For me, the most striking aspect of this month's Bank of England Inflation Report was the view that the UK's debt mountain is set to rise above 100% of GDP (more than £1.4trn). So after the 2010 general election, the average British family will be hit by a double whammy of higher taxes and big cuts to public services. That's bad news for any firm dependent on the UK consumer.
So what's the answer? From an investment standpoint, your portfolio should be weighted towards stocks that earn a large chunk of their money overseas. Take KBC. It's a niche consultant that focuses on the application of advanced chemical engineering and software in the oil refining (85% of sales) and other process industries.
Its client list includes blue-chip petrochemical companies, such as Marathon Oil (US) and Sinopec (China). Typically, KBC is appointed to make plants more efficient, cut energy consumption, raise capacity and/or lower carbon emissions. Its chunky order book as at December was split as follows; 36% Asia, 27% Europe and 37% Americas.
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KBC Advanced Technologies (Aim: KBC)
The past year has been tough. The falling oil price has hit downstream investment; the recession has seen contract delays and cancellations; and sterling has rebounded. This means lower first half profits for 2009. Yet what I like about KBC is that due to its strong cost containment, it has remained cash flow positive (net funds of £5.7m as at December) and is getting new business; last month it won a $10m deal with SK Engineering.
So despite the temporary fog, the longer-term picture looks far brighter. KBC has a first-class position in a growing niche market, and has developed proprietary software (30% sales) that lets it punch above its weight. The City expects 2009 turnover and underlying earnings per share of £55m and 5.9p respectively, putting the stock on a p/e of 6.5, with a 4% dividend yield. At these depressed levels, there's an outside chance a rival could launch a bid.
So how much is the group worth? I'd value KBC on a through-cycle multiple of eight times operating profits. Together with its cash pile, that generates an intrinsic worth of over 60p a share. Assuming trade buyers could extract the usual cost synergies, I wouldn't be surprised if KBC was bought out in the next 12 months for more than 75p. Interims are due out on 3 September.
Recommendation: speculative BUY at 37.5p (market capitalisation £21.4m)
Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments
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