Elementis plunges on profit warning

Investment: Chemicals specialist runs into trouble after selling off other businesses
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The Independent Online
ELEMENTIS, the company formerly known as Harrisons & Crosfield, yesterday shocked the stock market with a profit warning just as it completed its transformation into a pure speciality chemical group.

Shares in Elementis, which changed its name earlier this year after selling off its timber and pet-foods business, lost 27 per cent of their value as the company warned that demand for its chemical products had suffered a slowdown as a result of the Asian crisis and destocking in the aerospace industry.

The warning came as Elementis sold BOCM Pauls, its pig production and animal feed division, to a management buyout team backed by Electra Fleming, the venture capital group, for pounds 60m. The sale, which triggers an pounds 11m exceptional loss, completes Elementis's year-long conversion from a sprawling conglomerate into a company concentrating on speciality chemicals.

The strategy has largely won the support of the City. In retrospect, however, Elementis could hardly have chosen a worse time to make the switch. As yesterday's warning made clear, demand for both its main product lines has taken a hit in the second half of the year.

Sales of chromic oxide, which is used in the production of super-alloys for the aerospace industry, have been hit by destocking. Meanwhile slower demand for paints in the US has hit the group's pigments division. The shares dropped 21p to 75p.

Lyndon Cole, the new Elementis chief executive who was brought in from General Electric of the US earlier this year, said the poor performance had nothing to do with the company's restructuring. "It's purely down to economic factors feeding through," he said, adding that he expected some improvement in trading in the first quarter of 1999.

But analysts were dismayed. "This profit warning has come as a bolt from the blue," said Jeremy Chantry, chemicals analyst at Credit Lyonnais Laing. He now forecasts pre-tax profits of pounds 50m for the year to December, with a small rise to pounds 55m next year.

Michael Eastwood, analyst at Dresdner Kleinwort Benson, said: "Everything is going wrong. The environment is appalling."

Despite the disappointment, few observers felt the need to question Elementis's strategy of concentrating on chemicals. "Anything is better than pigs and animal feeds," said Williams de Broe analyst Peter Cartwright. "At least they've got one foot out of the mire."

The share price drop might even make Elementis a bid target. Britain's speciality chemicals sector has been seen as ripe for consolidation for some time, as large chemical companies seek to add new products to their portfolio by snapping up smaller niche players. In the past year a number of smaller companies such as Allied Colloids, Courtaulds and Inspec have been taken over. "Elementis is now quite a tasty morsel," one observer said.

However, analysts played down the likelihood of a bid, pointing out that Elementis's chrome and pigments divisions would each appeal to very different buyers. "Even at the reduced share price one expects dullness for some time," Mr Chantry said.

Mr Cole said the temporary shortfall would not deter Elementis from investing in its businesses. "The company's divisions have number one or number two positions in their respective markets," he said. "At this point in time the focus has to be developing these businesses."