The Investment Column: Consolidation doubts plague pricey Hanson

Elementis; Laura Ashley
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The Independent Online

Hanson shares continued their march to record highs yesterday after marginally better-than-expected annual results from the building materials giant.

Without doubt much of the stock's recent outperformance has been triggered by ongoing speculation about a possible takeover of the firm.

Given RMC, Aggregate Industries and BPB have all been swallowed by larger rivals in the past 12 months it is no surprise that Hanson is being talked of as the next mostly likely to lose its independence.

The latest bout of bid talk seems to have been prompted by news this month that the company had substantially reduced the costs of its US asbestos-related damage claims. By securing a settlement with its insurers, Hanson cut its annual bill - the bulk of which relates to legal costs - by 20 per cent to $48m (£27m) and stock market investors view the deal as making the group more desirable to a predator.

Nevertheless, there is no certainly that Hanson will be included in the consolidation of the global building materials sector, and in the absence of a bid the group's shares look a tad expensive.

Yesterday's full-year results saw the company boast of a 24 per cent jump in pre-tax profits to £429m. But, at 710.5p, Hanson shares trade at about 14 times forward earnings. For a cyclical business like Hanson that is too high. Sell.

Elementis

There was yet more good news for Elementis shareholders yesterday. The chrome and speciality chemicals maker reported a 77 per cent rise in annual operating profits to £20.3m and a 7 per cent rise in sales to £440m. For 2005, investors will have ended up getting 2.2p a share in dividends, with most analysts expecting progressive rises on this front over the coming years. Elementis has also seen its pension fund deficit fall by £20m to £62m.

The group has been on the up ever since the activist shareholder Hanover Investments took a 15 per cent stake late in 2004. It subsequently parachuted its own management team intothe company and pushed through a restructuring which is starting to bear fruit.

The reform process is ongoing and will focus on Elementis's speciality chemicals division. An update on this is expected by the end of March and should see the company consolidate its portfolio and focus it on higher-margin products. This could well act as the next driver of profit upgrades at the group.

One area of slight concern is the effect rising energy prices are having on the business. The group's fuel bill has jumped by 25 per cent over the past year. To counter this threat to profits margins, Elementis plansto raise selling prices for chrome by 10 per cent this year.

This time last year Elementis shares traded at about50p, and this column argued that they were worth holding on to.

Yesterday, the stock rose 2.25p to 78.5p in response to the results, but investors would be wrong to cash in their chips just yet, especially given the prospects for further earnings upgrades. Hold on to Elementis for more gains.

Laura Ashley

Could a turnaround be finally on the way at Laura Ashley? Lillian Tan, the retailer's latest chief executive, has been busy moving the group's focus from fashion to home furnishing, and a trading update to the City yesterday seemed to indicate that the strategy is starting to pay off. Ms Tan reported that Laura Ashley had finished the year "strongly", with positive like-for-like sales during the final quarter in home furnishings.

And things also seem to be looking up at the streamlined fashion side of the business where new ranges have proved to be a success. As a result, profits for the year just gone are likely to come in slightly above current City forecasts. In response, the broker Seymour Pierce has raised its pre-tax profits forecast from £4.5m to £5.5m, although it pointed out that even after the upgrade Laura Ashley shares trade at more than 30 times forward earnings.

Clearly, the business is going in the right direction but, as the old saying goes, one swallow does not a summer make. For now, the shares are just a hold.

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