Costs key to NFC's future

These were appalling figures from NFC, a fact the company admits freely, as new managements are wont to do - it is their last chance to blame someone else. The question facing investors is the extent to which the slump in pre-tax profits in the year to October is a reflection of the previous regime's incompetence or the fundamental unattractiveness of the markets in which NFC operates.

The figures, showing pre-tax profits tumbling from pounds 105.6m to pounds 38.6m, earnings per share a miserable 2p compared to last time's 11.2p and the full-year dividend badly uncovered at 7.1p, are largely irrelevant because, predictably, this was a kitchen sink job, including pounds 35m of exceptional provisions to cover the new chief executive Gerry Murphy's restructuring.

On the face of it he appears to be doing the right things, including a sensible sub-division of the pounds 1bn-turnover Exel Logistics arm into 12 separately accountable operations. There is a realism about his acknowledgement that trading conditions have changed irrevocably from the early years of the 1980s when transport outsourcing was in its infancy and the likes of NFC could charge customers what they wanted.

Now, customers are more sophisticated and the market too heavily supplied for anything but wafer-thin margins. As operating profits of pounds 88.8m on sales of pounds 2.2bn confirm, returns are unappealing. But not everything can be levelled at the state of the market. Sales are not NFC's problem (they rose 7 per cent in the year), but getting a decent return on them and on assets employed (NFC's chosen measure) is a bigger challenge, given the fixed nature of the contracts that are its stock in trade.

Obligations stretching out three or even five years must be met, even if the terms are unfavourable, which means the only option open to NFC is to cut its cloth to match prevailing conditions. A thousand jobs have gone already since Mr Murphy's restructuring began in the summer but many more have come on board with, for example, the joint venture distribution company with Bass. Keeping the lid on costs in a company employing 37,000 around the world is the key to transforming this old paternalistic behemoth into a lean, commercial enterprise.

Profit forecasts were trimmed sharply to about pounds 95m, putting the shares on a prospective price/earnings ratio of 14 at the current 139p, down 10p. If this is a genuine recovery stock that is good value, but in a tough market the risks are high. Fairly priced.