Exports give Highland a lift

The Investment Column
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The Independent Online
After years of cut-throat competition in the whisky market, Highland Distilleries is at last seeing glimmers of hope.

Orders for new fillings, the whisky Highland sells to other blenders to put into their own brands, are up 31 per cent.

More importantly, last month Highland pushed through a 30p price rise on its mainstay Famous Grouse brand taking it to pounds 12.29 a bottle, thereby maintaining the premium over the best-selling Bell's, owned by Guinness.

At the same time, Grouse has seen sales increase in each of the first three months of 1996 and has raised its market share from 13 per cent to 13.7 per cent. That sort of performance holds out the promise that the industry's stocks are now moving into better balance, raising hopes that the cycle may at last be turning up, which should benefit premium brands such as Grouse.

But Highland is by no means in the clear yet and yesterday's results show how bloody things have been. Pre-tax profits slid 6 per cent to pounds 22.2m in the six months to 29 February, after the operating result nudged ahead 1 per cent to pounds 13.8m.

Grouse, which contributes 45 per cent of Highland's bottom line, had a thin time of it, with profits sliding pounds 1.5m in the UK after it was forced to join in the hefty "promotions" offered by its rivals.

This sort of discounting is something that has been eschewed by Highland in the past, but its prices clearly moved seriously out of line last year, causing its market share to slump to 12.1 per cent last spring.

Management did well to recover the lost ground in the second half, without having to discount at Christmas, and end up with a maintained market share of 13 per cent in the first half.

Highland sees scope to increase its share of the non-pub market south of the border and last year's acquisition of Black Bottle from Allied Domecq should help.

But even if the British market, which fell 6 per cent last year, is now on the turn, it remains uninspiring, with supermarkets still calling the shots.

Highland's launch into the highly competitive gin market is unlikely to change that view, so the excitement must remain in the scope for promoting its brands overseas.

With increased sales to other distillers, exports made up for the UK shortfall from Famous Grouse in the first half and the launch of Gold Reserve should help penetration of the brand in the Far East.

The problem for investors is that Highland continues to be run like a private company.

It is not clear why the company needs a 26 per cent stake in Macallan- Glenlivet or the cross-shareholding in Remy Cointreau and the unquoted Robertson & Baxter group to cement trading relationships with those companies. But their presence constitutes a potent poison pill against predators.

Greig Middleton's forecast of profits of pounds 42m this year would put the shares, up 8p at 352p, on a forward rating of 16.

High enough.