Burmah Castrol motors ahead

The Investment Column
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Burmah Castrol has shown a sureness of touch of late that was not always apparent at the lubricants to printing inks group. It has taken years for Foseco, the metallurgical to building chemicals operation acquired for pounds 259m in 1990, to pay its way. But, with the benefit of hindsight, last year's pounds 100m disposal of the UK petrol business looks masterly in view of the price war raging on Britain's forecourts. Burmah reckons it would be losing around pounds 2m a month if it was still in the business.

The group has continued tidying the portfolio in the first half of 1996. The disposal of fuel operations in Turkey, Chile and Sweden brought in another pounds 89m in the six months to June and threw up a profit of pounds 23.2m. That distorted the half-year figures, which showed pre-tax profits soaring from pounds 117m to pounds 149m. Stripping out the one-off gains, underlying profits were 7.5 per cent ahead at pounds 126m, with earnings per share up 10 per cent to 32.8p. The re-shaping of the business means the group is in effect focused on lubricants and chemicals. More importantly, Burmah is more than ever a marketing operation.

The promotion of Castrol motor oils around the world has been well rehearsed. In the US from a standing start 15 years ago, Castrol has grown its share of a $5bn market from 1 to close to 16 per cent. But having become one of the five big brands, Castrol is finding it harder to make further significant inroads without conceding margin to a cut-throat market. So it has shifted its attack to higher-margin synthetic oils. Early results suggest it may be able to repeat its initial success with the Castrol brand in the US.

Despite falling steel production affecting Foseco's metallurgical sales, group operating profits from the Americas as a whole rose 14 per cent to pounds 42.8m. Of more concern was Europe, where the operating result sank from pounds 56.5m to pounds 52.3m, including flat profits from Castrol. The problems lay in Germany, where not even the oil brand's marketing magic could prevent a 1.5 per cent volume fall. The malaise affecting consumer markets was mirrored in industry, with European steel production slumping 15 per cent in the first half and the UK construction industry in no mood to buy Burmah's up-market Fosroc cement additives.

But German rate cuts this year should feed through to the European economy and, eventually, to demand for Burmah's products. Further out the promise of the group remains in developing markets. Castrol's eastern European volumes jumped 14 per cent, with Asia 10 per cent ahead and still on course to become the group's biggest region. Full-year profits of pounds 276m before tax would put the shares, up 21.5p at pounds 10.70, on a forward multiple of 15. Reasonable value.

A proud show of Ideal Homes

Housebuilder Persimmon was proudly exhibiting its Ideal Homes acquisition yesterday. The pounds 177m deal, part-funded by a rights issue, propelled Persimmon to the number four position in UK housebuilding, giving it greater geographic spread at a time when the property market is showing renewed signs of activity. It also held out the prospect of significant cost-savings and promised to be earnings-enhancing from day one.

Yesterday's better-than-expected interim figures suggest a good start has been made. Duncan Davidson, the chairman, says Ideal Homes has been successfully integrated, with all its sites rebranded and Ideal's head office and six subsidiaries closed, resulting in a one-off exceptional charge of pounds 3m.

Stripping out these costs, Persimmon's pre-tax profits advanced from pounds 9.7m to pounds 14.2m in the six months to June while earnings per share on the same basis rose by a quarter to 6.6p.

Ideal was included for four months, chipping in sales of pounds 74.2m to total turnover of pounds 202.5m. But the main driver behind Persimmon's encouraging first-half performance appears to have been its existing businesses.

Operating in the middle of the market, these benefited from year-on-year price increases of up to 5 per cent for three- and four-bedroom houses in parts of the South-east, though price rises were less marked further north.

Persimmon's landbank also increased to 25,000 plots with planning permission - 1,400 more than in March. Mr Davidson is looking for further land purchases, though the return of land price inflation may act as a constraint if it stretches the balance sheet further.

Net debt post-Ideal remains high at pounds 108m, or 40 per cent of shareholders' funds, and may reach 50 per cent later this year, while the high pay- out ratio - dividend cover is less than two times - acts as a large drain on cashflow.

Brokers raised their forecasts on the figures, with NatWest looking for pounds 29m, up from the pounds 22.8m recorded in 1995. That implies a forward price-earnings ratio of 16 with the shares at 215p, up 1p. While the full benefits of Ideal should be seen next year, the financial risks should not be ignored. High enough.

Bunzl papers

over the cracks

The difficult conditions experienced by Bunzl in the first half of this year clearly suit the talents of Anthony Habgood and David Williams, the dynamic duo credited with reviving the plastic cutlery to cigarette filters group. Pulp and plastic prices halved from the peaks of last year, hitting Bunzl's core distribution businesses.

So the group did well to raise interim pre-tax profits by 12 per cent to pounds 55.8m in the six months to June. Hardest hit in the period were the disposables and fine papers operations, which together represent 77 per cent of group operating profits. In the US, where Bunzl owns the biggest distributor of throwaway plates and packaging to the food industry, prices slumped up to 6 per cent. It also had to cope with bad weather at the beginning of the year, which cost 2 per cent in volume terms.

European fine paper distribution was another area struggling against the tide of falling prices.

Cuts of between 25 and 30 per cent in Germany and Italy left the businesses there only barely profitable.

But it is a measure of tightness of the ship run by Messrs Habgood and Williams, recently elevated to chairman and chief executive respectively, that disposables profits still rose 5.5 per cent to pounds 33.5m in the period, while fine paper held its result at pounds 9.8m.

The future is already looking brighter. Volumes were 3 per cent ahead in disposables in the first half and the second six months will see the first benefits of $100m of extra business won earlier in the year. Pulp and plastic prices are already off their 1996 lows, even if the outlook is a little cloudier. Meanwhile, filters continues to power ahead and pounds 75m of acquisitions in the period have yet to show their mettle, chipping in just pounds 1.5m to these figures.

Full-year profits of pounds 117m would put the shares, up 4.5p at 243.5p, on a market rating of 14. Fair value.

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