Ellis & Everard back on course

The Investment Column

Chemicals group Ellis & Everard went through a torrid patch in the early 1990s. Profits took a hammering after an ill-judged diversification into so-called performance chemicals like cleaners and aerosols had to be reversed. But the group is now back, firmly focused on its profitable niche of buying bulk chemicals from large manufacturers, breaking them down into smaller lots and selling them on to around 60,000 customers, large and small.

Profits have begun to motor in the last few years, with the last of the underperformers being ditched in 1995, and this year looks set to continue the trend. The pre-tax figure grew a fifth to pounds 15.6m in the six months to October and full-year forecasts were being nudged up close to pounds 30m yesterday. The shares, unexciting performers in recent years, put on 9p to 312.5p on the news, taking them to within a few pence of their all- time high.

That looks fully justified by the potential. The group tends to find the going harder in periods of deflation, so the latest figures are impressive given the overall price reduction of 6 per cent in the period and as much as 20 per cent in areas like polymers. Strong positions in both its traditional market in the UK and the US, into which it moved 15 years ago, means Ellis is winning business from customers like Procter & Gamble and Unilever who are focusing their supply requirements on a smaller number of larger players. This, alongside moves to widen and build the product base into areas like surfactants, food chemicals and solvents, helped send volumes 7 per cent higher in the latest six months, offsetting the price erosion.

The prospects for more of the same look good. Ellis is market leader in the UK in distributing commodity chemicals like caustic soda, nitric acid and phosphates, with a market share of around 30 per cent. But there should still be plenty of scope for expanding the speciality chemical side, while its US share remains a minimal 2 per cent despite being the fifth largest operator there.

Strategic advantage is enhanced by its strong environmental position, while the strong pound, if continued, will slice only around pounds 600,000 from translation of second-half figures. On a forward p/e of 14, the shares are good value.

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