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Paterson pays a price for loyalty

Paterson Zochonis is in many ways an anachronism, a family-dominated company clinging to its long-held links with Britain's former colony in Nigeria. Its refusal to break the tie with Nigeria is a pity because in many ways Paterson has a real success story to tell.

The Nigerian naira has been declining for as long as anyone can remember, causing periodic alarms at the group which controls over 40 per cent of the country's soap and detergent market. The latest flurry was caused by a new bout of political turmoil in Nigeria, leading to acute foreign exchange shortages and a 20 per cent cut in production in the first half of 1994.

The well-flagged problems led to the 11 per cent drop in pre-tax profits to pounds 25.1m in the 12 months to May. Paterson is confident that January's budget has stabilised the situation, with production now recovering on the back of more freely available foreign exchange.

However, this stability has been won at the price of a 74 per cent devaluation in the naira, forcing the group to write off another pounds 23.2m of its assets in Nigeria. The steady erosion of its assets has reduced the importance of the former colony to which Paterson owes its origins to just 10 per cent of the group total.

Elsewhere Paterson has a good record. A minnow in a world of soaps dominated by giants like Unilever and Procter & Gamble, the Manchester-based group still manages to head the UK market with the 17 per cent share commanded by its Cussons Imperial Leather brand. More impressive, given that the ordinary soap market is on a steady decline, is Cussons' 24 per cent lead in liquid soaps, a sector currently growing at 25 per cent a year.

It is also rapidly securing its future in developing markets overseas. After half a decade and a pounds 10m investment, Paterson believes that it has turned the corner in Indonesia, where it is at last making profits. Meanwhile, Poland, where the group bought a local brand two years ago, has seen an even quicker turnaround.

A recent second Polish purchase and a new venture in India should cause few problems for a group with net cash and investments of pounds 113m. Profits of pounds 28m this year would put the non-voting A shares on a forward multiple of 11. The shares will remain lowly rated while enfranchisement is ruled out and the risk remains that the industry's heavyweights will one day trample on Paterson, as happened in Thailand last year. Hold.