Lacking the genius for growth

The Investment Column
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The Independent Online
Guinness has been a pathetic investment over the past five years, slipping further and further behind the rest of the market as year after year profits have emerged little changed from the previous period.

You would have had to have held your Guinness shares since 1990 in order to have achieved any sort of absolute gain and even then you would be looking at relative underperformance of a third or more. Pure Genius it ain't.

Figures for the first half of 1996 yesterday did little to put any fizz back into the shares even if, for the first time in several years, they did not precipitate a round of analysts' downgrades.

Although a 5 per cent rise in pre-tax profits to pounds 357m was slightly above expectations, and free cash flow of pounds 254m was strong, the top-line growth that will drag Guinness out of the investment doldrums remained as elusive as ever. Focusing on a 4 per cent decline in Scotch sales, the market trimmed another 8p from the shares, which closed at 447p.

The problem for Guinness is that it is already generating good profits, with pre-tax margins in the mid to high teens, and throwing off enough cash to make periodic hand-outs to its shareholders. What it can't seem to achieve in the mature spirits and beer markets it serves around the world is growth, and growth is what share prices thrive on.

The chairman, Tony Greener, and his team do at least realise that the only way to generate that growth is to pour staggering amounts of cash into promoting its portfolio of brands. Half a billion pounds last year was spent on advertising and other promotion of Johnnie Walker, Gordon's and Guinness itself, but even that was only enough to tread water. You only have to look at smaller rival Matthew Clark to realise what might have happened to Guinness had it inflated its short-term profits by not shelling out that awesome amount.

It is also right to try to break the self-destructive scrap for market share that has led all the leading drinks companies to slash prices to push volumes in a basically static market. Guinness says it will not play that game this Christmas and has thrown the gauntlet down to its rivals to follow suit. It remains to be seen who loses their nerve first.

The sad fact is that there is no quick fix for Guinness - neither a bid for GrandMet nor demerger would solve the underlying need to increase volumes and prices.

Forecast profits of pounds 955m this year, after underlying profits of pounds 942m last time, and pounds 1.02bn in 1997, put the shares on a prospective price- earnings ratio of 13 falling to 12 and promises another dull year.

Redland still looking exposed

Investors in building materials group Redland are still reeling from the dividend cut last year when the company's shares lost a third of their value in just seven months. Rehabilitating the roof tiler was always going to be a slow process, though some reassurance came when Rudolph Agnew, chairman, said the dividend was sacrosanct.

Falling interest rates in Germany, where the bulk of profits are struck, also encouraged optimism, as did the sale of its bricks business to Ibstock for pounds 160m, which left Redland to focus on tiles and aggregates.

But it was the merger of Redland's tiles business with Braas, its German joint-venture partner, to create the world's largest roof-tile supplier that created most excitement. The move, which German tax authorities are expected to clear by the end of the year, should free capital for roofing markets outside Europe which have greater growth potential. A small joint venture in South Africa, for example, is imminent.

But atrocious market conditions still leave Redland looking exposed. Bad weather in the first quarter was blamed for the 42 per cent drop in pre-tax profits to pounds 95m in the six months to June. European roofing profits nearly halved to pounds 69m as German concrete tile volumes collapsed by 47 per cent in the first quarter. Incredibly, gross margins were maintained as selling prices above inflation were pushed through.

Even more remarkable is Redland's assertion that the German housing market has turned. It cites a 3 per cent rise in the first half for single and two-family housing, the main market for pitched roofing. But this rosy view is not shared by its rivals such as RMC and is hard to reconcile with a German economy being whipped into shape for European monetary union by deep public sector spending cuts.

Redland can also expect little help from its aggregates side, where first- half profits fell to pounds 27.5m from pounds 35m and it is heavily dependent on an almost redundant UK roads programme.

Broker Albert E Sharp has slashed its 1996 pre-tax forecast to pounds 251m from pounds 303m with pounds 310m (pounds 345m) pencilled in for the following year. The shares, up 2.5p to 447p, stand on a chunky forward multiple of 21 falling to 17 and yield just 4.7 per cent. Expensive.

McBride cleans up its gremlins

Few companies can have had a more fiery baptism on the stock market than McBride, Europe's biggest maker of own-label detergents. Launched in the midst of John Major's leadership crisis at 188p last July, things have gone from bad to worse. Last summer's problems with new concentrated detergents gumming up machinery were compounded by soaring raw material costs. The result was a profits warning earlier this year which sent the shares plummeting. Yesterday they clawed back 13p to leave them at 139p.

The market's optimism was prompted by figures suggesting that McBride is through the worst. Pre-tax profits slumped from pounds 27.1m to pounds 20.7m in the year to June, but the bald figures hide a strong recovery in the second half. Stripping out pounds 6.3m of one-off costs, mainly relating to expelling the gremlins at the Barrow detergent factory and cutting up to 500 jobs, underlying margins expanded from 6.7 per cent to 7.4 per cent between the two halves.

McBride is within striking distance of its aim to raise margins to between 7.5 and 8.5 per cent. Barrow is said to be sorted out, raw materials are back to more normal levels and a management restructuring is about to be completed with the appointment of a new managing director in the UK. With cost savings on top and a core business growing at above 5 per cent, Barclays de Zoete Wedd is looking for further recovery to deliver profits of pounds 31m this year, putting the shares on a modest forward multiple of 10.

That looks too low, but the shares should not be chased. The own-label market has successfully fought off the price war initiated by Procter & Gamble, but the past year has also shown what little control McBride has over its own destiny. The group remains at the mercy of commodity chemicals prices on the one hand and on the other the big supermarket groups, four of whom take around 30 per cent of sales.