INVESTMENT COLUMN: Pitfalls in logistical paradise

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Logistics - the buzz-word for the provision of distribution services for the likes of Sainsbury and Ford - has been growing fast as companies farm out more and more of their non-core activities.

Growth rates of up to 10 per cent in the UK and on the Continent make this a highly attractive business when compared with the more pedestrian growth rates of other mature industries.

And "out-sourcing" of distribution is one fashion that looks here to stay. Competitive pressures should ensure that groups with big transport requirements find that their cheapest option is to use outside logistics companies.

The scope for development remains huge. The most mature sector of the most mature market - providing distribution for the UK's ultra-efficient food and consumer goods retailers - is only 40 per cent covered by the sort of long-term contracts typical of the industry.

The figure for the whole UK market drops to 30 per cent, while on the Continent such contracts represent half that level. In North America the total is just 5 per cent.

Contracts can last from anything between three and10 years and nine times out of 10 they are renewed. So if the logistics company gets its sums right, the business should virtually print money.

But not all sectors of the market provide the same easy pickings. Tibbett & Britten, number two in the sector and with a hitherto unblemished record, saw its shares slump 25p to 595p yesterday as it revealed the pitfalls.

Pre-tax profits of £26.9m for the year to December, an 11 per cent uplift on 1993, proved a disappointment after Tibbett's compound earnings growth of 22 per cent since flotation in 1986. Earnings rose 14 per cent to 42.8p.

Labour problems at the Lowfield food distribution offshoot and poor volumes in Fashion Logistics, which delivers clothes, dragged operating profits from the main UK subsidiary down by £2.1m to £13.3m. Those difficulties could have cost close to £4m and the division is only expected to break even next year.

More serious are the problems at the new Axial car transport business, formed from the merger of the existing Silcock Express with last year's £17.5m acquisition of Toleman.

Tibbett has been forced to give a chunk of its margins to Ford to secure a 10-year contract and a sharp volume drop has pushed it into final-quarter loss.

On a profits forecast cut to £27.5m for this year, the shares stand on a forward multiple of over 14. High enough for now.

Redland throws in dividend towel

With Redland's shares yielding more than 7 per cent before yesterday's 33 per cent cut in the payout, the market was in no doubt that a reduction was on its way. What is still unclear is whether the company has lost its nerve at the last minute and not cut it enough to offer investors the prospect of reasonable growth from now on.

With pre-tax profits jumping 34 per cent to £373m and earnings rising a quarter to 33p a share, trading is plainly continuing to recover and the new base level for the payout of 16.7p is safely if not lavishly covered by retained profits. But the small print of last year's results showed just how dependent Redland is on its remarkable German subsidiary Braas and how vulnerable its other operations are.

The non-German activities are a lot more cash-negative than most analysts feared, which leaves Redland dangerously exposed to heavy investment from better-financed competitors. And with construction orders in the UK on a worrying downward tack, earnings at home are simply not likely to rise fast enough to relieve Redland's perennial advance corporation tax problem.

Redland tried every trick in the book to avoid this dividend cut. The decision to throw in the towel a year after Gerald Corbett, architect of a string of clever tax-saving wheezes, left for Grand Met is a defeat even if it is correct.

Comparisons may be invidious, but the contrast between Redland and RMC, the other British building materials company in Germany, is illuminating. RMC is as cash-generative as Redland is not, it has no ACT problem and has been as parsimonious with share issues as Redland has been extravagant. Now that Redland has bitten the bullet and cut investors' income, a serious cloud over the shares has been lifted. But with a cautious forecast of UK prospects echoing Blue Circle's pessimism earlier this week and worries over the strength of west German housing, the shares even after yesterday's 22p fall to 445p look unsupported.

On the basis of forecast profits of £400m this year, the shares stand on a sector average p/e ratio of 11 - about the same as RMC, which is plainly anomalous. So is the new prospective yield, which at 4.4 per cent is no higher than the market as a whole.

Booker serves food for thought

Booker, the sprawling cash-and-carry to fish-farming conglomerate, has undergone large-scale reshaping under its chief executive, Charles Bowen.

Out have gone engineering, up-market ice cream, mushrooms and stone-ground flour since his arrival in the middle of 1993, while the remaining businesses have been redirected.

The results are coming through. Booker yesterday unveiled profits before exceptionals up from £88.3m to £90.1m in the year to December. Gearing fell from 83 per cent to 69 per cent.

Food wholesaling, including the cash-and-carry business, remains the powerhouse. Underlying profits rose from £48.7m to £51m, half the group's operating total. Agriculture also remains a workhorse, chipping in £11.8m against £8.6m, and the fish-farming acquisition, Marine Harvest, added a further £1.6m.

Businesses closer to bigger customers had a tougher time. The new food service division, supplying caterers and the like, fell from £15.1m to £13.2m.

Reported profits down a fifth at £69.8m were muddied by disposals and £18.3m provisions to cover the establishment of food service and the move to central distribution in food wholesaling. Food service is now said to be the best-performing division.

On an unchanged forecast of £108m for this year, the shares, up 4p to 406p yesterday, are on a forward multiple of nearly 13. About right until the fruits of the new strategy become clear.

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