WHEN Kingspan Group left the diminutive Unlisted Securities Markets (USM) in London and Dublin, less than two years ago, to join the full listings market, it was valued at just £8 million. After shareholders approve the acquisition of Ward Building Systems today, and the new rights have been issued, it will have a stock market value of some £70 million. That represents a cool 4.4 fold increase. Has it moved too fast?
Acquisitions and the issue of new shares only partly explain the surge in value. Virtually all of the increase, 80 per cent in fact, is directly due to a rise in the share price. Granted the whole market has been very buoyant but industrial shares only rose by an average of 40 per cent, a pale shadow of the 250 per cent gain by Kingspan and all that in just 19 months. That's enough to tickle the fancy of even the hardest nosed investor.
The Murtagh brothers, Eugene and Brendan, the major shareholders, are major beneficiaries and are showing very substantial gains. Apart from a tax free payment of £6.7 million they shared with two other directors from a royalty arrangement, their combined shareholding was valued at £19.2 million (Eugene £13 million, Brendan £6.2 million) 19 months ago.
Now, prior to the rights issue, that is valued at £70 million (Eugene £47.5 million, Brendan £22.5 million), making them among the wealthiest Irish entrepreneurs.
But by not taking up their rights, are they sending a discreet signal to the market that the company may be running out of steam? This might appear to be a valid view, particularly as another director, Mr Eoin McCarthy, sold 340,000 of his shares at 525p each earlier this month.
However, much of the share price rise is understandable. For a start, the shares were undervalued when they were trading on the restricted USM. A full listing, and a subsequent marketing of the company to institutions, gave Kingspan a far larger audience.
But the awakening on investment interest was also backed up by rising earnings. Earnings per share, for example, rose from 14.6p in 1994 to 18.7p in 1995. There could be an almost doubling to 31.8p in 1996.
The takeover of Ward is expected to be earnings neutral this year, but some benefits should start to flow through in 1998.
It is difficult to get a good fix on what type of benefits will come through because there are few details of Ward's contracting business, which Kingspan intends to sell. A short sentence in the document put it this way: "The board does not regard these businesses - Atlas (UK) and Atlas Germany - as part of the core businesses being acquired and will review their future within the enlarged Kingspan Group in the short term."
The contracting business is understood to have generated £35 million sales, or almost half of Ward's total, but accounted for under £2 million of net assets, or just 15 per cent of the total. Also, the contracting business would have been operating on a low profit margin.
It is obviously in Kingspan's interests to move out of this business as soon as possible. A management buyout must be a distinct possibility, but Kingspan should avoid giving loans, or taking staggered payments, as part of a consideration package. A clear cut off is always the more desirable option.
The takeover of Ward will push up gearing to a high 110 per cent. However, strong cash flow should bring this down to 70 per cent by the end of 1997. An amalgamation of Ward and Kingspan should lead to greater sales of their building products and a rationalisation of the operations should reduce costs.
It could add about 3p to earnings per share but that will not come through until 1998. In the meantime, an ex rights price of 519p puts the share on a prospective (1997) pie of 13.3, which despite the strong rise over the past 19 months does not appear too demanding.
