development. The outcome was a £67m write down in the accounts to 31 December 2008, without which there would have been a similar pre tax profit to the previous year’s £32m, on overall revenue approaching £200m. – not bad considering the effect of the recession on traffic through the group’s ports.
Planning applications and the masterplan for Leith Docks are on hold and the shares at 1257p (18.09.09) will bounce strongly with an upturn in the commercial property market, this however could be some way off for Edinburgh. [9]
Barr(A.G.) (BAG)
Scotland is the only country in the developed world where Coca Cola is not the No.1 soft drink and Barr(A.G.) is the company responsible. Irn Bru (or ‘Ginger’ as it is called in Glasgow) accounts for over 60% of Barr’s turnover. A current member of the FTSE 250 Barr(A.G.) was first established in the Parkhead area of Glasgow in 1875.
Barr(A.G.) employs 900 and is now based at Cumbernauld a few miles to the north of the city. Growing organically and by acquisition the company’s turnover and earnings have both increased steadily over the past five years, additional brands are Tizer, Strathmore Spring Water, St Clements and the most recent purchase, Exotic Rubicon which is based in London.
Group turnover for the year ended 31 January 2009 was £169.7m and earnings per share 42p. the group has always been well run and managed to increase its dividend each year in line with increased profits. Debt is usually minimal but the £60m acquisition of Rubicon left over £31m of borrowings on the balance sheet at 31.Janury 2009 but with Barr’s very positive operating cash flow this will soon be eliminated.
At 1655p per share (17.09.09) the shares yield 3.7% and the group has a market capitalisation of £322m. With Barr family interests still dominating the share register the company is unlikely to be a take over target in the near future so as a future investment the shares have yield attractions and rate safe but unspectacular. [10]
Summary
All of the above Scottish companies are efficiently and well run and likely to provide solid enough returns for investors.
Cairn Energy Plc is the most speculative, big returns possible but a lot of it is in the share price already and the future depends so much on where the oil price goes. The price of ordinary shares in Aggreko has a history of steep fluctuations, due in part to the constant need for ‘something new to develop’. Weir Group are very sound but the recent change of top management may introduce a period of uncertainty. Forth Ports have a solid business on the shipping side but have got themselves into a position of being dependent on a recovery of their related commercial property market. Barr(A.G.) probably still has some scope and the financial resources to buy up the fragmented area of the competition but, if I had to pick one, my choice would be Firstgroup who are now recognised as highly efficient scale players in a very big market and at a price of 436.40 (18.09.09), the shares should outperform.
[2] http://www.talentscotland.com/jobs.aspx?item_id=1128
[3] Scotland Plc, http://www.corporatewatch.org/?lid=1827
[4] http://business.timesonline.co.uk/tol/business
[5] http://www.cairnenergy.com/uploadedFiles/Investors/Announcements/Downloads/2009%20Half%20Year%20Announcement%20-%20Final.pdf
[6] http://www.firstgroup.com/corporate/investors/annualreports.php
[7] http://aggreko.rtrk.co.uk/?scid=13203&kw=5798722&pub_cr_id=4097743908
[8] http://www.weir.co.uk/investors/financial_information/annual_reports/2009.aspx
[9] http://www.forthports.co.uk/ports/investors/annualreports
[10] http://www.agbarr.co.uk/agbarr/newsite/ces_docstore.nsf/unid/913A8303E009C22A802575A2002ECDD5/$file/abg_annual_report_1.pdf
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3 Comments on this Article show/hide all
Why use nationality as a selection criteria ?
Geography is becoming less and less important as companies become ever more independent of their locale, as production moves abroad and distribution turns global or even virtual.
In spite of this, I would bet that 90% of private investors are heavily overweight their own nation's stocks. It's a combination of tax, cost, lack of information, xenophobia & other natural human biases.