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ICI finds the winning formula

The Investment Column
ICI finds the winning formula

After eight years in the chairman's seat, Sir Denys Henderson is leaving ICI in good shape.

The restructuring programme he launched in 1990, which reached its apogee with the Zeneca demerger in 1993 and has continued since, is really starting to deliver the goods. First-quarter figures yesterday showed trading profits accelerating from £108m to £231m and shareholders should soon be able to share the rewards.

Addressing his last annual meeting yesterday, Sir Denys gave a clear hint that a dividend increase could come as early as this year's interim.

Profits are being given a fair wind by ICI's reshaping, which has taken it into higher value-added markets and should be delivering annualised cost savings of about £500m by the end of this year. But the biggest impetus to the figures is the general improvement in the main industrial markets that started in mid-1994. The recovery in volumes has carried over into a 10 per cent improvement in the first quarter, which also saw the first full period of higher prices, up 8 per cent in the three months to March.

The main beneficiary was the core industrial chemicals business, where profits more than tripled from £42m to £143m. Prices were particularly strong in petrochemicals and fertilisers - ironically, commodity areas on which ICI has been reducing its dependence.

ICI's gain in basic chemicals caused problems elsewhere, where higher raw material costs are squeezing margins. Paint profits fell from £17m to £14m and explosives from £12m to £11m, largely because of higher costs, although the weak European market for the likes of Dulux decorative coatings played its part.

The figures caught analysts by surprise, with typical upgrades pushing full-year profit forecasts to £850m-£950m. But the question is how much further the chemical cycle has to run beyond 1995.

ICI has few doubts. Alan Spall, finance director, points out that chemical price recovery is still at an early stage. With D-mark prices languishing 25 to 35 per cent off their peak in 1988, the returns are still insufficient to provide an appropriate return to make it worthwhile for the industry to increase capacity, he says. Despite that, ICI is raising capital expenditure this year to over £500m from a spend that has recently averaged closer to last year's figure of £380m.

Mr Spall is confident that investment will be carefully targeted, but the group is in danger of adding to capacity just as the market peaks in the next couple of years. Such long-term considerations helped turn yesterday's early rise in the shares to a fall of 2p to 756p, where they stand on a forward multiple of between 10 and somewhat over 11 on the updated forecasts.

Shored up by a prospective yield of 5 per cent, assuming a 2p rise in the dividend, they are worth holding.