Hanson drives into a dead-end

Investment Column

The decision not to raise the dividend at Hanson confirmed what has been becoming increasingly obvious of late - that the conglomerate is a spent force, forced into cosmetic changes to convince the City (as Williams, its smaller rival, has had to do) that far from being a sprawling mish-mash of businesses it is actually sharply focused on four clearly defined operations.

The reality of Hanson's plight is that its strategy has been driving it into a cul-de-sac for years. Buying underperforming, basic businesses to slash costs can only ever lead to a grouping of performing basic businesses with unexceptional growth prospects. As the parent grows bigger, it becomes more and more difficult to do deals of a sufficient size to make a difference.

The company put a cheerful gloss on these figures, which superficially were not at all bad. Pre-tax profits, down slightly at pounds 1.28bn (pounds 1.37bn) were put in an unfairly harsh light by a pounds 440m swing in exceptional, one- off charges compared with last year.

At the trading level in the US, Quantum and SCM continued to power ahead, riding the chemicals price cycle. Peabody benefited from the absence of last year's strike and Grove, the crane business, is running fast and still not keeping up with demand.

At home, ARC continues to squeeze better margins out of flat demand, Imperial Tobacco continues to shrug off the relentless decline of its market, rising 6 per cent during the year, and Hanson Brick bounced pleasingly.

All that drove operating profits to a record pounds 1.49bn, 35 per cent better than last year after funnies like the coal strike and acquisition profits have been stripped out. Underlying earnings per share, ignoring last year's one-off Beazer Homes profit, were up sharply from 15p to 19.7p. That left the dividend, at 12p, covered safely, if not exactly lavishly. But since the Quantum acquisition, Hanson has become a much more cyclical, volatile earnings stream and a dramatic fall in ethylene prices in the final quarter of the year to September points to the Quantum success running out of steam.

So how best to value Hanson now it has reached the corporate pipe and slippers stage? Now it is talking seriously about selling off non-core but sizeable businesses such as Cavenham or Suburban Propane, a break- up valuation is pertinent. At between 174p and 226p, according to one broker, that offers little upside from the current 192.5p, unchanged yesterday.

As a quasi-gilt, the current yield of 7.8 per cent is attractive, but with little growth in prospect that is only right and proper. Hanson's shares are worth less now than they were five years ago and although well supported, they are still unattractive.

One for the road at Grand Met

Yesterday's results from Grand Metropolitan were remarkable for a number of reasons. There were no nasty surprises or complicated restructurings; the results themselves were bang on target; and analysts held their forecasts or even upgraded for the current year.

Perhaps this was because these figures were Lord Sheppard's last before he steps down as chairman next March. So much nicer to go out on a steady, upbeat note than a controversial one.

Of course, given the company's record further restructurings, with the usual barrow-load of provisions and re-stated figures, can never be ruled out. But for now at least the company looks set for a reasonable period of organic growth. Pearle, the opticians business, will no doubt be sold before long, leaving Grand Met focused on branded food and drink.

Pre-tax profits for the year to September were up 40.7 per cent to pounds 920m, though the underlying profits were 3 per cent lower at pounds 912m. Overall, Pillsbury, the US food business, is doing well while the IDV drinks division and Burger King are suffering from some minor localised difficulties.

Pillsbury, which now includes Pet, the US foods group that was acquired in February, pushed up profits by almost 50 per cent. Burger King is not for sale, the company says, and like-for-like profits increased by a healthy 6 per cent. However, profits dropped from pounds 224m to pounds 196m over the year due to lower franchise sales - which fell from pounds 64m to pounds 30m.

IDV, which includes the Malibu and J&B Scotch brands, is still suffering from the loss of the Absolut vodka franchise. The group hopes to push through a 2 per cent price increase next year though this may be wishful thinking. Rivals such as Guinness and Seagram have been cautious on price recently.

Grant Met shares have had a good run this year, up from 355p in January to 442p yesterday, when it climbed 8p. Analysts are forecasting profits of pounds 980m for the current year, which puts the shares on a forward rating of 14. With bid speculation falling away, the shares look no more than a hold.

BPB still faces price worries

BPB's plans to open a new pounds 50m plasterboard plant in Berlin by the middle of next year is a bold move. Despite commanding half the European market for the product, the company failed to hold on to any of the 10 per cent price rise posted in Germany earlier this year.

Although it fared better in the UK and France, the revelation that much of the pain was caused by an aggressive attempt to win back market share by its rival Gyproc Benelux is a worrying reminder of the price war of five years ago.

It is against this apparently unpromising background that BPB is now attempting to push through a new round of price increases. Ranging from 2-3 per cent in France to 12 per cent in the UK, the hope is that the rises will recover some of the margin lost so far this year to higher paper costs.

But this is not the whole story, as yesterday's better than expected interim results demonstrate. Pre-tax profits advanced from pounds 76.1m to pounds 78.9m in the six months to September, an underlying rise of over 13 per cent when a pounds 7.5m loss on sale is stripped out. The dividend goes up 8 per cent to 3.1p.

Mr Cuny argues that things have changed markedly since the early 1990s, when the two major Continental groups Lafarge and Knauf were fighting their way into new markets. And although the slowdown in Germany has hit volumes, growth there and in Austria and Eastern Europe combined was still a healthy 15 per cent in the latest period.

The theory is that the new factory will only make up for the shortfall between current German production and demand. The problem is that others are also adding capacity, not all of which can be absorbed by the admittedly fast-expanding eastern European market.

Full year profits of pounds 181m would put the shares at 317p, up 6p, on a forward rating of 13. Fairly rated until the picture in Germany clears.