Ellis rides the chemical bronco

The Investment Column

For a company ostensibly exposed to the vagaries of the chemical price cycle, Ellis and Everard's track record is second to none. As Jonathan Taylor, chairman of the Bradford-based chemicals distributor, highlighted yesterday, earnings per share and pre-tax profits have almost doubled in the last three years, a period which has seen massive swings in chemicals prices. The share price has responded accordingly, nearly doubling from a low of 153p at the end of 1992 to 282p yesterday.

Results for the year to April once again make impressive reading. Stripping out a one-off pounds 7.7m charge taken on last year's sale of a swimming pool equipment and food and drink hygiene business, pre-tax profits rose 22 per cent to a record pounds 25.6m on turnover 11 per cent up at pounds 571m. Earnings per share were 8 per cent higher at 20p, while the 9.2p payout is a tenth up on last year.

The sales figure includes a maiden pounds 12.7m contribution from acquisitions, including Rhode Island-based George Mann which made Ellis the fifth-largest chemicals distributor in the US. Almost half of profits come from across the pond. All told, five businesses have been bought so far this year and should add pounds 60m to turnover.

Cost control is another key to Ellis's success. Despite the increased level of business, distribution and administrative expenses rose by only 2-3 percentage points, squeezing operating margins higher.

Tight working capital control and strong cash flow also did wonders for the balance sheet. Gearing halved to 16 per cent, despite Ellis splashing out pounds 14m on acquisitions.

However, there are several reasons to believe that the recent rapid rate growth is likely to be a little more restrained going forward.

Having re-focused on chemicals distribution and sold off loss-makers, Ellis increasingly relies on corporate activity to drive profits ahead. While the track record in this area is good, the number of earnings-enhancing deals out there is not infinite.

Second, the commodity chemicals cycle is becoming less volatile, making stock profits more difficult to achieve while raising the prospect of stock losses being incurred.

And pushing up operating margins much further will be difficult in an increasingly competitive environment, especially in the US.

Analysts nudged up their profits forecasts for the full year by about pounds 500,000 to pounds 29.5m, suggesting a forward price-earnings ratio of less than 13 with the shares at 282p. That is an undemanding rating, but probably is an accurate reflection of more subdued prospects going forward. Hold.