BP perfects high-octane recipe

BP is fast becoming an example of how to turn a basket-case around. Three years ago, nobody had a good word to say about a company that was overspending, not generating enough cash, looking at the oil price through rose-tinted spectacles and distributing too great a share of profits to shareholders.

Since then, Sir David Simon, and latterly new chief executive John Browne, have worked wonders, cutting debt, improving productivity and, it has to be said, riding a bit of luck. Their good work has been reflected by a share price that has outperformed the market by 65 per cent since August 1992 but arguably has still to reflect BP's bright growth prospects.

Half-time figures yesterday showed that not everything is going the company's way. Refining margins remain very tight, although well above the abnormally low returns achieved in the first quarter. Capacity continues to come on stream too fast, undoing the helpful contribution from rising volumes.

The oil price, too, while better on average than a year ago, and higher than in the first quarter, has fallen from its recent peak as the supply of crude has outstripped firm product demand. It is currently at the lower end of BP's planning range of between $16 and $18 a barrel.

Everything else, however, looks as good as it has for a long while, and the targets set three years ago after the departure of Bob Horton look like being achieved well ahead of schedule.

Rolling four-quarter profits have been rising every quarter since the first half of 1992, despite a steady decline in the oil price during the 1990s. In the upstream exploration and production division, net income per barrel of oil is now well ahead of BP's peers; return on assets in the capital-intensive refining and marketing operations is in line with the pack; and in chemicals, where BP has underperformed for years, it is now performing as well as its best competitors.

All those factors created the conditions for a much bigger rise in dividend than the market had been expecting. At 4p a quarter, the payout is now close to the 4.2p BP was paying before the dividend was halved three years ago.

Despite all the good news, BP still trades on a discount to its peers on a number of valuation measures. It has a lower price-to-cashflow ratio than the other integrated energy companies, trades on a lower p/e ratio and, thanks to the rising payout, is fast catching up in terms of yield. The shares have had a fantastic run over three years but have not yet run out of steam.

Wilson warning

signals the end

Tarmac pulling out of housing was bad enough, but a profits warning from Wilson Bowden, perhaps the sector's best performer, is the clearest message so far that the industry has ground to a halt.

It is tempting to suggest that yesterday's statement was another piece of characteristic gloom from chairman David Wilson, but his comments were unequivocal. Hindsight is a wonderful thing, of course, but evidence was already piling up five months ago that Wilson Bowden's impressive recovery from recession was coming to an end.

Full-year figures for 1994 were excellent, but Mr Wilson suggested in March that flat house prices were all that could be expected this year and margins would come under pressure from rising building costs and higher land prices.

Even five months ago, volumes were patchy with good progress in some parts of the country undone by sluggish sales elsewhere. Those good figures saw the shares bounce by an anaemic 4p to 326p despite falling 43 per cent over the previous year, so it is little surprise that yesterday's confirmation that the cycle has peaked should wipe 28p off the shares to 343p.

The malaise afflicting the housing market has been well-rehearsed - uncertainty over interest rates, the whittling away of mortgage interest relief and the proposed elimination of guaranteed mortgage payments for the unemployed have conspired to wipe out what fragile confidence was returning to the market last year.

That is tough luck for Wilson, which handled the recession better than any of its peers. Even in the thick of the slump, return on sales never slipped below 13.5 per cent and the balance sheet remained strong with gearing at the end of last year 7 per cent.

Maintaining a land bank of more than 10,000 plots, or five years' supply, meant Wilson did not have to buy inflated land when the market got over- excited about recovery in 1994. It was shrewd enough to change its mind on pounds 20m of acquisitions in last year's second half. But, as the shares found yesterday, it is impossible to buck the general direction of a market and the recent flurry of bad news for the building sector means its underperformance is likely to continue.

At this stage in the cycle, shares should be trading at a substantial discount to the rest of the market as expectations of falling profits are fact- ored into prices. If Wilson makes pounds 32m this year, the shares will trade on a prospective p/e of 15. Even after the fall, that is demanding and the shares still look expensive.

Microfocus only for the brave

Investors in Microfocus have over the past five years grown used to wild gyrations in the share price of one of the most volatile stocks on the market. The company, which yesterday announced losses of pounds 4.5m for the first six months of 1995, has marched its shareholders all the way to a peak of pounds 30 only to march them all the way down again.

One of the darling stocks of the early 1990s, the British-managed but mainly US-focused developer of software soared to its recent high in early 1993, on the back of an impressive client list and the company's expertise in the mainframe computer sector.

It all went terribly wrong soon after, as the strong growth in so-called network servers began to whittle away at Microfocus's core markets. The stock plunged as low as 695p by this April, recovering to just under 800p earlier this month.

Microfocus reckons it has turned the ship round and pointed it in the right direction. The market's reaction yesterday, pushing the shares down from 790p to 725p, suggests its enthusiasm is not universally shared.

Guessing how well computer software companies will do is notoriously difficult. The company argues it can make good money helping clients move from mainframes to network servers, linking chains of personal computers. At the same time, it is concentrating on developing new software products, and hints that the fruits of an aggressive research and development spend in recent years will soon show through.

The team that took charge in 1994 is certain the good times will come again. Many mainframe users, they claim, don't like the idea of abandoning all their systems at one go, and will still need Microfocus's expertise in "re-engineering" old processes. Investors will be wise to wait and see.

COMPANY RESULTS

Turnover pounds P/Tax pounds EPS Dividend

Barclays (I) - (-) 1.125bn (1.035bn) 42.8p (40.6p) 9.5p (8p)

BPP Holdings (I) 30.2m (24.7) 4.1m (3.5m) 9.4p (7.7p) 3.6p (3.1p)

BP (I) - (-) 1.1bn (813m) 19.9p (14.9p) 7p (5p)

Caverdale Group (I) 90.7m (48.3m) 2m (1.3m) 0.69p (0.55p) 0.12p (0.1p)

Cordiant 374.7m (379.4m) -29.6m (15.3m) -16.6p (2.9p) - (-)

Epwin Group (I) 33.4m (29m) 2.6m (2.5m) 8.2p (7.5p) 2.9p (2.7p)

Henderson Admin (Q1) - (-) 4.1m (5.3m) 12.6p (16.5p) - (-)

Holliday Chemical (I) 82.3m (62.9m) 10.95m (9.8) 7.6p (7.5p) 2p (2p)

Kay's Food Group (F) 9.1m (-) -1.1m (-) -2p (-) - (-)

Mid-States (I) 40.9m (36.8m) 2.45m (3.3m) 3.2p (4.8p) - (-)

Rea Bothers (I) -(-) 677,000 (621,000) 1.16p (1.13p) 0.5p (0.5p)

Spring Ram (I) 137.1m (128.2m) -17.3m (-1.1m) -3.5p (-0.3p) - (-)

(Q) - Quarterly (F) - Final (I) - Interim

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