BP pumps up its performance

The Investment Column

These are happy days for BP. The embarrassment of having to halve the dividend in 1992 is now no more than a bad and fading memory; BP is back as Britain's biggest company; and Sir David Simon, the architect of the dramatic turnaround, is the country's top industrialist, according to a recent poll of fellow business leaders.

The view that BP seems to be pushing all the right buttons was borne out by yesterday's first-quarter profits of pounds 629m (pounds 464m). They broke all records - apart from a freak first three months in 1986 when crude oil prices crashed and huge stock losses sharply reduced the tax charge.

Exploration and production, the main income stream, saw operating profits rise 36 per cent to pounds 737m but it would be too easy to put this down just to a rise in the oil price from $16.72 a barrel to $18.50 during the period.

BP says the higher oil price merely offset falling chemicals margins. Rather, it reckons the $160m underlying improvement came entirely from what it calls self-help. Half of this was due to higher volumes, due to the unusually cold winter in Europe.

The rest came in reduced costs, which, all other things being equal, should flow straight to the bottom line, pushing full-year profits to pounds 2.3bn or above, implying a p/e ratio of about 14.

Even on the chemicals side, where profits almost halved to pounds 128m as rising feedstock prices hit margins, BP appears to be doing better than most of the other oil majors. The outlook here is encouraging, with demand showing no sign of tapering off and only limited capacity coming on-stream.

Elsewhere, the UK petrol forecourt price war took its toll on the marketing side, but better refining margins improved the division's overall profit contribution from pounds 43m to pounds 156m.

The right sort of records are also being broken on the balance sheet. Net debt of $7.1bn, for example, is just 27 per cent of equity - the lowest since 1987. All this, and promises to pay out 50 per cent of underlying earnings to shareholders in the medium term, suggests that the shares are set to continue their recent strong run.

The big cloud is the prospect of sharply lower oil prices if Iraq is allowed to re-enter the world market. Talks are continuing between the United Nations and Baghdad about lifting sanctions, but Sir David thinks a resolution is no more likely this time around and he is factoring in an oil price of $16-$18 a barrel for the rest of the year.

He's probably right - it is hard to see the oil embargo being lifted this side of the US presidential election or until there is a change in the Iraqi leadership. All of which indicates that the shares, which encountered some profit-taking yesterday, down 13p to 569p, look pretty good value.

Chiroscience is still overvalued

The City's ability to suspend disbelief can be a wonder to behold. Promoters with hard-to-verify claims have parted investors from their money for centuries, but the rise and rise of the biotechnology sector has been impressive even by past standards.

Chiroscience is a case in point. Floated at 150p just over two years ago, the shares only broke through their issue price last year, boosted by prospects for its Levobupivacaine anaesthetic following a link-up with Swedish drugs group Pharmacia. For most of this year the shares drifted but since the end of April, in a week, they effectively doubled to 500p after rising 45p yesterday.

That surge has come on the back of the results of pre-clinical trials showing that Chiroscience's matrix metalloproteinase inhibitor against cancer had produced better results at this stage of its development than Marimastat, a more advanced rival being developed by British Biotech. Hopes for Marimastat have given British Biotech a market capitalisation sufficient to put it on the verge of the FT-SE 100 index.

No doubt Chiroscience's success with an MMP-related drug is coincidental, but it has clearly had a wonderful effect on the share price, which has come in handy given that the company is now going it alone without Pharmacia and yesterday announced a placing to raise a net pounds 40.3m. Shareholders are being offered one new share for every seven held at 410p to pay for a pilot-scale drug production facility being sold by E Merck for pounds 5.5m and to garner funds for Chiroscience's development needs for the next few years.

The bull case is that the company's Dexketoprofen pain killer could be launched in Spain soon, making it one of the first of the biotech babes to actually bring a product to market, while its purer, "chiral", chemistry offers lower risks, as it relies on established drugs.

Its existing business has managed to nearly triple sales to pounds 4.96m last year, even if pre-tax losses deepened from pounds 9.23m to pounds 11.6m. But its really new compounds remain around five years from the market and its near-term prospects are likely to be subject to generic competition.

At pounds 413m at the placing price, Chiroscience remains overvalued.

Gus Carter offer is the best bet

The rumoured offer from Stanley Leisure for Gus Carter is probably the best end to an unsatisfactory year on the stock market for the North- east-based bookie. For a company that makes a living reading future probabilities, Carter got the impact of the national lottery on its business spectacularly wrong and without the prospect of a bid shareholders would be looking at a sizeable loss.

Announcing a sharp fall in profits within months of coming to the market a year ago was an embarrassment for both the company and its adviser, Wise Speke, and it was no surprise that the shares sank from their 80p placing price to a low of 49p last November. Bid rumours pushed them up to 78p by the weekend and yesterday's confirmation that the two companies were talking about a price slightly above that put another 6p on the price for an 84p close, 5 per cent above the flotation level.

A takeover of Carter's 72 betting shops by Stanley, which itself runs 400, is the just the latest merger in a continuing consolidation of a hard-pressed industry. With Sunday betting pushing up the costs of running bookies without any appreciable uplift in revenues, it is not likely to be the last. Only the strongest can withstand the onslaught of the lottery, which has radically altered the discretionary spending patterns that determine the profitability of gambling businesses.

The Trewhitt family that still owns a majority of the shares, even after cashing in pounds 2m worth at last year's flotation, will do well enough out of the pounds 13m acquisition not to worry about the pounds 500,000 they wasted on the costs of coming to the market. But plainly a trade sale would have made more sense in the first place and shareholders who bought the leisure industry hype 12 months ago will count themselves lucky to have secured a no-loss exit. Not all stock market mistakes have such a happy ending.

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