Wednesday tips round-up: Croda, GKN, Provident Financial

27th Feb 2013 07:20

Over the last few years Croda has reinvented itself as an innovator producing advanced patent-protected ingredients for the cosmetics, coatings, agriculture and energy industries. Much of the growth has been organic, but Steve Foots, the Chief Executive, is particularly proud of his network of scouts seeking out acquisition targets with interesting technologies. Production is gradually being shifted overseas because of the cost advantages and to be nearer Croda's growing customer base in the Far East and Latin America. The shares have quintupled in the space of four years. That's partly a function of the strong profits growth but also the result of a big uprating: the shares now trade on a pricey 20 times earnings. As well, two years ago the company decided to hand more of its abundant cash back to shareholders, boosting the dividend by 57% in that year alone and it has kept growing. The company says it has made an encouraging start to this year, although it is anxious about the prospects for the European economy. Furthermore, the racy rating leaves little margin for error. The chemicals business is hardly immune from setbacks. The shares seem to have got a little ahead of reality. Take some profit, says The Times´s Tempus. Engineering and aerospace component manufacturer GKN yesterday beat consensus estimates with its yearly results. Full-year sales for the group as a whole rose 13% to £6.51bn, with pre-tax profit up 68% to £588m. However, when one-offs such as gains and losses from derivatives are stripped out, profits rose a more modest 19% to £497m. For the year as a whole the dividend pay-out increased by 20%. More tantalizingly, the return on average invested capital came in at 18.1%, just shy of its ultimate target of 20%. GKN shares are trading on a 2013 earnings multiple of 10, falling to nine next year. This does not seem overstretched. The Telegraph´s Questor team last said buy on August 4th last year, when the shares were at 210.6p. Following the share rally since then, Questor says hold.Figures out yesterday from sub-prime lender Provident Financial showed that the company continues to sail through the crisis with barely a blip. Customer numbers grew by 9% to 2.74m. Pre-tax profits were up 12% to £181m, while the dividend was raised by the same proportion to 77¼p. It is true that the core doorstep-lending business struggled to make progress this year, given part-time, hourly-paid workers in rented accommodation´s unwillingness to take on any more debt in the face of squeezed living standards (although the bad debt rate was stable). That's not the case in the other main division, Vanquis Bank, which offers credit cards to borrowers turned down by mainstream banks. Profits here leapt by 61% to £71.3m, while arrears levels remain at record lows. For the longer-term, a pilot project in Poland is producing good results and could be the basis for a very large new business. The company trades on 14 times earnings and yields more than 5%. For such a reliable earner, that valuation looks ungenerous. It hasn't made a loss in 132 years. The threat of a crackdown on sub-prime lenders hangs over the shares, but successive governments have always shied away from a cap on interest rates. Buy says Tempus.Please note: Digital Look provides a round-up of news, tips and information that is impacting share prices and the market. Digital Look cannot take any responsibility for information provided by third parties. This is for your general information only as not intended to be relied upon by users in making an investment decision or any other decision. Please obtain a copy of the relevant publication and carry out your own research before considering acting on any of this information. AB