Bottom Line: BOC strong long-term

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The Independent Online
THE market's curt response to BOC's mild profit warning was more due to the shock of the event than any fundamental disaster.

The company is one of the world's biggest industrial gases businesses, with a deserved reputation as a conservatively run business. Dull it may be, and so hardly any analyst was prepared for yesterday's low- key disclosure that full-year operating profits before interest would be lower than profits in 1992.

Its nine-month figures to 30 June provided little guidance for the bearish news because they were in line with expectations. Taxable profits rose from pounds 251m to almost pounds 252m on a 12 per cent improvement in turnover to pounds 2.3bn. Even operating profits before interest were up 4 per cent though earnings per share were a shade lower at 33.2p against 33.5p.

However, they masked a sharply deteriorating picture at its healthcare business due to regulatory uncertainty and growing competitive pressure. Although operating profits from the division were largely unchanged at pounds 74m, the full- year outcome is likely to show the adverse impact of the expiry of US patents for Forane, BOC's anaesthetic agent, which currently holds an overwhelming market share.

Generic producers have been moving in fast since it went ex- patent last January and BOC's share is expected to fall to about 50 per cent by the year-end. Although BOC has a new product to replace Forane it is unlikely to contribute profits for about 18 months.

But uncertainty about the US healthcare reforms is also causing a temporary weakness in demand for its other medical equipment. As a result the division is expected to experience a full-year profit decline to pounds 80m against pounds 113m last time.

The second factor pointing to the warning is the continuing tough trading climate worldwide. While BOC's core gas businesses in US and UK operations have not seen any significant upturn, European demand has been slipping significantly.

Not surprisingly the company has been anxious to talk down the market. Analysts are now looking for about pounds 340m before tax this year, rating the shares on 15 times prospective earnings.

At current levels they remain a sound investment for the long term. With interest rates due to fall sharply in Europe over the next few months, BOC should be an early beneficiary of any global recovery. It also has a strong balance sheet and a yield above the market average, amounting to about 4.7 per cent.

Although the shares are likely to mark time until its full-year results are published, any further weakness provides a sound buying opportunity.