Demerger no panacea for BAT's ills

The Investment Column
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The Independent Online
When sentiment turns against a company there is no point fighting it. Markets tend to overshoot in both directions and trying to catch the bottom on the basis of fundamental valuation measures is a mug's game. BAT may look cheap, but so it did in the summer and it will probably look even cheaper in three months' time. These are bleak days for the tobacco industry.

BAT's chief executive, Martin Broughton, came out with guns blazing yesterday, making a string of jaw-dropping remarks about the lack of evidence linking smoking with cancer, heart disease and all the other terminal illnesses the rest of us accepted years and years ago were the inevitable result of addiction to the weed. You have to admire the man's chutzpah in saying these things with a straight face, but the market, normally a good judge of these matters, doesn't believe him.

Since January, BAT's shares have fallen from a high of 579p and yesterday closed another 7p lower at 429p, at which level they yield more than 8 per cent on the basis of next year's forecasts. If you think that is a reasonable compensation for the risks, just remember that the shares, which have already fallen 150p in eight months, only have to slip another 26p to wipe out the whole of that seemingly attractive dividend payout.

BAT has more things stacked against it than almost any other company you can think of. The litigation bandwagon in the States is rolling faster and faster, threatening to flatten everything in its path. Bill Clinton, a determined opponent of the industry, is about to get re-elected. Since the Carter case earlier this year, in which BAT's Brown & Williamson subsidiary was ordered to pay a former smoker's widow $750,000 in compensation, there has been a flood of cases launched in Florida. To cap it all, BAT is a big dollar-earner and it is being hit by the recent strength of the pound.

Against that backdrop it makes no difference that nine-month figures announced yesterday were as strong as ever, with sales of cigarettes to the Third World more than making up for declines in the mature markets of the West. Financial Services, the Eagle Star, Threadneedle and Allied Dunbar combine, is holding up well. The company claims to have ringfenced the troublesome US tobacco arm from the rest of its operations, but nobody seriously believes that an pounds 800m dividend bill would be sustainable if Brown & Williamson went up in smoke.

It is hard to avoid the conclusion that a watershed has been reached in the public's willingness to tolerate the tobacco business and, although the company is plainly considering the option, demerger doesn't look to be any sort of panacea for BAT's problems. Avoid the shares.

Betterware opens new doors

Betterware's shares have well and truly pulled out of the nose- dive they went into after distribution problems hammered the door-to-door sales group in 1993. From a low of 39p hit in March last year, they have recovered to 120.5p after a 2.5p rise yesterday, although they remain some way from the peak of 278p three years ago.

Interim results showing pre-tax profits up from pounds 4.08m to pounds 6.65m in the 28 weeks to September go some way to justifying the rehabilitation of Betterware in the eyes of the City. The comparisons are flattered by the disposal of loss-making businesses, which chalked up a deficit of pounds 492,000 last time, and a pounds 1.25m windfall in the latest period from the repayment of VAT. Stripping that out, the 18 per cent underlying rise remains more than respectable.

But, given the history, doubts will inevitably linger around Betterware. Despite the much-trumpeted move into overseas markets, which started with France five years ago, 85 per cent of the sales and in effect all the profits still come from the UK.

The home market clearly remains healthy, with sales up 15 per cent to pounds 28.3m in the half-year. New management has revamped the catalogues and tightened control of the commission-led sales force.

But a 29 per cent sales increase to pounds 3.7m from foreign businesses, now operating on three continents, failed to show any significant return, even if something is promised for the second half. Andrew Cohen, executive chairman, who with his family still controls the shares, believes world demographics are moving in Betterware's direction. In Britain, an additional 2 million homes expected by early next century should increase demand for home shopping.

The group is setting up in a third Latin American country in March as part of plans to raise overseas earnings to half the total in five years. But distribution half-way across the world may stretch the group, while saturation will become a problem in the UK.

Sales growth of approaching 10 per cent thus far into the second half and lower plastics prices means full-year profits could reach pounds 10.7m, putting the shares on a forward price/earnings ratio of 18. Not to be chased, even if some of the pounds 10m-odd cash pile is again returned to shareholders.

Evans Halshaw lacks volume

Investors in Evans Halshaw may have felt a sense of deja vu after yesterday's profits warning. It was almost a year ago that the West Midlands motor dealer said poor demand for "volume" cars from August had helped wipe out profits in September and October and saw its shares plunge 66p as a result.

Yesterday it was again warning that demand growth had decelerated in the key months of August and September, with volume marques - Vauxhall, Ford and Rover - particularly affected. Given that these represent 62 per cent of new car sales at Evans, it is hardly surprising that margins are under pressure.

House brokers Kleinwort Benson have cut their forecasts for the current year from pounds 13.5m to pounds 11m in response. The fact that the share price damage this time was limited to a 5.5p fall to 248.5p reflects the wide-ranging pruning of the group's 88 dealerships unveiled yesterday by its new chief executive, Alan Smith.

Apart from applying experience gained at other retailers such as B&Q and Boddingtons, Mr Smith's review has been prompted by moves by manufacturers to rationalise the number of distributors they deal with. The quid pro quo is that dealers will be able to operate in larger areas, which should improve returns in the long run. In anticipation, Evans is axing or selling 19 outlets on top of seven already closed or disposed of earlier in the year. That will remove expected losses of pounds 1.3m this year and should deliver annual savings amounting to a further pounds 3m.

Unfortunately, the pain is immediate, with 220 jobs going, pounds 11m in exceptional charges and an pounds 8.8m goodwill write-off to be taken in this year's figures. The continuing fragile state of the retail market means profits forecasts for next year have been scaled back a touch to pounds 15.5m, despite the cost savings. That said, a forward p/e of 7 should reflect all the risks and the promised unchanged final dividend gives a yield of 8.3 per cent. A firm hold.

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