Demerger was not a winning formula at Courtaulds

The Investment Column
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The Independent Online
The urge to demerge has suddenly become unfashionable and it is not hard to see why when pioneers of the genre, like Courtaulds, have done so little for shareholder value some seven years after doing the splits.

Cutting away its currently troubled textiles arm in 1990 has not saved the chemicals rump of the business from a vicious business cycle. Courtaulds went through the mill last year as key raw material prices doubled or tripled. They have since come back to normal, but although acrylics are now definitely in the recovery ward, viscose demand is still in the doldrums, with only the faintest glimmerings of a pick-up as yet.

But the slippage in Courtaulds' profits from pounds 67.8m to pounds 64m in the half- year to September is more complicated than that. Stripping out disposals, underlying operating profits from continuing businesses were up pounds 5m at pounds 80m.

Despite the problems of viscose, the fibres and chemicals division still recorded a 13 per cent increase in operating profits to pounds 27m and there are clear indications that things are moving in the right direction for the group.

The main coatings and sealants business was hit by one-off factors which should not repeat themselves and Courtaulds' leading positions in aircraft coatings and sealants should allow it to cash in next year on the current surge in aeroplane orders. Boeing alone, where Courtaulds is the dominant supplier, expects business to soar by 55 per cent.

But the real story at Courtaulds remains a long-term one. The Far East consistently notches up profits growth of 15 per cent as the group continues its drive into the region, with businesses like marine and powder coatings and toothpaste tubes all building new facilities there. Next year they will be joined by the third production plant for Courtaulds' Tencel "wonder fibre", now showing its first profits after a decade of development costing around pounds 300m.

The pounds 150m plant will keep capital spending up at around pounds 200m a year for some time, but Tencel will be making at least pounds 60m by the beginning of the new millennium, which is roughly the profits on viscose Courtaulds has lost since the early 1990s, according to analysts' estimates. If viscose is back by then too, 10 per cent margins may become a reality again.

Meantime, profits of pounds 140m this year would put the shares on a forward multiple of 20. That fully values the prospects, while viscose and currency worries will continue to act as a drag on the shares.

Unigate milks BSE scare

Over the past two years, both Unigate and Northern Foods have gone through the painful process of adjusting their businesses to cope with the rapid decline of doorstep milk deliveries. Plants have been closed, provisions taken and redundancies made. But as the milk industry starts to emerge from the dark days, it seems Unigate holds the stronger position.

There are two main reasons. One is that Northern is more exposed to the weaker commodity prices which have hit the industry this year. While Unigate has been able to use excess butter fat to produce cheese and other dairy products, Northern has been unable to do so and has had little option but to sell its surplus at weaker prices.

Then there is the BSE factor. As a large pork producer, Unigate has benefited from the BSE scare while Northern's prepared foods division took a pounds 3m profits hit on BSE in the first half. It has had to produce a raft of new, non-beef, ready-made meals for supermarket customers such as Marks & Spencer and Sainsbury's.

These two factors held back pre-exceptional profits to pounds 57.7m, up just 1 per cent in the six months to September. It was a tale of two halves as the prepared foods division boosted profits by 24 per cent to pounds 43m while the dairy division saw profits fall 27 per cent to pounds 21.6m.

In both divisions, Northern's strategy is to move closer to its main supermarket customers which account for 43 per cent of group sales compared with 39 per cent last year. The thinking is that as the supermarket giants grab market share, Northern can grow with them.

Assuming full-year profits of pounds 129m, the shares, up 2.5p to 198p yesterday, trade on a forward rating of 12. Hardly expensive but with little prospect of a share buy-back or acquisition, the more lowly rated Unigate looks a better bet.

Tenancies cast off dull image

The City has fallen so heavily in love with the managed pub chains run by companies such as Regent Inns and JD Wetherspoon that it has had little time for the industry's country cousins in the business of operating tenanted estates. Compared to the heady ratings they have given to managed groups, investors have been prepared to pay a relatively stingy multiple of earnings for tenancies.

Slowly, however, it is dawning on some that tenancies have their attractions and, as a low-risk way into the sector, they have gained some support in the past year since Enterprise Inns and Century Inns came to the market. Century, which reported figures yesterday, has been the less exciting investment of the two, but even so has given shareholders a return of more than 30 per cent over the 12 months.

Pre-tax profits in the year to September of pounds 7.1m were 23 per cent higher than in the comparable period, struck from a 13 per cent rise in sales to pounds 24m from its portfolio of 342 pubs, mainly in the North-east and Yorkshire. A final dividend of 4.5p made a total for the period since flotation of 5.75p.

Tenancies have developed a dull image, thanks largely to the years during which the big brewers used them as cash cows to fund investment in their managed pubs. As a result they were underinvested and often shabby. Properly run and maintained, however, tenancies can be high-margin, stable businesses.

Everything has its price and at 165p, unchanged yesterday, Century's shares trade on a prospective price-earnings ratio of under 11. That is cheaper than Enterprise and a snip compared to the glitzier managed chains whose multiples of more than twice as much are in danger of putting managements on a dangerous acquisition-led treadmill. Good value.