The Investment Column: Umbro sheds its flotation woes

Now's the time to get behind UK Coal - Yule Catto is proving to be a costly cocktail
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The Independent Online

For a company associated with the "beautiful game", Umbro has had a pretty ugly opening match on the London stock market. In fact, it is already one-nil to the City, which forced the sportswear and replica kits company to slash the price of its shares by one-third. Its venture capital backers also had to scale back plans to cash in on their investment.

For a company associated with the "beautiful game", Umbro has had a pretty ugly opening match on the London stock market. In fact, it is already one-nil to the City, which forced the sportswear and replica kits company to slash the price of its shares by one-third. Its venture capital backers also had to scale back plans to cash in on their investment.

The shares were eventually pitched at 100p when they began trading at the beginning of June, and they have been bogged down in midfield ever since. Yet Peter McGuigan, the former Mansfield Town player who is Umbro's chief executive, put in a good performance at the company's maiden results presentations yesterday, and he may start to win over the sceptics.

The trouble with Umbro is that sales of sportswear in the UK, its biggest market, have come off the boil, and the competition with Nike, Adidas et al is ferocious. The company has launched its new Evolution X range to try to improve matters, but it will be a hard slog.

The latest England away kit, premiered at Euro 2004, accounted for most of the 40 per cent rise in earnings that Umbro posted yesterday. Next year sees a new home strip and, God willing, the World Cup in 2006. And Umbro makes replica kits for myriad other football teams whose products are increasingly finding demand across the globe, particularly in football-mad Asia.

Umbro has spent the past few years sorting out its network of overseas licensees, who are permitted to distribute Umbro-branded clothing, and the better quality and higher-margin deals it has agreed will provide a boost to profits for a few years. The focus can now switch to other areas of the business, and in particular the need to design more trendy, expensive gear to freshen up the brand, and to develop more women's clothing. There is also a new US-wide distribution agreement for football boots and trainers with the mighty Foot Locker which will be lucrative.

The City was right to drive a hard bargain at flotation and is now faced with a share that has a prospective dividend yield of 3.5 per cent and reasonable growth prospects. It is worth a shot.

Now's the time to get behind UK Coal

UK Coal is the symbolic legacy of Thatcherism: the rump of Britain's coal industry inside a private company, whose shares are of primary interest not to mining sector investors but to property speculators.

UK Coal's mines continue to show themselves barely economical. Indeed, in the first half of 2004, they lost £14.2m as costs rose, miners threatened industrial action and the company encountered several production problems.

This should be a low point, though, since the worst of the pits have now been closed. The price of coal has doubled in the past year, and will be reflected in new long-term contracts from next year. In addition, UK Coal's competitive position has improved as shipping costs have made imports more expensive.

Bitter experience would suggest investors should not hope for too much from the coal side, even taking into account government subsidies. The real value in UK Coal lies in its properties, which were valued at £133m two years ago (that is £174m minus the large costs of cleaning up these old mining sites) and which are set to be revalued early in the new year.

The company is sitting on 49,000 acres of land and is only starting to scratch the surface of what could be redeveloped. Rental income from sites turned into business parks was barely £2m in the first half. At Orgreave, near Sheffield, it is seeking planning permission for 3,500 homes and an industrial park, and there are similar opportunities for development across the portfolio.

UK Coal's backers might enjoy the sort of of their investment seen by shareholders in the country's ports operators over recent years. That longer-term prospect should figure larger than worries over the short-term progress of the dividend, which had to be held yesterday. At 162.5p, take a punt.

Yule Catto is proving to be a costly cocktail

Chemicals produced by the Essex-based Yule Catto & Co go into products as wide-ranging as surgical gloves, paints, perfumes and prescription drugs. It is a heady cocktail, and the company is suffering one of its periodic comedowns. Sales of one drug ingredient, the ulcer-busting omeprazole, soared last year on its entry to the US market, but copycat competitors have eroded that unique position and the group's interim profits halved, it said yesterday.

It obscured some progress in the underlying business. Investment in new factory capacity in the Far East, South Africa and Saudi Arabia is helping to expand Yule Catto's geographical reach. And there are 22 new drug ingredients in the pipeline. But margins are squeezed by the rising cost of oil and related raw materials - a problem that won't go away until prices stabilise.

A year ago, we said new investors should wait for the dust to settle on the omeprazole issue before buying in, and the shares are 20 per cent lower at 268.75p. Existing shareholders have had a decent dividend (yielding about 5 per cent) to see them through. But the trouble is they still look a touch expensive on a multiple of earnings and, with raw materials prices moving against the company, it remains prudent to wait.

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