Time to exit patchy performer ICI

Safety-first Halma will not set portfolios alight; Jennings pubs group fails to lift the spirits
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The Independent Online

Here is ICI's vision of the future: more profits, better use of resources, lower costs, cash flowing in. This vision is based on "performance transformation rather than portfolio transformation".

Let's cut out the verbiage. What ICI is saying is that it cannot get rid of its worst performing businesses so it will have to do the best it can with what it has got. Or as ICI prefers to put it: "Major divestments are unattractive at present."

Investors should not be distracted by the fact that the one-time chemicals giant chose to put out its strategy update three hours after its third quarter results, as if something momentous were about to hit the stock market fan.

This vision of becoming "a genuine leader in formulation science... bringing together outstanding knowledge of customer needs with leading edge technology platforms" is just a pipe dream, assuming it means anything at all.

Scour the wordy statement and you find that ICI cannot afford to step up investment in research and development. Some businesses will get little or no capital spending, which rather limits their chance of recovery or finding a buyer.

The reality of ICI is that underlying group pre-tax profit was down 13 per cent in the third quarter compared with a year earlier. The major culprits included, yet again, fragrances maker Quest, with sales down 5 per cent and trading profit down 31 per cent. Chemicals business Uniqema fared even worse, with a fall of 10 per cent in sales and 78 per cent in profits. Group debt is still a staggering £1.64bn despite disposals, although it is admittedly well covered. ICI retains great hopes for aggressive growth at Quest. It is one area that is singled out for investment. Uniqema, on the other hand, sells to industry in Europe, which is rather unpromising.

Apart from the patchy performance among its various parts, ICI must cope with a variable geographic performance. North America, which accounts for 40 per cent of sales, shows no signs of growth. Much depends on a continued strong showing in Asia/Pacific.

Such is the reputation of ICI for underperforming that the shares shot up 17.7.5p to 196.5p yesterday on relief that the profits fall was no worse. Take the opportunity to get out.

Safety-first Halma will not set portfolios alight

If you've ever been bounced between the doors of a lift as they try to close, you have Halma to thank for your embarrassment - but at least it will have saved you from nastier injuries.

Halma makes all kinds of safety and accident prevention equipment for homes and companies. These include devices that detect gas leaks for the oil and power industries, the sensors that reopen lift doors, and the humble smoke alarms on kitchen ceilings.

The company yesterday said, ahead of its interim results, that trading in some of its businesses had been good, particularly in its fire and gas division. Halma benefits from having a captive customer base, which must buy its products to meet health and safety regulations in the workplace, and to protect the public from potential damage. Legislation in this area continues to grow, adding to the stable demand for its products.

But markets, even for safety equipment, can stagnate when production levels decline and the global economy slows. Some of Halma's major customers are in heavy industry in the US. This market has contracted in the face of a manufacturing slowdown and overall, the company yesterday said it could see no "discernible improvement in market conditions".

At 141p, Halma is trading at about 16 times forward earnings. This doesn't make it cheap, although some argue that Halma is worth it because its dominant market position gives it pricing power and its margins, at about 60 per cent, are the highest going. But while this business will always produce solid earnings, its growth potential is not exactly a fire hazard. The 4 per cent dividend yield is also pedestrian. Avoid.

Jennings pubs group fails to lift the spirits

If you've seen the film Calendar Girls and have a particularly good memory, you'll remember it was Jennings - the brewer and pubs operator - that helped the Women's Institute distribute their naughty calendar.

Apparently, the idea for the calendar was, in fact, borne in one of Jennings' pubs - The Devonshire Arms - and a promotion featuring the movie has lifted sales of its Cumberland Ale.

The company made a pretax profit of £1.8m in the six months to 30 August, up from £1.5m. Sales were £9.1m in the period, up from £8.8m.

Sales of its Cumberland Ale were up by 24 per cent in the half-year and the company has also signed an agreement to brew and distribute Ward's Best Bitter - something that could prove a fillip.

That brand sold, at its peak, 40,000 barrels a year. To put that in context, Jennings sells about 33,000 barrels. The company also has an option to buy the brand.

For the time being, a bit like the WI, Jennings is sticking with the knitting and plans to carry on spending £4m to £5m a year on snapping up individual pubs.

Current trading is reassuring - with trading in September in line with the board's expectations, with sales growth in line with the first half of the year.

Jennings' broker is forecasting profits of nearly £3m this year, which translates to earnings of about 19.6p a share - putting the stock on a multiple of about 11 times.

The shares, which have rallied sharply this year, and which closed up a penny at 217.5p last night, look up with events for now. Hold.

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