Demerger could improve Burmah's rating

The Investment Column

Burmah Castrol is an odd fish. Neither a fully fledged oil company nor totally a chemicals group, the City habitually equivocates about how to rate this lubricants and industrial chemicals combine. The confusion partly explains why Burmah's share price has underperformed the FTSE All- Share by more than 16 per cent in the past year, despite its consistent ability to turn in respectable results from mature markets while maintaining a high dividend yield.

Excluding a pounds 21m currency hit in the first half, mainly on translation, underlying pre-tax profits for the six months to June rose 23 per cent to pounds 134m. The interim dividend is being hoisted by a chunky 125 per cent as the group tries to pay out as much as possible in the form of foreign income dividends before the Government clamps down on FIDs as part of the changes to advance corporation tax.

The results spurred a 20.5p rise in the shares to pounds 10.50, leaving them on a forward rating of 15, assuming NatWest Securities' full-year profits forecast of pounds 151m is borne out, still behind Shell's prospective p/e of almost 20. One practical solution to Burmah's rating problem, which the company seems unwilling to contemplate, would be a demerger of its chemicals and lubricants businesses. Though margins at Foseco, the chemicals company bought in 1990, are improving, building them to the target 10 per cent level has been slow and has required costly restructuring.

Chemical margins, 9.5 per cent in the first half, have room to improve another couple of points, while chemical operating profits, up 29 per cent to pounds 36m before currency effects, continue to be driven by demand in Asian and Middle Eastern markets. But that depends on continuing economic growth, which is uncertain, given volatile markets in the Far East. Though Jonathan Fry, Burmah's chief executive, says lubricants and chemicals deserve similar ratings, industrial chemicals, supplying the steel and construction industries, looks a shakier leg. Strongly cyclical, it will suffer when the next downturn hits.

Lubricants, though more stable, is a tough business, especially in the mature US and European markets. Growth in lubricants operating profits of 19 per cent in the half year, excluding currency, was solid enough, but persuading customers to stump up cash for engine oil is an uphill struggle. However kind Castrol GTX may be to engines, vehicles are using less oil, and severe price competition from the likes of Mobil means Burmah must spend increasingly large sums, typically 10 per cent of sales, on marketing and advertising.

Sentiment continues to be hit by currency factors, with analysts expecting a pounds 30m hit in the full year, and the shares look unexciting.

Bunzl copes with a double whammy

Bunzl, the plastic plugs to paper plate distribution group, has suffered from being pigeonholed by the City in some pretty unfashionable sectors. Not only has it been hit alongside other paper and packaging groups by falling prices but, with most of its profits coming from overseas, it has had to cope with the double whammy of sterling's surge against the rest of the world's currencies over the past year.

Bunzl has also perhaps found it hard to shake off its image as an acquisitive conglomerate, even under the much steadier hand of Anthony Habgood, chairman, over the past six years.

But that would be unfair. Underlying profits have risen steadily over the period, a tradition continued in the latest half-year figures to June showing a 12 per cent rise in profits to pounds 62.4m. Stripping out the currency effects - nearly all on translation - the rise would have been more like 18 per cent. With the dollar at similar levels to this time last year, the effects of that are likely to be much less in the second half.

But Bunzl's recent re-rating, which has seen the shares soar from below 190p a month ago to 233.5p, down 2p yesterday, is based on acquisitions. The five biggish purchases announced since the beginning of the year at a cost of pounds 185m will add around pounds 360m to sales (which rose 6 per cent to pounds 818m in the six months). The extended acquisition of American Filtrona, the US group originally founded by another branch of the Bunzl family, looks set finally to go through later this month, extending the UK group's strong position in plastics and cigarette filters.

But margins are already high there and it is the recently announced $88m purchase of the paper and plastic disposable plate distribution operation of Unisource Worldwide, once part of Alco Standard, which could really lift the figures. Currently making losses of around $4m a year, the target is to bring margins up to the 7 per cent average of the rest of the disposable division within three years, adding another $21m to the bottom line.

Current year profits of pounds 119m followed by pounds 130m would put the shares on a forward p/e of 14, dropping to 13. That is a sub-market multiple for above average growth. Attractive.

Bluebird's future hinges on Polly

Bluebird Toys remains firmly down in the dumps after a year which has seen a dire profits warning and the shares underperform the rest of the market by 56 per cent. Once a stock market high flyer, the shares peaked at 375p in 1995 but have been on the slide ever since. Yesterday they closed a penny lower at 92.5p.

The shares have been so weak that the management, led by chief executive Chris Burgin, admit they have considered taking the group private. They said yesterday there were no plans for a management buy-out, but a change of heart was possible depending on the share price. Bluebird is now capitalised at only pounds 38m, including more than pounds 12m of cash. For the time being, however, it looks as though more share buy-backs are likely, after three costing a total of pounds 15m in the past 18 months.

Yesterday's half-year figures did not make pleasant reading. Profits for the six months to 30 June fell to pounds 1.9m from pounds 3.1m before. Sales have been hit by destocking in the United States and weak US sales of Bluebird's core Polly Pocket and Disney Tiny Collection ranges. However, the company says the marketing team at Mattel, which distributes the toys in the US, has been changed and higher sales levels are anticipated.

On full-year profit forecasts of pounds 8.5m, the shares trade on a lowly forward rating of 7. Bluebird's future depends on the prospects for Polly Pocket. The company says new launches will drive sales higher. Buying before there is some evidence of that is risky, but the cash provides a cushion and the brave may want to take a punt.

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