Lancashire-based safety switches specialist Mechan Controls has rewarded shareholders with a 25% increase in the interim dividend to 0.625p following the release of a healthy set of half-year results.

During the six months to 30th June 2010 the company reported a 4.5% increase in sales to £1.36 million on gross margins that were 20 basis points higher at 52.6%. Administrative costs fell slightly by 1.5% to £0.38 million boosting earnings per share by 14.8% to 10.1p.

No balance sheet or cash flow statement was published with the accounts but we note that the firm was in a comfortable position as at 31st December 2009. Net current assets at the 2009 year-end stood at £0.46 million and interest payments were covered a substantial 10 times by operating profits.

Commenting on its outlook, the group said it expected continued organic growth over the second-half of the year with it expecting full-year profits (which we take to mean as post-tax profits) to show double digit gains on the previous year.

At the current mid-price of 142.5p, Mechan Controls is capitalised at £2.85 million. Assuming that earnings per share increase by 10% on the 15.04p achieved over the 2009 financial year current year earnings should come in at 16.54p valuing the shares at 8.6 times 2010 earnings. A solid outlook for the second half, the continuing operational progress being made and the improving income prospects mean that we continue to favour the shares.

That said, investors should be aware that there is a large 135p/150p spread and since there are only 2 million shares in issue (with directors holding substantial stakes) trading in the shares is likely to be illiquid. Nevertheless, Mechan Controls is a buy.

*Mechan is a corporate client of RSH, the ultimate owner of this website, and Worship Street Investments which owns shares in Mechan Controls is advised by a subsidiary of RSH.