P&O steams back into calmer waters

Stripping out the £278m gain from the disposal of Sutcliffe Services in 1993, pre-tax profits up 41 per cent to £341m in the year to December suggest that, while not yet firing on all cylinders, P&O is finally starting to feel the benefit of economic recovery.

Apart from a few continuing laggards like European transport services and bulk shipping, all divisions increased profits last year.

It has been a long, hard slog to reach this stage.

With plenty of late-cycle operations such as construction and bulk shipping, it was always going to take a while for Lord Sterling to get the P&O liner steaming again.

It is therefore ironic that the shares peaked nearly a year ago at 732p and are now languishing at 582p, down 9p yesterday.

What has been depressing P&O's share price is the Channel Tunnel effect, as investors anticipate the impact on P&O's dominance of the cross-Channel ferry market.

Yesterday's figures will give some comfort to those looking ahead to the long-delayed build-up to a full service through the tunnel late this summer.

Ferries were last year's star performer for P&O. Operating profits from the division powered from £76.5m to £114m, providing the main stimulus to group operating profits up from £396m to £477m.

That is clearly both a strength and a weakness, as Eurotunnel inevitably takes market share. P&O's control of the Dover-Calais route has already slipped a bit from last year's 60 per cent for cars and 53 per cent for freight in the early months of 1995. But the continuing problems at Eurotunnel are clearly putting back the day when the ferries have to meet the full blast of competition, allowing the booming market - currently growing at between 15 and 20 per cent - to take up the slack.

Meanwhile, cruise ships - where profits roared from £85.6m to £100m - and containers, £63.2m compared with £42m before, continue to forge ahead.

On forecasts of around £375m for the current year, the shares stand on a prospective price/earnings ratio of 14.

The possibility of a bid for Costain and dollar worries could restrain the shares in the short term, but they are well- supported on a yield of 6.6 per cent and Channel Tunnel concerns are now surely all in the price.