Bunzl cashes in on niche control

THE INVESTMENT COLUMN

Since his arrival as chief executive in 1991 Tony Habgood has done a good job cleaning out the stables at Bunzl, the packaging and cigarette filters group. His performance has been reflected in a share price that has tripled over that period.

The tidying up process was largely completed last year when the group disposed of the building supplies division and took the decision to make a pounds 49.7m write down against many of the other acquisitions.

Although the resulting goodwill charge led to a notional loss in 1994, the potential of the remaining businesses showed through clearly in yesterday's interim results.

Pre-tax profits up 52 per cent to pounds 50m were to some extent flattered by comparison with a comparable period depressed by bad weather in the United States and initial losses on a couple of acquisitions that have since recovered. But there was plenty of underlying growth too. Total sales up 25 per cent in continuing operations reflected organic growth of more than 14 per cent.

Part of that reflected Bunzl's ability to pass on price rises of up to 80 per cent for raw materials over the past 18 months or so. More encouraging, in view of those spiralling prices, was underlying volume growth in the latest period of perhaps 6 to 7 per cent and margins raised from 4.6 per cent to 5.8 per cent. Part of the secret of Bunzl's success lies in its commanding position in several niche markets.

The group is now the biggest supplier of packaging for American supermarkets and disposable supplies for contract caterers and number two in the Britain. Bunzl beat the market in the first half by raising volumes 7 per cent in the paper and plastic disposables division and saw profits rise 61 per cent to pounds 31.7m in the process.

One-off factors restrained profits growth in the cigarette filters operation to 3 per cent. But prospects in Bunzl's main market for low tar filters are underpinned by volume growth of 43 per cent in the latest period.

Fine paper distribution to printers, where Bunzl is up against bigger groups such as Arjo Wiggins, is the odd-ball. But Mr Habgood believes not being tied to its own paper mill helps customer service, a view supported by the 15 per cent growth in UK volumes in the first half.

Strong cash flow and the conversion of loan stock has reduced gearing to a modest 9 per cent, leaving the way clear to further acquisitions. The only fly in the ointment is the uncertainty over future prices, but they look to be moving in the right direction. Rivals have posted paper price rises in the autumn, while plastic costs could now start to level off.

After a 0.5p fall to 209p yesterday, the shares stand on a rating close to the market at just under 14 times earnings, based on Panmure Gordon's pounds 104m profits forecast for this year. That seems a bit harsh for a company that should now start to show its paces. For the first time in several years Bunzl has raised the interim dividend, which goes up 11 per cent to 2p.

Burmah Castrol

sparkles again

A low-growth lubricants market, a highly cyclical chemicals arm and a rag-bag of fuel, transport and energy investments is hardly the combination of choice but it hasn't stopped Burmah Castrol producing another set of sparkling figures.

Cheered by unexpected confidence in Europe, where drivers are tinkering with their cars again, and continuing good news from the dynamic economies of Asia, the market warmed to yesterday's interim figures and the shares closed 16p higher at 970p. They have doubled over the past three years.

Post-tax profits of pounds 59.9m, up 19 per cent, were right at the top end of expectations and after a 16 per cent rise in earnings per share to 29.7p, the well-covered interim dividend rose 10 per cent to 11p.

As usual, Castrol drove the figures with perennially impressive volume growth of 6 per cent compared with a world market edging higher at about 1 per cent a year. The differential shows what a fantastic brand Castrol is and is testimony to the company's ability to spot the market's growth spots and take a decent slice before the competition gets up and running.

In India, for example, where the company hung on during a programme of Indianisation of the country's industry, deregulation has allowed Burmah to increase its share from 6 per cent to 15 per cent in three years. Malaysia was another highlight.

The beauty of the lubricants market is that, despite its maturity, margins can always be levered upwards by persuading existing buyers to pay a bit more for a higher-spec product. It makes Burmah's other main division, chemicals, seem a clumsy commodity operation by comparison.

In fact, despite a useful rise in profits from pounds 22.1m to pounds 30m and another rise in return on sales to almost 8 per cent, it is still not clear why Burmah is in chemicals at all. After over-paying in 1990 just ahead of the recession, the long-promised 10 per cent margin (just around the corner we are told again) has been a long wait. It is not apparent that the money couldn't have been a lot better spent invested in Castrol.

The other problem with the chemicals arm is that it dilutes the premium rating that the Castrol business would otherwise merit. On forecast profits of pounds 130m this year (pounds 114m last time), the shares trade on a prospective p/e of 15, about a market rating. With a yield of 4.3 per cent, the shares have finally caught up with events. Fairly priced.

Time to take Bluebird profits

The really attractive present from Bluebird Toys for Christmas 1990 would have been its shares, which have enjoyed a spectacular run.

From 7p almost five years ago, the shares rocketed to 257p this spring, fuelled by a strong performance from the Mighty Max range of boys' toys and, more recently, the Polly Pocket range of miniature dolls.

As with all companies in this volatile sector, the question is whether the magic will last. The toy industry is heavily reliant on the craze- obsessed whims of the pre-teen generation. A massive hit is a licence to print money. A mis-judged investment, or being late on a trend, can take a heavy toll.

Which is why yesterday's announcement from Bluebird is a little worrying. Though profits were up by 5 per cent to pounds 7.6m in the six months to June, sales were down by a similar amount to pounds 38m.

The hot weather hit the traditionally weak summer period, making Christmas trade uncertain to predict as shops will be sitting on unsold stock.

More significant is the rapid decline of Mighty Max, which accounted for a quarter of group profits last year.

Hit by competition from rivals such as Power Rangers and the natural slowdown of a product nearing the end of its life, Mighty Max sales will halve this year and disappear completely by 1996.

Also worth noting are recent share sales by both management and institutions. Torquil Norman, chairman, halved his stake earlier last year. Swiss investor Fransad did the same in February.

Normally that would be a clear signal to take profits, but there are a couple of caveats. One is bid speculation. The company had net cash of pounds 22m at the half-year and could prove attractive to toy giants such as Mattel and Hasbro.

The other is the shares' low rating. On forecasts of pounds 19.5m to pounds 20.5m for the full year, the shares, down 18p to 224p yesterday, trade on a forward price-earnings ratio of just 8.

There could be more growth to come, but taking profits looks the safest course.

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