F&C sidesteps exchange pains
The Investment Column
Friday 15 August 1997
Net assets per share in the six months to June rose by 16 per cent to pounds 2.1bn, or 195.4p a share, against an 8.5 per cent rise in the FTSE 100 index. A healthy exposure to the buoyant US market helped even if, at home, F&C's contrarian, value-based investment strategy meant it was underweight in the financials and pharmaceuticals that drove the Footsie.
A reflection of that strong asset growth was a 14 per cent increase in the half-time dividend to 0.8p and a final payout of at least 1.65p. A total of 2.5p is promised, an 8 per cent rise over last year.
Apart from poor stock selection in the UK, the main problem last year was F&C's exposure to the strength of sterling, common to internationally diversified investment trusts. This time, taking out loans in European currencies allowed F&C to enjoy rising stock markets without the pain of exchange rate falls. The policy netted pounds 9m.
Looking forward, F&C's new manager, Jeremy Tigue, refuses to be pushed off course by last year's poor performance and promises to continue the strategy that has served investors so well over the years.
The emphasis will be on maintaining a position in the strong US market. That may make some investors nervous but it is probably the right approach given the seemingly virtuous circle of strong growth and low inflation characterising that economy. Despite indifferent performance from Japan, he is also sticking to that country's world-class exporting companies.
He is testing out new emerging markets such as Russia and Romania and focusing on Latin America, where he sees much better value than in the overheated tiger markets of the Far East, and on continental Europe, where stock markets certainly look much better value than the UK.
Whatever you think of F&C's strategy, it is hard to argue with its long- term performance. Between 1945 and the end of last year, pounds 1,000 invested in Foreign & Colonial, with net income reinvested, grew to be worth almost pounds 1m. Putting that same pounds 1,000 in a representative portfolio of UK equities would have resulted in a fund worth pounds 250,000, while stashing it in a building society would have given you just pounds 18,000.
That is as strong an argument for long-term investment in an actively managed fund as it is possible to make. The attraction of F&C at the moment is that you can buy that sort of potential growth at an 8 per cent discount to the underlying value to the shares in the portfolio. If sterling weakens, as the Bank of England forecast this week, international investment trusts will have their day again. This is a good time to jump on board.
Hanson builds on US operations
Hanson may only be the building materials rump of the recently demerged former conglomerate but it still has a big company ego. It reports quarterly results like a Unilever or BP and releases them at lunchtime to fit in with New York time to satisfy its large group of US investors. Quite a show for a company which is now principally involved in just bricks and aggregates.
Though the demerger happened in February there remains some tidying up to do and yesterday's third-quarter results continued the process.
Hanson is changing its year-end to December to fit in with the rest of the sector. So the key numbers yesterday were the six-month figures to June reported on a pro forma basis. These strip out figures from the Energy Group, which was demerged in February.
These numbers showed a 9 per cent increase in operating profits to pounds 121m and pre-tax profits of pounds 48m. These were struck after exceptional items of pounds 49m, which included a hefty write-off for the sale of Hanson Electrical to CinVen.
But though Hanson remains bullish about prospects, the outlook seems mixed at best. On the plus side, work to re-jig the portfolio is continuing. Talks on selling the Grove Crane business in America are continuing though yesterday the company said it had taken no final decision to sell it. Also in the US, the Cornerstone aggregates business is going well, buoyed by rising demand and increased government spending on road construction. It is in America that Hanson is likely to expand as there are 4,000 aggregates business there, most of which are single quarry operations.
But the news is less rosy in the UK where the operations have seen a "flattening" of demand in recent weeks. A particular concern is the Government's road review which has already seen two big road schemes scrapped.
Hanson shares have had a strong run in the last few weeks, rising from 280p to 328p. They lost 24.5p on profit taking to close at 304p yesterday and on full-year operating forecasts of pounds 253m they trade on a forward rating of 11 falling to 10. About right.
Micro Focus finds safe pair of hands
New management, but the same recovery story, was Micro Focus's line yesterday. The computer software company was at pains to dismiss the surprise replacement last month of Marcelo Gumucio, hired as chief executive to turn the company around less than 18 months ago.
Rumours have it there was a board bust-up over an acquisition Mr Gumucio favoured. While the share price fell heavily on news of that departure, the new chief, Martin Waters, met the City yesterday and came across as a safe pair of hands with oodles of experience in IT.
Happy that the management soft-shoe shuffle had not knocked recovery off track, shares in the group rose 222.5p to 2,162.5p. Compared to a net loss of pounds 9.4m in the second half of last year, the company turned in profits of pounds 3.5m for the six months to July on revenues ahead 21 per cent ahead to pounds 41m.
Revenues for the second quarter were 24 per cent ahead of the first, traditionally the group's toughest period, with product licencing revenue up 40 per cent.
The legacy of Micro Focus, which has suffered from poor product marketing and poorly targeted spending on research, means there is plenty of tightening up to do. Anthony Muller, vice president and finance director, aims to improve operating margins at the company from around 11 per cent to 15 per cent by the fourth quarter.
As a world leader in Cobol, the language of most mainframe computers, the company looks ideally placed to meet demand to solve the year 2000 problems which require rewriting of the Cobol language. The company's products, which allow computer lines to be rewritten on personal computers rather than on mainframes, where capacity is limited, look attractive.
If there are any questions it is whether, once the company has evened up its revenues and spending and the year 2000 has passed, customers will find an active use for Cobol.
Micro Focus insists that because it is such a fundamental system, Cobol has wide uses, including exploiting the Internet.
Merrill Lynch forecasts profits of pounds 16.4m for the full year and pounds 27.7m in 1999. The shares are on a forward PE of 31 times next year, falling to 19 times in 1999. Fair.
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