[image 1] Established for more than 150 years and long quoted on the London market, 600 Group is the UK’s largest machine tool manufacturer, a fact which its lowly market valuation belies.

Operating from more than 30 global locations, the company’s distribution network sells other manufacturers’ wares as well as its own. The products range from low-cost machine tools such as milling machines, saws, drills and grinders to metal cutting lathes under the renowned Colchester Harrison brand.

600 Group is also the proud proprietor of Electrox, a maker of laser marking systems used for direct part marking across a variety of industries.

Strategy

In 2006, 600 Group undertook a strategic review to clarify its objectives ‘for the remainder of the decade’. The findings flagged up a business with robust finances and strength in the design, development and distribution of machine tools and laser marking systems. The company’s investment efforts have subsequently been focused on these two markets, which ambitious chief executive Andrew Dick considers attractive, growing and able to provide profits progression and capital growth for investors.

‘We used to be something of a mini-conglomerate,’ recounts Dick, ‘a diversified group spread across a number of locations. Today, we are focused on our two growth platforms.’

He says that in laser marking 600 Group has ‘some good technology’, while in machine tools – used in the cutting, grinding and drilling of metal – ‘we are one of the few groups around with such a huge range and we’re into several markets including automotive, aerospace, medical and general industry’.

Encouragingly, the world market for machine tools is enjoying its fifth successive year of expansion, buoyed by the manufacturing booms in China and other emerging economies in the Far East, where international procurement programmes are increasingly migrating.

The core UK and US markets are in good shape, with the UK benefiting from favourable investment and the company’s UK business being behind the bulk of the sales increase. The US has grown markedly for the past three years and 600 Group is fostering its ties in China, where many of its machine tools are now made and where there are opportunities to sell its partners’ Chinese machine tools through the 600 Group distribution network.

‘The biggest opportunity we have as a group is the US,’ explains Dick. ‘It’s the biggest market in the world for machine tools and we need to expand our distribution there.’

The global laser marking market is thought to be growing at five to ten per cent a year, with applications ranging from the medical sector to Formula One motor racing. Dick adds: ‘Laser marking is taking the place of chemical and fibre etching as well as physical marking and the cost of lasers is coming down. Traceability, anti-counterfeiting and environmental concerns are driving the market.

‘Over the next 12 to 24 months we need to clean the group up, grow the top line and realise some of the value in the business. Although we have two growth platforms, we are still sub-scale in both businesses.’

Management

Appointed to the board as managing director in April 2005, Dick, 51, was handed the chief executive’s baton on 1 January 2006 and has driven the positive changes since then. He was formerly chief executive of chemicals and industrial products concern Yorkshire Group.

Martin Temple, aged 57 and with a CBE to his name, joined 600 Group in April as a non-executive director and in July succeeded Michael Wright as non-executive chairman. Temple is a heavyweight addition to the boardroom, being director general of the Engineering Employers’ Federation (EEF) and having formerly occupied senior management positions within British Steel.

FD Martyn Wakeman, appointed to the board in October 2006, was UK chief financial officer of Swedish lock company ASSA ABLOY, having previously held senior financial positions with Williams Plc and Teleflex Inc.

Stephen Rutherford joined the board as a non-executive director on 1 October 2006 and brings a wealth of international operational experience to the table.

Prospects

Recent financials from 600 Group point to profitable progress. The full-year figures to March bore the early fruits of recent restructuring and the group’s sharper strategic focus and investment efforts. A £4.5 million contribution from a contract with Airbus added to the 11 per cent growth in the top-line sales figure of £79 million (more impressive at constant currency rates). A loss of £3.3 million swung to operating profits of £615,000.

A rise in finance income to £1.8 million (£1.6 million) – arising from an increase in the expected return on the group’s pension scheme – helped 600 Group transform pre-tax losses of £1.7 million into pre-tax profits of £2.4 million. Balance sheet strength was another feature of the financials, with year-end net cash substantial at £4.4 million despite a £1.4 million decrease in net funds.

Since his arrival, Dick has stopped paying a dividend ‘because now we need to reinvest and we are looking for capital growth’.

At its recent AGM, 600 Group said sales for the first 17 weeks of the current financial year were up seven per cent (adjusted for a disposal, growth was even more impressive at ten per cent). The board also revealed that the order book was 20 per cent up on the previous year, buoyed by a £2.5 million contract awarded by a mystery UK aerospace company, which should increase future profits.

Valuation

Analysts see another good year shaping up, although sales won’t be as high as last year because of disposal activity and the non-repetition of that substantial Airbus order. This year, house broker Altium envisages a jump in profits to £3.1 million and a 28 per cent surge in earnings to 3.7p (2.9p). The following year, 30 per cent-plus growth in earnings to 4.9p is predicted on a similar percentage rise in profits to £4.1 million.

These estimates place the shares on forward price to earnings multiples of 13 and 9.8, undemanding given the aforementioned growth rates and value price/earnings to growth ratios of 0.46 and 0.33.

600 Group’s current market cap of £27.5 million represents a shade over a third of last year’s sales, decidedly ungenerous given that the net assets of the business grew by £4 million to £50.4 million last year and profitable progress is now in play.

‘We own all our own buildings freehold and have around £50 million of net assets,’ says Dick. ‘We’re financially extremely sound, we have blue-chip institutional shareholders and we actually have a pension surplus.’

This article is from the October 2007 issue of What Investment.