Bluechip: P&O sails into calmer waters

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The Independent Online
The Peninsular & Oriental Steam Navigation Company - or P&O as it is less formally known - has come back into favour in recent months.

A cracking set of results in March confirmed the company's new-found status as a successful turnaround stock. The question on investors' lips now is whether management has done enough, or could more radical surgery - such as full-blooded demerger into its constituent parts - yield an even more appetising dish.

Since a low of around 460p in 1995, the shares have come back. They now stand at 612.5p, although they have slipped back in the last few weeks.

Two years ago the future looked bleak. As well as the drag on earnings from a depressed property market, there were accusations that the company had lost its way. The charges seemed to sting chairman Lord Sterling into action.

A raft of new proposals have been announced over the last six months. Bovis Homes, its house building arm, is set to be floated off in the autumn for upwards of pounds 200m. The company has postponed the sale, in the belief that the longer they held it back the more investors would see a business reaping the rewards of the upturn in the housing sector. There is every possibility that the next interim results in September will show a pleasant surprise on the Bovis front.

P&O has a target of selling pounds 500m worth of its property portfolio by the end of 1998. It sold pounds 300m worth in 1996, but with pounds 200m of purchases the net decrease was pounds 100m.

It has also sold pounds 143m of non-core assets. It entered into a 50:50 joint venture with Ned-lloyd, the Dutch shipping group, for its container business at the end of last year. It means P&O has reduced its capital expenditure on the business significantly, and a positive outcome is expected with a strong contribution to the 1998 results.

It also cut a deal with Stena Ferries, the other main cross-Channel ferry operator, to merge their ferry businesses. Clearance from the competition authorities is expected in the next few weeks.

In Australia and Asia-Pacific, P&O's 15 container terminals are pressing ahead, while its cold storage business has been extended into the US. It also has a successful service business doing cleaning and catering contracts in Australia, which recently won an A$1.4bn (pounds 673m) contract from the navy.

The change is apparent in the consensus of forecasts which show profits rising to pounds 350m this year and pounds 460m in 1998.

With the shares on an historical yield of 6.5 per cent - among the highest in the Footsie - they look a decent bet for further recovery. A reasonable long-term buy.

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