Laporte prunes for future growth

THE INVESTMENT COLUMN
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Yesterday's 175p fall to 608p was a pretty uncompromising reaction to Laporte's profits warning. Jim Leng, chief executive since 1 October, and the cause of a surge in the share price when his appointment was announced, has had a pretty short honeymoon.

On the face of it the market is right to punish the company. Having expected profits of pounds 140m for the year to the end of this month, expectations have had to be reworked on the basis of a promised 10 per cent fall from last year's pounds 123.5m. An pounds 85m provision to cover a far-reaching restructuring will knock a further substantial hole.

This, of course, is another kitchen- sink job, like NFC's earlier this week, throwing all the bad news into one announcement as only a new management can afford to do and giving the company a firm base from which to grow earnings in future. The new boss's confidence in that future was confirmed by the promise to maintain the dividend at last year's level.

What Mr Leng proposes for the company also makes eminent sense. He inherited a sprawling chemicals conglomerate, which included some great businesses but also had a smattering of non-performers, taking up their share of management time and contributing nothing in return. Stripping those out can only be good news for the group as a whole.

What the programme probably means is the closure of 10 of Laporte's 100 sites, smaller ones from which many of the best assets will be saved and moved into continuing operations. Job losses will be considerably less than the 700 a 10 per cent cut in the number of sites might suggest.

What really upset the City was the suddenness of the apparent downturn in trading at the group after an impressive set of interim figures in September. Star performers then included organic specialities, making intermediate chemicals for pharmaceuticals and peroxides for the petrochemicals industry. That division made impressive margins of 17 per cent in the first six months and there is no sign that it is suffering the fate of the construction and bulk polymers businesses.

Electronic chemicals is another business that has the capacity to cash in on the booming semiconductor industry. Laporte's strength in the ultra- pure chemicals required for silicon chip manufacture helped the division's profits in the first half rise by over a fifth.

With those sort of returns from Laporte's good businesses, returning to a growth path should be rather easier than yesterday's share price movement suggests. Shareholders should also take comfort from the speed with which Mr Leng has moved - within nine weeks he has identified the problem areas across the group, decided on a course of action to sort them out and implemented it.

Assuming profits slip back to 1993's level of pounds 107m the shares still stand on a prospective price/earnings ratio of 15, which explains the need for the sizeable correction.

That said, having got to grips with the problems, Mr Leng has created a strong floor at the current level. Fairly priced.

Ransomes

gears down

Ransomes has been talking about strengthening its balance sheet for months and it was only a matter of time before there was a rights issue. New management had taken this manufacturer of grass-cutting equipment off the danger list but needed to address gearing, which stood at a heady 750 per cent just two years ago.

The proceeds from yesterday's one-for-one cash call at 48p - to raise pounds 37.3m - will be used for the usual financial "deck-clearing" including cutting debt and a return to the dividend list next year. Quite why shareholders should think it a good idea to give a company cash so they can hand it back again taxed is hard to fathom.

That said, Ransome's debt-to-equity ratio, 402 per cent currently will fall to a more manageable 59 per cent after the fund-raising.

Preference shareholders, who are one payment behind, will be getting their outstanding pounds 2.4m in dividends. And the company has reduced its interest bill with Barclays Bank and National Westminster Bank.

All this was yesterday backed up by a sharp recovery in pre-tax profits, which were up by more than 50 per cent to pounds 9.2m for the year to end-September. No dividend is being paid, but a 0.5p interim payout for the current year is promised.

Having put the commercial side of the business in order, the management is turning its attention to the consumer operations.

But the time for fire sales is over, and some orderly disposals and cost- cutting over the next year should help drive profits.

Disconcertingly, perhaps, Ransomes may use some of the rights issue capital to go back on the acquisition trail. It was, after all, Ransomes' pounds 95m purchase of an operation in the United States that caused the problems and forced a management shake-up. Investors should be wary of anything but small "bolt-on" purchases.

News of the cash call had no lasting effect on the shares, which closed unchanged at 64p.

With BZW forecasting profits of pounds 13.9m next year, and earnings of 5p, the shares stand on a forward price/earnings ratio of 13. Fairly priced, after a stupendous run, and the rights should be taken up.

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