BLUECHIP: Castrol well oiled for future

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The Independent Online
The view from the bridge at Burmah Castrol must look fairly enticing. Figures for the last five years have been excellent: profits have more than doubled, sales continue to rise, and the dividend has increased without fail. So it must remain something of a mystery to the captain and his crew that their progress seems to count for little among investors.

After hitting a peak of 1,146p in late 1996, the shares have been becalmed as the market has roared away. The reason for the decoupling is sterling; Burmah makes over 90 per cent of its sales overseas, and currency translation costs have reduced profits from those territories.

With sterling looking less confident of its perch at the top of the pile of European currencies, there is a real possibility that the shares will receive an instant boost simply by a fall in sterling. In any case, currency considerations do not reflect at all on the underlying performance of the business, which continues to make solid progress.

The group is now a world leader with its lubricants division, headed by the ubiquitous Castrol brand, where pounds 120m was spent worldwide promoting the name - including pounds 15m for stickers on Williams Formula 1 racing cars.

Lubricants is sometimes condemned as a low growth market, with some justification. Operating profits between 1995 and 1996, for example, fell in Europe from pounds 103.2m to pounds 93.6m, and from pounds 74.2m to pounds 71.5m in North America. Against that, Asia Pacific saw profits rise to pounds 75.4m from pounds 70.9m. Latin America, Africa and the Middle East also turned in good performances for the Castrol brand. Chemicals, which contributes almost a quarter of profits, also has its difficulties. However, there is no denying that the chemicals side, founded on the acquisition of Foseco in 1990 for pounds 270m, has repaid shareholders handsomely. Jonathan Fry, the chief executive, reckons the business would be worth at least pounds 800m if it were to be sold today. With the shares stagnating, they have also picked up the added attraction of a high yield, and currently offer 4.2 per cent - not bad, when the All- Share yield is 3.4 per cent.

Last month, the group made a couple of small disposals, in the shape of two adhesives companies, with the pounds 40m-odd proceeds neither here nor there. While titchy, the deal could also allay worries in the City that Burmah held ambitions to expand Foseco to a larger chunk of the group's pounds 3bn-plus turnover. That would also release some demand for the shares in the months ahead. Interim figures are due in September, and while the market is not expecting a stellar performance, they could still impress. For those with a longer-term view, the shares offer good value.