Inchcape on track for recovery

the investment column
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Inchcape, the car distributor and marketing group, is finally on the road to recovery after years in the wilderness. Under the astute guidance of Sir Colin Marshall, who flew in from British Airways last year, Inchcape has slimmed down its ragbag of businesses by selling off both Bain Hogg, the insurance broker, and its testing services division, raising pounds 540m in the process.

Inchcape's large restructuring programme, which has seen 2,000 jobs go, is also beginning to pay off. Group profits fell to pounds 78.8m (pounds 82.8m) in the half year to June. However, strip out the exceptionals, plus the adverse impact of the strong pound, and underlying earnings improved by 15 per cent.

The car import business has led the recovery. Strong growth in the number of Japanese cars shipped into the UK and Hong Kong from manufactures such as Toyota pushed operating profits up 21 per cent to pounds 42.7m.

However, Inchcape's results raise as many concerns as they answer. Chief among them is just why the group is investing huge sums of money into Russian Coca-Cola bottling plants. It plans to spend another pounds 65m over there this year, having already poured pounds 32m into the business in 1996. The operation was supposed to make a profit this year, but clocked up a loss of pounds 7m in the first half.

Now analysts believe it could struggle to break even in 1998. Construction and wage costs have been much higher than expected and black market suppliers forced margins down. A good performance from the South American bottling business in Chile and Peru was not enough to dispel analysts' disappointment over Russia. In the longer term Russian returns could be huge, but Inchcape is taking a big gamble.

The other main problem is the marketing division, which produced another poor result as operating profits slipped another pounds 2m to pounds 15.2m. Inchcape's answer is yet another restructuring programme. A substantial round of job cuts and the closure or sale of small businesses is on the cards. While the revamp looks the right thing to do, it will cost pounds 55m in all and only boost earnings by pounds 9m a year.

There is also a sneaking suspicion Inchcape will be hit by the currency turmoil spreading like wild fire across the Far East. So far the impact has been limited to its small businesses in Thailand and Malaysia. However, if the problems spread to Hong Kong or Singapore, Inchcape would be badly affected.

Analysts forecast full-year profits of pounds 183m, putting the shares, which rose 7.5p to 268.5p yesterday, on a prospective p/e ratio of 14. The shares have underperformed the market by more than 25 per cent over the last year, even though the group has done a lot of the right things. That said, Inchcape's rating looks about right, given the question marks over Russia and the sustainability of the recovery in its car business if currencies move the wrong way.

Laporte plays it

by the book

First the pain, then the gain. Yesterday's results from Laporte, the speciality chemicals group, were the strongest indication yet that Jim Leng, the new-broom chief executive, could be presiding over a textbook turnaround. The market has taken some convincing.

When Mr Leng was appointed from Low & Bonar in September 1995 the market was euphoric, sending Laporte's shares soaring to a high of almost 850p. By December the honeymoon was over. Laporte's chairman, Ken Minton, bowed out ahead of a profits warning and Mr Leng announced a massive overhaul of the group's businesses costing nearly pounds 90m. Laporte's shares slumped 20 per cent to just over 600p. Though the share price has been slow to recover, Mr Leng's hard line looks vindicated.

In 18 months, he has closed or sold over a third of a sprawling business to focus on high-margin speciality chemicals, cut 2,000 jobs to 5,500 and slashed the number of manufacturing sites by 45 per cent.

As the half-year figures to June show, the resulting focus on more profitable areas such as fine chemicals, pigments and chemicals used in electronics has boosted margins and profits.

Excluding currency, which sliced around pounds 8m off profits, most of it in translation, the pre-tax total rose over a fifth to pounds 60.4m on underlying sales 2 per cent ahead to pounds 395m.

Laporte now also has around pounds 100m cash following the recent sale of US adhesives and sealants for pounds 90m.

With all the painful cuts completed - there are only some pounds 5m to pounds 10m of disposals left including the freight forwarding business - Mr Leng must prove he can spend his cash wisely and generate real growth. There were no firm ideas given away yesterday, just talk of bolt-ons and organic growth.

Laporte's heavy, pounds 70m-a-year, capital investment programme will take some of the cash and there is still room to grow margins from more efficient use of plant space, while volumes should benefit from a new fine chemical factory in the US. But Laporte could spend up to pounds 500m and still have comfortable interest cover.

Though Mr Leng says he will not be rushed, the City will want to see some evidence of decisive action on acquisitions. NatWest Securities is forecasting full-year profits of pounds 132m, to give a forward multiple of 15, with the shares up 30p at 706.5p. Still reasonable value.

Morgan Crucible back on track

Morgan Crucible, the carbon brushes to industrial ceramics group, ran into some squalls in its markets last year. But an ability to ride out bad weather has been a feature of the group's results in the past few years and latest results showing pre-tax profits rising 11 per cent to pounds 56.1m in the six months to 4 July have continued that tradition.

European economic problems have continued into this year, while the strength of the pound hit profits, which would have been 22 per cent ahead barring currency effects and exceptional items.

But European orders have started to pick up and most of the sterling effect was translational. Even the economic problems in South-east Asia, Morgan's fastest-growing region, where underlying sales ran at 20 per cent in the first half, have left the group unfazed.

Despite the problems, it was only thermal ceramics which really suffered in the first half, seeing operating profits dip from pounds 19.3m to pounds 16.3m. But it is already back on the recovery track.

A pounds 1.5m bounce-back to break-even in the US electro-optics business and full contributions from acquisitions boosted margins to the target 14 per cent in specialty materials.

Meanwhile, technical ceramics is now close to a 15 per cent return on sales after strong organic growth.

A series of further bolt-on acquisitions, for a total of pounds 30m to pounds 40m, are in the pipeline. Morgan is also understood to be on the point of beefing up its operation at Swansea to replicate in Europe its commanding US position in commutators. South-east Asia remains a slight worry, despite the group's confidence, but at least Morgan seems to be softening up the City for a seamless change when Bruce Farmer, managing director, retires. An announcement is thought to be imminent.

Full-year profits of pounds 112m would put the shares, up 3p at 479.5p, on a forward p/e of 15. Reasonable value.

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