Bottom Line: Hard days ahead for Wickes

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WICKES may be paying its first dividend since it was laid low by the ill-timed Hunter Timber acquisition in 1988 but that does not mean it has put the disastrous effects of that deal behind it.

Both its timber businesses are still making losses and, although it has managed to cut debt from the 1988 peak of pounds 275m to pounds 73.2m, gearing, at 88 per cent, remains uncomfortably high.

Getting the Malden timber merchant business back to profits is likely to remain an uphill struggle. The pounds 2.8m operating loss in the first half was partly due to the costs of experimenting with new formats but it will be some time before the results of the experiments are clear.

Henry Sweetbaum, chairman, is pleased with the results of the Builders Mate programme. But, with only 18 stores and sales of pounds 5m, it is still too small to assess whether it will be able to compete against the likes of Jewson and Travis Perkins. Mr Sweetbaum is confident that its lower prices will win it business although credit, so important to the jobbing builder, will remain a privilege rather than a right.

It has opened a fourth Malden Joinery outlet, its other trial format. But the fact that the latest is completely different to the first three suggests it has still not got the right solution. In the meantime, its 84 traditional outlets will continue to struggle against fierce competition and depressed demand.

The prognosis for Hunter Timber, the bulk supplier, looks better. The pounds 3.8m loss is largely due to the fact that it carries the bulk of the interest bill and masks market share gains. But, until there is clearer evidence of an improvement in demand, competition for business means it will have problems passing on the higher post-devaluation costs.

Wickes' operating profits in Britain rose 17 per cent to pounds 8.3m, on like-for-like sales just 0.5 per cent ahead, as it opened eight new stores. It has also yet to feel the cold winds of the Continental recession; profits there rose 5 per cent and it still plans to open a further four stores this year, bringing the total to 37.

Overall, it expects to open 30 stores this year, which means that capital spending could be 50 per cent above last year's pounds 15m. While sales could improve sharply with recovery so too will the need for working capital, so another rights issue cannot be ruled out.

The City is expecting the real recovery to start showing through next year, when profits should rise from the pounds 18m expected this year to pounds 31m, or earnings of 7p a share. But given that the shares have already outperformed by 35 per cent this year, putting them on a multiple of more than 17 times 1994 earnings, the recovery is all in the price.