ICI calms fears of chemical slump

INVESTMENT COLUMN

It may be too early to conclusively dismiss recent worries over the state of the chemical cycle, but the omens are improving after ICI's results yesterday. Although the figures came in at the low end of expectations, the chemicals giant still managed to raise its "clean" profits before exceptionals by 85 per cent to pounds 951m in 1995. More importantly, unlike Shell and BP's chemicals operations, the fourth quarter saw continued growth. Profits jumped 30 per cent to pounds 193m and the strength seems to have continued into 1996.

After initial disappointment with the bare numbers, the shares perked up 24p to 856p yesterday, following an upbeat presentation to the City by the group.

With first-quarter profits said to be in line with last year, last autumn's destocking by customers in the US and Europe may be turning out to be a blip rather than the start of a down-trend. Certainly ICI is bullish. Capital spending was jacked up 72 per cent to pounds 641m last year and, with a total of pounds 1.2bn authorised, will rise again in 1996. Meanwhile, the group has been confident enough to raise the dividend for the first time in at least five years.

The outlook is hard to interpret. Chemical and polymer prices slipped 4 per cent in the fourth quarter over the third and there was further weakness in petrochemicals. But fertilizer remains a strong market and underlying demand for acrylics is good.

ICI believes the first half will see a pause in growth before the upward path is resumed in the second half. It argues that the current cycle will be longer than has traditionally been the case, given the appearance of demand from Asia and an easing in world monetary policy.

Whatever happens, ICI should be well positioned by several years of restructuring. Management reckons 40 per cent of last year's profit improvement came via self-help. Manpower alone has been cut from around 100,000 in 1990 to 64,000 today and ICI confirmed yesterday that restructuring will be a permanent feature of the group from now until the next century.

By 1997, the "value gap initiative" should be delivering pounds 400m of benefits to the bottom line, just ahead of the peak of the current cycle, if analysts' forecasts are to be believed. That should provide a substantial cushion against a downturn, but ICI has set itself a demanding target of a 20 per cent return on assets across the cycle.

Last year it raised returns to 18 per cent with chemical prices still at only about 75 per cent of their peak at the end of the 1980s.

Kleinwort Benson's forecast of pounds 1.05bn for this year puts the shares on a prospective multiple of only 10. Still good value, assuming ICI uses its ungeared balance sheet to buy in shares rather than splashing out on mis-timed acquisitions.