QUALIPORT
You Don't Have To Make It Back The Way You Lost It

By Maynard Paton (TMFMayn)
May 16, 2002

"In my book, it's never too late to sell. Remember too, that you don't have make it back the way you lost it. There are plenty of other companies out there that have more stable, predictable futures than MMT. More than likely, they'll deliver greater returns to shareholders in the future too."

Those were my words when the Qualiport sold its holding in IT services firm MMT Computing (LSE: MMT) last year. At the time, selling out at an 80% loss seemed like capitulating at the maximum point of pessimism. Nine months and two results statements later, a greater perspective can be put on the decision.

Published earlier this month, MMT's interim numbers highlighted "difficult trading conditions" and an operating profit of just £315,000. Although comments of "cautious optimism" concerning a rebound in IT spending were made, it's worth bearing in mind sector heavyweights Logica (LSE: LOG) and Xansa (LSE: XAN) have both recently reported flat-to-declining domestic performances. Furthermore, MMT has appointed yet another Managing Director, the third in under three years.

All in all, nothing fundamentally has changed at MMT following the Qualiport's disposal. And for the moment at least, MMT shares still hover around the portfolio's 120p sell price. Whether MMT can return to its past glories is still a matter for debate. But rather than get involved with such conjecture, the Qualiport remains happy clawing back those MMT losses with more stable, predictable companies.

Ultraframe

Qualiport watch list member Ultraframe (LSE: UTF) published its interim results last week. Here's a summary:

                       Six months to   Six months to      Change
                         29/03/02        30/03/01           (%)

Turnover (£k)             66,352          38,533           +72
Operating Profit (£k)     11,246           8,463           +33
Pre-tax profit (£k)       10,467           9,115           +15

Earnings per share (p)       7.4             6.7           +10
Dividend per share (p)       3.0             2.7           +11

The main points concerning Ultraframe and its latest performance are:

* Worth £358m, Ultraframe is Europe's leading conservatory roofing specialist, designing, manufacturing and supplying a comprehensive range of products and components for this niche industry. Sales are made to third-party conservatory installers, retail outlets, other branded conservatory manufacturers and house builders.

* Ultraframe's business strength comes in the form of dominating a fragmented market (the company is said to be ten times as large as its nearest competitor), a raft of patents and a management team that effectively created the marketplace for specialist conservatory roofing.

* Ultraframe purchased Four Seasons, a market leading 'glazed enclosure' business based in the US, for £89m in July 2001. Doubts over that move, followed by a profit warning in August, sent Ultraframe shares sharply lower during late 2001. Standing at over 350p this time last year, the shares touched 156p in November. Final results in December soon reassured nervous shareholders, and the most recent numbers have reaffirmed the group's progress. The shares have now recovered to 363p.

* Although there's still time for the doomsayers to be proved right, Ultraframe appears unique amongst UK businesses in that a substantial US acquisition has yet to give any real trouble. It's worth noting that a new, more experienced Finance Director was appointed in April in light of the company's overseas expansion.

* The latest results appeared to show contrasting geographical performances. At home, half-year operating profits rose 10% to £10.5m. In the US, an interim operating profit of £3.1m was declared. In the first eight and a half months of ownership, Four Seasons has contributed profits of £4.9m, which on an annualised basis equates to £6.9m. With operating profits of £9.0m generated in 2000, it seems Four Seasons has suffered of late.

* Ultraframe has very attractive financial characteristics. The group's domestic business generates operating margins of 28% and has a heavy reliance on intangible assets. Over the past twelve months, operating profits of around £28m were produced from tangible fixed assets of only £26m. Over the five years ending September 2001, Ultraframe has generated a juicy incremental return on equity of 22.3%.

* On a twelve-month trailing basis, the UK operation produced a £25.7m operating profit. If you add on the annualised £6.9m contribution from Four Seasons, replace a £3.6m depreciation charge with capital expenditure of £4.4m, subtract interest payments of £1.5m and then tax the lot at 30%, the resultant free cash flow comes to 21.7p per share. If that free cash flow increased by 6% in the forthcoming year, a share price of 306p would offer a prospective free cash flow yield of 7.5%.

More: Ultraframe: A Missed Opportunity | Ultraframe discussion board