The co-manager of a range of SVM funds including SVM UK Opportunities and SVM UK Absolute Alpha says there are a number of reasons for these expectations.
“The US companies, and indeed most of the Europeans, trade on higher multiples than the UK peer group as the market has yet to discount the improvements many of the UK companies have made to their businesses. If the market will not give the UK entities higher ratings then trade buyers - who better understand the competitive position - will,” he says.
“In addition, UK engineers, despite being domiciled in the UK, are actually international businesses with only circa 15 per cent of their earnings coming from the UK. The ongoing depreciation of sterling makes these businesses much more attractive to foreign acquirers.”
Veitch also says that while UK engineers are small relative to many US companies, whose market caps are in the billions of dollars, they have strong corporate balance sheets giving them significant financial firepower. M&A activity so far this year has already seen US company Emerson bid for Chloride, whilst Delta has been acquired by a foreign competitor.
Veitch predicts Invensys could follow after annual results saw a rise in pre tax profits to £179m from £165m in the year to March 2010. The company is far from being the most expensive in its sector on a historical price to earnings ratio of 12.92 as of the afternoon of 25 May 2010. The share price then was up 22 per cent over 12 months to 270.4 pence, although still a way off its 12 month peak price of 348.9 pence, achieved at the end of March this year.
Invensys' total return, 1yr
Source: Financial Express Analytics
Data from financial express analytics suggests there are eight IMA UT and OEIC funds with exposure to Invensys, with weightings ranging from 1.60 per cent to 4.91 per cent.
| Fund | Holding weighting for Invensys |
| Cler Med - UK Focus | 3.50 |
| JPM Inv - Europe Recovery | 1.60 |
| Liontrust - European Absolute Return | 2.43 |
| M&G - Recovery | 2.10 |
| Saracen - Growth | 4.91 |
| Schroder - UK Alpha Plus | 3.40 |
| Stan Life Inv - UK Ethical Trust | 1.90 |
| Threadneedle - UK Accelerando | 3.90 |
Invensys has put its boost in profits down to an increase in orders from emerging markets, which account for 40 per cent of its order book, with recent contract wins for work on Chinese nuclear power stations and Brazilian metro systems. Emerging markets such as China have been undertaking a number of infrastructure projects in recent years, which can only be seen as a benefit for the industrial sector, especially engineering.
Premier Asset Management’s China Enterprise fund manager Fen Sung says consolidation is inevitable as economies grow.
“It is essential for China to consolidate to be able to compete with global companies. In the past any major engineering projects would be given to global giants such as Siemens and GE, but nowadays domestic companies are capable of doing the projects,” he says.
Sung says China is a developing economy and vast amounts of investment are required to be spent on all levels of infrastructure, from water treatment to the building of train networks. Opportunities in this area will continue throughout the year, he says.
“This will provide opportunities for companies in this sector to continue growing. China is still a manufacturing nation, but with the current turmoil in the EU area, it is a good sector for the Chinese government to promote, as exports will inevitably be under pressure if there is a slowdown in EU growth.”
“During my last visit to China in October 2009, I visited engineering companies which were actively competing with global engineering companies. My view is that this will continue as China has around seven million graduates a year, many of whom study engineering.”