Investment: Highland cheer may not last

HIGHLAND DISTILLERS is showing little sign of the hangover plaguing the rest of the UK whisky industry.

While falling sales and a shrinking market have put many competitors under the table, the maker of The Famous Grouse and The Macallan is still firmly on its feet.

Yesterday's results, which showed flat profits at pounds 43m and a slight increase in turnover to pounds 211m, are evidence of Highland's staying power. The Famous Grouse even managed to increase its share of the UK market, despite a 3 per cent fall in sales, as the inherent strength of its brand was reinforced by an aggressive marketing campaign.

But, for all its efforts, there is little Highland can do to stop the long-term decline of the UK whisky market. With younger drinkers set to desert a tipple associated with elderly men and high duties preventing price cuts, there is no prospect of a near-term upturn.

Highland has countered the slump in the UK by expanding in Europe and the US, where whisky is still drunk by young people. Last year, marketing expenditure outside the UK went up by 12 per cent and sales showed encouraging increases, especially in Greece and Spain. However, winning market share in the fiercely competitive markets of continental Europe and the US is extremely difficult, and sales gains will be harder to find in coming years.

Highland's other problem is its complex relationship with the French producer, Remy Cointreau. The Scottish company receives the proceeds of a fixed-interest bond in Remy as part of a deal which includes cross-distribution of the two groups' products. The worry is that, with Remy in dire financial straits, this source of income could dry up or be severely reduced. The shares, down 7p to 228p yesterday, are on around 10 times 1999 earnings, forecast at pounds 47.5m. Despite the cheap-looking multiple, they are no more than a hold.