Burmah's well-oiled gains

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The Independent Online
Burmah has had to battle with the bears for as long as anyone can remember. Lubricants are mature, they say, which will put the lid on profits; the chemicals business is too cyclical and was bought at the wrong time; and petrol retailing is on a hiding to nothing competing with the hypermarkets' discounts.

All true to an extent, but, as yesterday's 20 per cent rise in underlying profits showed, Burmah is doing something right.

Shareholders certainly have little to complain about with the shares, up 1p to 874p yesterday, trading at twice their level of three years ago.

After an exceptional profit on the sale of a business in Singapore, pre- tax profits jumped from £191.9m to £243.5m. Earnings per share, even stripping out the exceptional profit, were 31 per cent higher at 69.4p. The 32.5p dividend rose nearly a fifth.

The strength of the core lubricants business was underlined by last year's rise in sales from £1.63bn to £1.76bn despite a pretty much stagnant market. Profits were ahead by an even more impressive margin from £154m to £181m.

Castrol is a well-oiled marketing machine and its presence in the exciting growth markets of India and Thailand, both larger now than the UK, and Vietnam, which soon will be, augurs well for margins.

Returns are always a lot fatter for oil companies in the new markets of the east than the competitive, mature western markets.

The cycle also seems to have turned finally for the old Foseco chemicals businesses, acquired in 1990 to much gnashing of teeth. The return on sales and investment is still far from acceptable but a rise from profits of £36.6m to £48.9m after three years of flat returns confirms the business's promise.

What is less clear is Burmah's strategy regarding its liquid gas transport business, its petrol retailing arm and its remaining oil exploration interests, although they are so small in group terms that lower profits from all three are not too much of a concern.

Of more interest to investors is the prospect of earnings growth of over 10 per cent a year for the next five years, according to one analyst, and similar rises in the dividend.

On the basis of a forecast pre-tax profit of £124.4m this year and £139.8m next time, the shares stand on a prospective p/e of 13 falling to 12. Given the steady nature of Burmah's earnings, its strong balance sheet and good cash flow, that is not demanding.

Morgan Crucible

finds its focus

Morgan Crucible has taken to heart criticism of its previous acquisition- led strategy, which led to a string of share issues in the 1980s and left the ceramics group saddled with debts in the early 1990s.

The £57.5m proceeds of the disposal of the Holt Lloyd car care business in August transformed the balance sheet - halving gearing to 36 per cent at the year-end in January - and left Morgan a more focused group.

Ironically, the fruits of the original strategy, to build up world leadership in areas like carbon brushes for electric motors and crucibles for metal smelting, are now starting to show through. Pre-tax profits up from £65.7m to £72.6m in the year to 4 January showed growth in all areas, although the profit from the Holt Lloyd sale of £2.9m and a £1.6m cut in the interest bill helped.

The 13p bound in the shares to 330p yesterday had more to do with the prospects. Boosted by accelerating world economic recovery, the outlook, with orders up 10 per cent, now looks better than it has since the last boom.

Thermal ceramics, the heart of the original crucibles business, raised operating profits from £22.4m to £25.1m last year and the view is good. Price rises are sticking and margins, just below 10 per cent last year, are already through 12 per cent this year.

Carbon, up from £17.3m to £19.5m in 1994, is also riding on the back of firming prices, plus the benefits of past rationalisation. Margins have broken through 13 per cent and Morgan is expanding capacity.

Speciality materials, now shorn of most of Holt Lloyd, are currently basking in similar margins to carbon, leaving technical ceramics the one black spot, after sales were hit by low US defence and aerospace demand. Mr Farmer believes the recent move into semiconductors will offset that.

Nearly half the Holt Lloyd proceeds were spent on three bolt-on acquisitions last month, with the rest likely to be used by the year-end. Profits of around £82m this year put the shares on a prospective p/e ratio of 14. With the 15 per cent margin target now clearly in sight, they are reasonable value, backed by a 5 per cent yield.

Highland spirits fail to excite

Shares in Highland Distilleries, best-known for its Famous Grouse whisky, were caught squarely in the sights of the City's 12 bores yesterday as the company disappointed analysts with a flat 1 per cent rise in interim profits to £23.7m. The price fell 26p to 357p.

Pricing pressures, which have caused havoc throughout the industry, have finally come home to roost. Below- inflation rises in the UK of around 2 per cent have eroded margins, and the problem has been exacerbated because Highland only exports 40 per cent of production against an industry average of 85 per cent.

The results to 28 February were artificially bolstered by customers stocking up ahead of the Budget tax increase on 1 January. As a result, the underlying growth in UK volumes was probably nearer to 3 or 4 per cent than the reported 6 per cent.

Highland is trying to push through price increases in the UK of 3.5 per cent, but it is not clear that they will stick, with Famous Grouse also coming under pressure from United Distillers' smart re-branding of Bell's as an 8-year old, and sales of fillings for blended whisky also under pressure. Analysts responded by downgrading forecasts to £45m, up 5 per cent after last time's 10 per cent rise.

The prospective p/e is 16, a 20 per cent plus premium to Guinness, owner of United Distillers. That looks even more unjustified given a yield of only 2.75 per cent, assuming the 8 per cent increase in the interim dividend to 1.9p is applied to the final payment.