Light at end of tunnel for P&O

The Investment Column

The 9p rise in P&O's share price yesterday to 492p represented a welcome respite after almost three years of dramatic underperformance by the container shipping to ferries, cruises and property conglomerate.

The bounce will, however, have capped a bad 48 hours for Lord Sterling, the group's chairman. He won't have relished the implied confirmation of a Sunday newspaper survey of fund managers suggesting that most of the large institutions were after his head.

The poor performance of P&O in recent years partly reflected the market's disenchantment with conglomerates generally. But there are a number of company-specific problems that P&O is struggling to overcome.

Put together in a haphazard way over many years, P&O is a ragbag of unrelated interests, a fact tacitly acknowledged in March when Lord Sterling pre- empted calls for a break-up by promising a pounds 1bn disposal and flotation programme to create a more focused group with fewer, larger divisions.

The programme, which included the flotation of Bovis Homes, and the sale of pounds 500m of investment properties would, Lord Sterling hoped, return the group to operating margins of 15 per cent, a level P&O had not achieved in more than a decade.

It would also generate the cash to continue paying a 30.5p dividend, the level of the payout for years now and patently unsustainably high in the absence of the cash provided by property sales in the boom years of the 1970s and 1980s. Inflation has always bailed P&O out; now the company was showing signs of learning to live in a less favourable environment.

That was the theory. Since then the shares have continued to underperform as the market focused on the fact that, while P&O's businesses are not intrinsically badly run, they are operating in difficult markets. Commercial property is in the doldrums, container shipping is fiercely competitive and generates a return on assets little better than a building society account, and the cross-Channel ferry market has been clobbered by the Channel Tunnel.

As a result, analysts have steadily edged forecasts back and last year's fall in profits from pounds 350m to pounds 320m, itself a collapse from 1993's pounds 521m, is unlikely to be rectified this year. Profits of perhaps pounds 315m are the consensus now.

There is some light at the end of the tunnel, however, and if, as expected, the Government clears the way this week for some sort of co-operation between P&O and Stena on the hard-hit cross-Channel routes then prospects could brighten considerably for one of the group's largest and most troubled divisions. The other good news is thatP&O's dividend looks reasonably safe. At almost 8 per cent, the gross income on that payout looks increasingly attractive at more than twice the rate of inflation and, if nothing else, it puts a solid floor under the share price. Lord Sterling may still have an uphill struggle to rebuild bridges with the City, but the shares look good value.

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