Pain brings results for Pilkington

The Investment Column
Pilkington is a traditional bellwether for the British economy. Like ICI, it has been woken from past lethargy by a savage increase in competition in what have become commodity markets. But the world's biggest glassmaker has been shaken up by professional management led by chief executive Roger Leverton, formerly of RTZ, and since last year by Nigel Rudd, who added the Pilks chair to that of Williams Holdings in July.

After several years of restructuring in the face of sluggish or declining markets for glass, there is evidence that the pain is working. Yesterday's figures were distorted by the enormous provisions that have become a feature of recent years. Last year it was a pounds 375m goodwill write-down on the disastrous contact lens business.

This year it was a pounds 157m charge, mostly to cover the latest round of "downsizing" in the automotive and German building glass businesses.

That turned a reported loss of pounds 248m last time into pre-tax profits of pounds 55m in the year to March, but stripping out the big one-offs from both years, underlying profits soared 47 per cent to pounds 212m. Earnings per share before exceptionals leapt even further, rising 63 per cent to 14p.

Pilkington is clearly showing it can fight back in both its main businesses. Existing cost-reduction programmes added pounds 68m to the 1995-96 figures and the benefits of the latest wave should build up from pounds 35m this year to pounds 75m in year three.

The automotive glass business looks well placed. Last year's restructuring at Libbey-Owens-Ford in the US will be matched by the shake-up in the European side following October's acquisition of the other half of Italian auto glass producer SIV. As well as the savings that will bring, the purchase has raised Pilkington's share of the European market from 14 per cent to a third. That gives it a powerful voice with the big car-makers and, notwithstanding the General Motors strike earlier this year, which cost pounds 6m, it augurs well for the future, given signs of strength in automotive markets on both sides of the Atlantic.

More serious is the malaise affecting the German building market. Central European prices have slumped by a fifth in the past four months as clear signs of overcapacity have emerged. Pilkington puts surplus production in the industry at up to 8 per cent and has acted to cut its own capacity in Poland and Germany. A crucial factor will be whether its recently announced 8-10 per cent price rises will stick.

Profits of pounds 250m this year would put the shares, up 6.5p at 204.5p, on a forward multiple of 14. Those who took up October's rights at 155p have already done well and there should be further recovery potential.

Boots cash pile is a problem Boots' management had good reason to look pleased yesterday as they unveiled a decent set of results alongside an upbeat statement on the outlook for consumer spending. Yesterday's interest rate cut should help the housing market and Boots' DIY businesse s, which include Do It All and Fads, continue to lose buckets of money. But while these two businesses remain a problem and Halfords is not exactly a star despite its strong brand name, the real question about Boots is what it will do with its pounds 526m cash mountain as the core Boots the Chemist chain reaches maturity in the UK. For all its attempts at diversification, BTC still accounts for 80 per cent of Boots' profits. AG Stanley, Do It All and Childrens World (since sold to Storehouse) recorded a loss and falling like-for-like sales last year. The Boots cash pile is set to be boosted by a further pounds 73m from BASF, which represents the balance of the pounds 900m it agreed to pay for Boots Pharmaceuticals last year. Boots has several options. It is looking at taking Boots the Chemist overseas, though there are no immediate plans. It is also investing in Boots Healthcare International, the non-prescription drugs business, and an acquisition in Europe looks likely. An other share buy-back is a possibility. There was no news on this yesterday though the door has been left open. The shares are likely to mark time until the market has a clearer idea of Boots' intentions, but the prospects still look encouraging. Though pre-tax profits fell from pounds 849m to pounds 493.5m in the year to March 1996, the 1995 figures were inflated by pounds 320m from disposals. Operating profits from continuing operations rose by 2.5 per cent to pounds 444m. Like-for-like sales increased by 2.8 per cent across the group, driven by Boots the Chemist, which contributed a 4.4 per cent uplift. If Boots could sort out its troublesome "tail" of subsidiaries, prospects would look brighter still. BZW has lifted its profits forecast from pounds 550m to pounds 560m for the current year. With the shares up 2p to 608p, that puts them on a forward rating of 15. Hold.

3i keeps up with record markets NatWest's decision to sell its remaining 17.8 per cent stake in 3i looks shrewd in the light of yesterday's figures from Europe's biggest venture capitalist. By the group's own total return method of accounting it turned in results 25.4 per cent ahead on the year, virtually the same as the FT-SE smaller companies index, which rose 25.6 per cent. Stripping out foreign assets, the growth was 28.3 per cent. Shareholders' funds rose 23.4 per cent to pounds 2.53bn, the revenue surplus rose 18.4 per cent to pounds 70m and the dividend was 12.5 per cent higher at 8.1p for the year. Costs are clearly under control and the balance sheet is in fine shape. As a specialised investment trust with a wide spread of quoted and unquoted stakes, the results are highly cyclical and, with the stock market racing ahead, 3i was bound to break lots of records, which it duly did. There is bound to be a slowdown atsome stage. Disposals of stakes have risen faster than expected six months ago, but it is proving a little tougher to sow the seeds of future growth with new investments, where demand for capital for expansion has weakened. 3i and the investment funds it manages inc reased their investment 13.7 per cent to pounds 613m. On the other hand, the valuation basis is still conservative. Since valuations lag the performance of the companies in which 3i invests, there should be more to go for in the current half year. SBC Warburg and NatWest Securities both reckon actual net asset value is nearer 445p a share compared with the statedfigu re of 426p at the year end in March. The lack of any movement in the shares, unchanged at 452p, owes much to the overhang of next week's NatWest disposal. Institutions will be topping up their stakes but private buyers should not rush in if the price strengthens any more. As a long-term investment, 3i offers a well-managed stake in the most dynamic part of the economy. Hold.