Bottom Line: Ellis achieves the right chemistry

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The Independent Online
FRESH management at Ellis & Everard, the commodity chemicals distributor, has resurrected the company's reputation in the City after a period of ill-judged expansion into specialist chemicals sent its shares and profits into a downward spiral.

Its results for the six months to 31 October provide evidence of rehabilitation at work. Back concentrating on what it knows best, Ellis's pre-tax profits rose 30 per cent to pounds 8.5m and the dividend has been lifted by 9 per cent to 2.45p.

Ellis benefited from a bit of everything during the period: currencies added pounds 500,000, sales picked up, prices held and a tight rein was kept on costs.

Shares rose 4p to 241p. Assuming the group makes full-year taxable profits of pounds 16m, the stock is trading on a prospective earnings multiple of 18 - some way above the sector average that is itself some way ahead of the market as a whole.

The prospective yield of 4 per cent accounts for some of the high rating. The company has also gained followers now that its profit base appears more reliable. There are obvious attractions in cyclical chemicals stocks as well - exposed to the US and the UK, Ellis can reasonably expect some help from reviving economies.

However, the shares are also being supported by hopes that commodity chemical prices, currently near an historical low, will inevitably increase. This would help Ellis because it earns its money in proportion to chemical selling prices. The higher the price, the bigger Ellis's cut.

Chemical prices are depressed because too much production is chasing too little demand. In time prices may rise.

But the experience of steel and bread producers - both also plagued by over-capacity - suggests the wait may be long and the results not entirely satisfying. Patience is required with Ellis shares but the yield is a compensation.