MARKET COMMENT
Room For More At Invensys

By Stuart Watson (TMFTiger)
November 15, 2001

The recent escapades of Invensys (LSE: ISYS) and Marconi (LSE: MONI) have many similarities. Last year, both businesses had sales of £7b and had operating margins in the low teens producing operating profits of around £900m. But 2001 has not been kind to them. Both have seen their businesses decline and their debts levels increase.

Marconi has debts of £4.3b and Invensys has debts of £3.3b. Both are undertaking major reviews of their businesses. However, whilst Marconi's market value is languishing at £850m, Invensys has seen its valuation recover to £3.7b, helped in no small measure by this morning's 33% share price jump.

The decline in Invensys's business has not been so dramatic. Today's results from the engineer showed sales falling just 5% this year, whereas Marconi's have fallen some 40%. Invensys has managed to pay a small dividend whereas Marconi's payout is now a distant memory. Marconi urgently needs to restructure its debt as it is currently due for a repayment in 2003. There are concerns that any revised refinancing could massively dilute current shareholders.

Invensys is under less pressure, although a large chunk of its debt is due for repayment in the next year. However, it is negotiating from a position of greater strength. It is likely to dispose of large chunks of its business, although a full list is unlikely to be drawn up until early next year. The fact that the group has decided to pay a 1p dividend, albeit 60% lower than last year, is seen as big vote of confidence in its future cash flows. And barring extreme events, Invensys expects to meet the requirements of its banking covenant at the year-end.

At 105p, the shares have now tripled in the last seven weeks, on the back of relief that its situation wasn't quite as dire as Marconi's. Could there be more to come? The best gains have undoubtedly been taken already. Last year's pre-tax profits, before exceptional costs, came in at £700m. At the current price, the business is valued on 7 to 8 times 'full recovery' earnings. That looks like an optimistic view of events though, especially as Invensys said its trading was more likely to decline than improve in the second half of the year.

But the early signs of Invensys's strategic review are encouraging, with the overall complexity of the business and a lack of attention to operational basics cited as the group's main weaknesses. Both of these should be fixable but, as today's statement says, they are not trivial. Those brave enough to have invested recently could be forgiven for taking the money and running. But there is still room for a further increase if there is a fair economic wind.

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