OMEGA INTERNATIONAL (OME)

Previous Stock Tip

These companies are all previous recommendations from the Red Hot Portfolio that I have subsequently recommended and then sold from the portfolio at a later date. By no means are these companies intended to be buy recommendations for you to go out and invest money towards their shares. For the opportunity to start making serious money from the recommendations I am making now, just start your no obligation trial!

OMEGA INTERNATIONAL (OME): We Take a 43% Profit! - Apr 2007

RHPS Recommendation - SELL

Results for 2006 were right up to best expectations, and Omega is now intent on doubling the size of the business by 2010. Earnings per share were 16.1p, and Omega ended the year with net cash on its balance sheet in spite of £2.5m of investment in fixed assets, a tax payment of £2.4m and £2.7m distributed to shareholders in the form of dividends. However, the shares are now on a high rating and after the results four of its directors sold a total of 6,379,600 shares at 300p. We sold on 15 March, taking a 43% profit.

OMEGA INTERNATIONAL (OME): Grabbing more market share - Oct 2006

RHPS Recommendation - HOLD

In addition to an interim dividend of 0.7p Omega will make a special payment of 8p. Omega is now selling through 466 kitchen distributors, and with the most modern production facilities it is fast taking market share from the hundreds of small manufacturers. The expansion of its Doncaster factory will give it the capacity to make sales of £100m – still just 10% of the total market. With the shares well on the way to my 350p target, HOLD.

OMEGA INTERNATIONAL (OME): Excellent Start to Year - Jul 2006

RHPS Recommendation - BUY

At the AGM chairman Bob Murray reported an excellent start to the year and expressed “total confidence” in Omega’s strategy and prospects for the Group. BUY

OMEGA INTERNATIONAL (OME): A Classic Growth Stock Going Cheap! - May 2006

RHPS Recommendation - BUY

Imagine a penny share that doubled its turnover between 2000 and 2005. Gross profits nearly trebled. Profits after tax have risen 24 times over to £3.28m.

What is this amazing business – some high-tech wizard? Or a mining stock riding the resources boom? Perhaps it boosts the numbers year-on-year by buying other companies...?

No, no and no! This company operates in what looks like an overcrowded business that you probably think of as old hat – fitted kitchens. But Omega International is living proof that you don’t have to do anything desperately clever to make good money. Just make sure you do it better than the competition.

Growing its share of this £1bn business

The housewife’s wish for gleaming surfaces and sleek kitchen units was first granted back in the 1970s. Since then lots of small companies have come forward to satisfy Britain’s demand for stripped pine and marble tops. Now there are no fewer than 850 suppliers of fitted kitchens in the UK. The total market, at the prices charged by the manufacturers, is worth £1bn per year.

But 95% of these suppliers have turnover of less than £5m per year. Some of them are one man bands turning out no more than two or three kitchens a month. All very “handcrafted” of course – but hopelessly inefficient.

Then there are mass producers supplying the cheap end, the so-called “sheds” of MFI and B&Q. Up at the posh end of the market there are the likes of Smallbone. But my first Red Hot tip for you this month, Omega International, targets the mid-market consumer, those people ready to spend about £6,000 to £20,000 on a new kitchen. It’s a big market with big margins.

Omega’s biggest single customer is John Lewis, the department store. It also supplies independent kitchen retailers, providing them with marketing material, training them to use special design software, and then delivering the chosen units either to the retailer or to the customer’s home. At that moment the retailer becomes responsible for installation and after-sales care, leaving Omega to bank the cash.

Reflecting the efficiency of its operation, Omega makes 96% of its deliveries – complete – on time and first time. That’s miles better than the industry average.

It supplies only its own brands of Sheraton, Omega and Chippendale. They are designed and manufactured with state-of-the-art equipment at a purpose-built factory in Doncaster, close to the M18 motorway.

Expert management with a simple story

Last year output increased by 9% without any additional staff. Now Omega is embarking upon a £4m investment programme to increase the factory’s capacity by 50%. It’s due for completion at the end of this year.

Omega’s success comes as no real surprise, given the experience of its directors. Chairman and 57% shareholder Bob Murray was joint founder of the highly successful Spring Ram kitchens and bathrooms group back in 1978. He worked there until 1990 with both Omega’s chief executive Francis Galvin and operations director, Newton Winfield. They have been in the industry since its birth, and know it inside out.

The non-executives on Omega’s board of directors are not short of experience either. Kevin McDonald founded another major stock market success story, Polypipe. He’s joined by the renowned cook turned businesswoman, Prue Leith.

Like most of the best investments, Omega is a simple story. It does not need to make acquisitions. It does not need to raise cash. In fact, it paid off all its borrowings last year. Omega can easily finance the extension to its factory all by itself. And despite Great Britain’s much-reported reluctance to move house in 2005 or buy “big ticket” items, it increased sales by taking market share.

What’s more, Omega recently implemented a 4% price rise on its kitchens, the first for two years.

The figures are testament to the success of this straightforward business model. Increasing efficiency and economies of scale have seen profit margins steadily widen over the last four years. Omega expects this trend to persist in 2006. In short, Omega has all the financial characteristics that I look for in a great growth stock. But what makes it even more exciting is the size of the opportunity and the valuation of the shares.

Omega has just 2% of the market for fitted kitchens. Despite having added 130 new outlets in 2005, it sells through only 450 of the nation’s 6,000 kitchen outlets. It plans to double the size of its business over the next five years, but even then it will have barely scratched the surface. Sales are still predominantly in the North and Midlands, although now it is making rapid progress in the South. And as Frances Galvin, the chief executive, told me in his best flat-cap-and-ferret Yorkshire accent, “You southerners have got all the money!”

What about that all important valuation? Well, stockbroker Evolution is forecasting a pre-tax profit of £5.6m this year and £7.0m in 2007. That would give earnings per share of 14.1p and 17.7p respectively. If Omega meets these figures it will have achieved earnings growth of 24% per year over four years. But the “PEG” ratio – the price earnings ratio divided by the growth rate – is only about 0.71. This makes the shares cheap.

RHPS Verdict: Omega is a classic growth stock. It has a proven and highly effective business model, and a clear opportunity to get a lot bigger. It is self-financing – which means it doesn’t have to knock on City doors to raise cash. I expect the share price to double over the next five years. So get in early before those rich southerners in the Square Mile notice what is going on in Yorkshire.

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The figures refer to the past and past performance is not a reliable indicator of future results. The past recommendation highlighted here is a small company share.By their nature, such investments can be relatively illiquid and, as a result, hard to trade. This makes such shares more risky than other investments. Please seek independent financial advice if necessary. These figures do not include the bid-offer spread, unless otherwise stated. Since the service began on 01/12/98 running through to 31/07/07, the average overall performance of the shares recommended is up 19.91%.All gains exclude dividend payments and dealing costs, unless otherwise stated. Profits from share dealing are a form of income and subject to taxation. Levels and bases of, and reliefs from, taxation are subject to change, and depend on individual circumstances. Full portfolio available on request. Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No. 115234.

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