This is ICI's bulk chemicals company, due to be demerged from the pharmaceutical and agro-chemical interests next month. In good times, bulk chemicals are hugely profitable. As the economies in the US and UK pull out of recession, these interests should really begin to motor again, making them a much more attractive bet than the pharmaceuticals side.
However, while there is uncertainty over the whole ICI demerger proposal, I have decided to opt for WPP, Martin Sorrell's transatlantic advertising group. At 47p, the shares have already had a good run since the refinancing last summer, but there seems to be plenty left to go for. Advertising is highly sensitive to relatively minor movements in the economy. Any revival, particularly in the US, could have a dramatic effect on the bottom line.
IF YOU believe an upturn is on the way, there is a strong case for buying bank shares.
Hongkong & Shanghai Banking Corporation is the one to choose, although it may take strong nerves to see it through the year. The shares have slumped from last year's high of 565p to 493p because of political uncertainty in Hong Kong. But history teaches that you should buy into the Hong Kong market on political weakness. The chances of a rapprochement between the British and Chinese are high, because it is in no one's interests to deepen the bitterness.
Meanwhile, HSBC/Midland will derive big benefits from continued growth in the Far East and recovery in the UK, where it will begin to push more aggressively for a larger market share. On a prospective multiple of about eight times 1993 earnings, the shares look cheap.
SHARES in Burton, at 71.5p, have been racing ahead recently, but that should not stop them climbing even higher in the coming year. The retailer is a big risk - it is still counting the cost of heady expansion under its former chief, Sir Ralph Halpern - but it also offers the biggest potential reward on the high street. Its operating profit margin of just 2 per cent is the lowest of any quoted fashion retailer, where the average is about 9 per cent. John Hoerner, the new chief executive, is schooled in the art of squeezing assets and raising margins. With annual sales holding up well and approaching pounds 2bn, despite the recession, he has plenty to get his teeth into.
SHARES in TI Group, headed by Sir Christopher Lewinton, have come under the cosh since midsummer in the wake of its pounds 500m acquisition of Dowty Group. Its aerospace side has turned out to be a short-term millstone and is likely to dilute TI's earnings and absorb cash. But after underperforming the market by 30 per cent since June, TI shares, at 316p, are trading at a sizeable discount to their long-term trend towards outperformance. Aerospace remains a growth market in the long run, and this could well blow TI shares back on course.
HOUSEBUILDERS are still pretty bombed out despite recent rises on the back of hopes for recovery in 1993. Bellway offers better prospects than most, with a p/e in the low teens (lower than many housebuilders) and a strong balance sheet. Bellway has net cash and is in a strong position to buy land cheaply.
SHARES in Fisons have lost a third of their value as the drugs company has lost its chairman, John Kerridge, and the confidence of both the market and the pharmaceutical regulators. At 245p, the shares trade at a rating below the average for the health sector, even assuming a 40 per cent fall in profits in the year just ended. As confidence recovers, there is the potential for a recovery in Fisons' fortunes and a rerating of the shares. If neither happens, expect a bid.
A PENNY share worth a punt is Brown & Jackson, the Poundstretchers discount stores group. Its new management seems to have got a grip on the business, and although the shares have recovered from a low of 2.5p to 12p, there should be more mileage in them.
My Irish tip is Smurfit, which has been in the doldrums lately but is well placed to benefit from recovery in the US. Greencore should also continue to do well.
ALTHOUGH Menzies' main line of business - stationery - is more resilient than most. Meanwhile, the company is nowhere near as prominent as its rival, WH Smith. Moreover, although its Early Learning Centres in the US hit trouble and recently closed, the UK end of that division is well placed to benefit from a traditionally sound sector, children's toys. The shares are nicely placed at 457p, a few pence off the year's high.
THE replacement of the founder chairman at food manufacturer Hillsdown Holdings in December injected confidence into the shares. Hillsdown needed it. After a miserably received rights issue in September 1991 at 210p, the shares slumped to 74p a year later. But news that Sir John Nott, a former Defence Secretary, is to take the reins from Sir Harry Solomon has prompted a 25 per cent rise in the shares.
As an importer, Hillsdown will be knocked when the currency movements feed through. But the shares - trading at 10 times current earnings per share forecasts for 1992 - are cheap. And any downside risk is countered by an 8.5 per cent yield on a dividend that the company insists will be maintained at 8.8p.
There is also a chance that Hillsdown will become a bid target. If an approach succeeds, new shareholders could expect to double their money.
I BELIEVE that British Aerospace has finally pulled out of a frightening tail-spin following the flopped rights issue and a series of gloomy trading reports. At 165p, there is no longer any downside to Britain's largest manufacturer unless it actually goes bust, and the shares are cheap enough to fuel bid talk.
The City has already been encouraged by the pounds 2bn Al- Yamamah defence contract and the spectacular revival at Rover. Add to that the US Airbus order and the decision to proceed with a scaled-down version of the European fighter and the signs are good. If a man of John Cahill's reputation cannot pull it round, I will give up share tipping.
DIXONS GROUP, the electrical retailing giant, is the closest you can get among quoted companies to cashing in on the computer games boom. It has about one third of this mushrooming pounds 500m market. Televisions, satellite dishes, camcorders and other gadgets should keep the sales pot simmering nicely in 1993. And the perkiness of the US economy should help to turn round the Silo chain.
AFTER three dreadful years for the motor industry, things could be perking up. Car owners (especially companies) are finally realising that it makes better economic sense to replace rather than maintain. Motor dealers ought to outperform the market in 1993.
The best of the bunch is Pendragon, which has wisely continued an aggressive expansion plan throughout the recession. Ending 1990 with 23 franchises, it now has 44. These include some Japanese makes, a welcome diversification from its roots in luxury cars. New outlets typically take about three years to mature, so Pendragon should continue to benefit from recent acquisitions. At 223p, a forward p/e of 15 is good value ahead of an upturn in the car market.
SHAREHOLDERS in Queens Moat Houses, the hotels group, had a bumpy ride in 1992. The share price turned down from 92p in May to a low of 27.5p in September on fears that a key banking covenant would be breached and concern about its exposure to the German economy.
While the sterling value of Queens' German debt will rise and UK hotel values will fall further, the shares have big upside potential. There are, for instance, strong rumours that it will forge a link with the Holiday Inns hotel chain.
Queens' net asset value is worth around 110p per share. Profits for the calendar year 1992 should have hit pounds 85m before tax, giving earnings per share of 6p. At the current price of 45.5p, the p/e multiple is a cheap-looking 7.8.
HANSON'S shares have been under a cloud since the ICI debacle, and its reputation was hardly helped when Tomkins beat it in the bidding for Ranks Hovis McDougall. But at 234p, its shares stand on a forward multiple of less than 13 times earnings, on forecasts of about pounds 1.2bn, and its yield at 6.5 per cent. A big ratings improvement depends on convincing the City that it really does know where its future lies. But with more than half its business in the US, where recovery should start to flow through, the shares look attractive.Reuse content