Bottom Line: Burmah Castrol doubts remain

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The Independent Online
WHILE Burmah Castrol's success in lifting profits off a three-year plateau is commendable, it is not enough to remove uncertainties about its long-term future.

Profits rose from pounds 130.7m to pounds 174.9m under flattering new accounting rules. Old style accounts revealed an underlying increase of 8.5 per cent to pounds 179.6m pre-tax. The final dividend was lifted, as usual, taking the total to 25.25p.

The company reckons its skill is marketing and points to the succesful performance of Castrol as evidence. Castrol has taken on its most formidable challenge yet with the decision to launch a marketing campaign for a premium price synthetic motor oil in the US, where consumers are used to paying discount rates. After pounds 6m and five months, initial results are encouraging but the company is taking nothing for granted.

The strategic plan was to apply these marketing skills to Foseco, which Burmah bought for pounds 270m at the end of 1990. But, partly thanks to the recession, the acquisition proved to be mistimed and mispriced.

While Laurence Urquart, the chairman, and his team can hardly be blamed for underestimating the economic downturn, they are opento criticism over their choice of target. Foseco supplies the steel and construction industries; and long-term pressures on the former were obvious before the purchase.

In the event, cost-cutting skills have been in greater demand than marketing ones. So far six factories have been closed and more will go.

Until earnings per share recover - and overtake - the pre-Foseco level, shareholders are unlikely to trust Burmah to take on another target at which to aim its marketing skills. The shares have only recently regained their relative value, having underperformed the rest of the market by 20 per cent in the year following the Foseco deal.

At 750p, up 18p, they are trading on just 13 times earnings, assuming earnings grow at the same rate as last year. That modest rating overstates the company's strategic difficulties, given the recovery potential.