Pilkington's new chief wields the axe

THE INVESTMENT COLUMN

Is Pilkington's glass half empty or half full? On first glance it looks half empty. Despite five years of hacking away costs at its commodity glass business and building up a huge market share in added-value "downstream" glassmaking - laminating, toughening, bending, glazing - Pilkington remains a flabby business against competitors like Saint Gobain and Glaverbel.

As prices of glass across Europe have plunged and recession has hit German building products, the failure of Roger Leverton, Pilks' recently ousted chief, to cut costs fast enough has resulted in three profits warnings in 12 months. A further warning on glass prices yesterday, accompanying the group's 1997 results, left the shares another 6 per cent lower at 117p.

Paolo Scaroni, the new chief executive, has drawn two simple conclusions. Firstly, the company can no longer hope that rising glass prices will rescue profits. The group failed dismally to put a 20 per cent increase through in the year and prices are starting to weaken alarmingly outside Europe.

Secondly, the company must take a sharp axe to costs. That was well known. What caused a big surprise yesterday was Mr Scaroni's plans to cut back the group's downstream business, which Mr Leverton took such pains to build.

The rationale is controversial, but has strong arguments in its favour. Having an added-value operation did not in fact do much for margins, but it did increase costs. Pilkington has 220 factories spread across Europe adding value to the group's float glass. Many are tiny, inefficient "mom and pop" operations and all have added to Pilks' crazily bureaucratic management structure. Pilks has four layers of managers - regional, country, company and product line. Mr Scaroni says all but the product line managers should go.

With 80 per cent of the group's building products business - itself half the group - residing in Europe, making such radical changes will take at least two years. There will be more provisions if Pilks cannot sell the inefficient factories. And shifting to normal float glass will make the company a dramatically more cyclical business. But cyclical businesses can be good investments for those with good timing.

Concerns that Mr Scaroni is vague about his plans for the buildings products business are unfair given his time in the job. More important, his vision is simple and he seems tough. And making costs not prices the focus puts the fate of the business in the hands of management.

SBC Warburg is forecasting profits of pounds 127m before exceptionals in 1998 and pounds 182m in 1999. The shares are on a1999 rating of 12. The cautious investor will wait until the full details of the restructuring are revealed in December, but the brave should buy for recovery.

Pay-back time for Boots

The reputation of Lord Blyth, Boots' chief executive, continues to suffer from the pounds 900m acquisition of Ward White some eight years ago. The ghosts of that deal continue to haunt the retail group in the shape of losses at the AG Stanley and Do It All DIY chains, but Lord Blyth and his company are now well on the road to rehabilitation in the eyes of the City.

Most obviously, Boots has led the pack in returning excess cash to shareholders. Yesterday's special dividend of pounds 400m brings to pounds 1.7bn the company has paid back over the past three years, including pounds 1.2bn from share buy-backs and special dividends.

Initially this policy may have been born out of necessity, given the reaction further corporate deals would have received. But the latest special dividend pushes Boots into modest gearing of 10 per cent for the first time, suggesting borrowings may not prevent further such payments.

Equally, Boots is now dipping its toe in the water for acquisitions again. Last year it spent pounds 170m, four times the previous year's figure, including the pounds 115m acquisition of Laboratoires Lutsia, a French skin-care group, which seems to have gone down well within and outside the company.

Further investment is likely to be concentrated on the 40-store-a-year UK opening programme planned for both Boots the Chemists and Halfords, plus the tentative moves abroad in Ireland, Holland, Thailand and Japan. But a biggish deal in Germany for Boots Healthcare International, the over-the-counter drugs operation, would probably be well received.

Meanwhile, the underlying like-for-like sales increases behind yesterday's 8.7 per cent rise in pre-exceptional profits to pounds 536m for the year to March looked creditable enough. Forecasts, cut as a result of the special dividend to around pounds 575m, put the shares, down 2.5p to 692p, on a forward multiple of 16. Reasonable value.

Staid 3i is one to put away for later

For a company whose raison d'etre is providing seed capital for small, energetic businesses, 3i is a remarkably staid institution. No surprise then that its chief executive elect, Brian Larcombe, should be promising more of the same when he takes over the reins.

Results for the year to March were equally unremarkable. A total return during the year of pounds 416m represented 16 per cent of 3i's shareholders' funds at the beginning of the period.

That compared with a total return of nearly 19 per cent on the FT All share index, with the differential almost wholly accounted for by 3i's lack of exposure to banks, oils and pharmaceuticals, this year's star performers.

Indeed 3i has made a virtue out of its position at the smaller end of the venture capital industry, providing funds for deals of less than pounds 100m. It has been right to do so.

It is estimated that there is pounds 4bn of uninvested money at top end of the market, pushing purchase multiples up sharply while exit p/es on flotation or trade sales have remained unchanged.

In the year to March net assets per share grew by 14 per cent to 486p on the back of a 21 per cent increase in investment to pounds 742m into 572 separate businesses.

The company dismisses talk that the UK has become saturated and claims that of the 100,000 companies in Britain it would like to invest in, so far it has stakes in just 3,000. There is still plenty to go for.

With short-term returns determined by the company's own valuation of unquoted investments, the only way to look at 3i is as a long-term play on the one of the most dynamic parts of British industry.

Over the long term its earnings and dividend can be expected to outperform the rest of the stock market by a small margin. As such it is one to buy and forget about.

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