Pressure mounts for BP buy-back
The Investment Column
Wednesday 07 May 1997
Progress in all directions was better than expected. Replacement cost profits before taxes and exceptional items, the best underlying measure of performance, surged by 19 per cent in sterling terms to pounds 755m, while the result in dollars was up 27 per cent, the difference reflecting the surge in sterling over the past year. The return on capital climbed to 19 per cent, the kind of figure Shell's top team would die for.
Better still, BP appears to have overcome wobbles this year about falling oil prices after the excesses of 1996, when a barrel of crude was selling for as much as $25. So far in 1997 prices have dipped to $18, which BP insisted was in line with a long-term trading range of between $16 and $19. This compares with the company's internal benchmark for investment projects of an ultra cautious $14.
Against falling prices, BP has seen even faster benefits from its self- help programme, chanted like a corporate mantra from office to office in the hunt for extra profit. To recap, the target set in 1995 was to save $1.5bn over five years from cost cutting and higher productivity, yet last year alone BP saved $600m and promptly brought forward its timetable by 12 months.
In this quarter it has saved another $120m and is hoping for even more towards the end of the year, so the internal target for 1997 of $300m looks increasingly conservative. Part of the drive behind these improvements comes from naked self-interest, as BP executives get their full personal bonuses if savings reach twice the target level.
After a dividend hike in the last quarter it was too much to hope for another one this time, though further increases in the second half are now certain. There is no constraint from borrowings, which at $6bn compare with long-term aspirations of $7bn to $8bn, but the reason Mr Browne remains cagey about raising the payout is, or course, political. Dishing out cash in special dividends or buy-backs would be a red rag to Labour as the other Mr Brown (Gordon that is) contemplates raising North Sea oil tax. Yet the pressure from the market for BP to do something by the end of the year is becoming intense.
Full-year profits of pounds 2.94bn would put the shares on a forward multiple of 14. Currently yielding 3.3 per cent and with the case for special payouts all but unanswerable, the shares are a definite hold.
Shire Pharmaceuticals is putting in a strong bid to be taken seriously as more than just a biotechnology hopeful. Following on from February's chunky pounds 105m acquisition of Pharmavene, a US drugs delivery group, yesterday the group was demonstrating the breadth of its drugs pipeline in a research and development update.
Galantamine, the compound originally derived from daffodils which represents Shire's lead product, is proving to have wider medical properties than originally thought. Initially indicated for use against Alzheimer's disease, the group is now ready to test its use against chronic fatigue syndrome, also known as ME or "yuppie flu". A 300-patient trial into both efficacy and tolerability will start later this month, with another involving 60 people in Iceland due to start in September. If it ever reaches doctors' surgeries, perhaps in 2005, it could be attacking a $2.5bn market for which there is no current treatment, the company believes. But there is more, for early observations using galantamine against Alzheimer's appear to show it is effective against both rheumatoid arthritis and osteoarthritis, two other big markets.
Meanwhile, analysts are excited by the prospects for Lambda, a treatment for reducing phosphate levels in the blood of people with kidney disease. Untreated, a build up of phosphate can lead to bone disease. Shire is already the market leader in the UK in this area with its calcium carbonate product, but Lambda is said to offer substantial improvements. The potential market is 1.6 million patients world-wide and this could be the first drug to be marketed outside the UK directly by Shire.
Finally, Shire reckons Nifedipine SR, a cardiovascular which could be launched before 2000, might sell into a US market worth $1.1bn. That will depend, however, on whether it can overcome expected legal action from Pfizer, the current market leader.
The wide portfolio at Shire is matched by the depth of its management. Much still depends on the outcome of the phase III tests for the Alzheimer's drug, due in September, but Lehman Brothers estimate the shares' net present value at 274p, rising to 364p next year. That is below the current market price of 219p, up 2p, and makes them a reasonable punt.
Sidlaw repackages its strategy
Sidlaw has been through the wars since its disastrous 1993 decision to step up the scale of its flexible packaging operations. That led to losses over the past two years and a plunging share price, but John Durston, who took over as chief executive in the autumn, is starting to use his experience in the industry to good effect.
Last year's move to dump the oil services business took the decision to concentrate on packaging to its logical conclusion. But Mr Durston has also put a lot of effort into improving customer service and efficiency, two areas which appeared neglected under the dash for volume policy which led Sidlaw astray before. The fruits of these labours are reflected in the group's half-year results to March, although the figures are distorted by the pounds 17.3m profit on the sale of oil services and a pounds 1.7m charge for rationalisation.
Stripping that lot out, the underlying pre-tax total rose from a loss of pounds 1.41m to a profit of pounds 1.75m.
The proceeds of the disposal of oil services cut the interest charge from pounds 2.09m to pounds 162,000 and left net cash of pounds 3.3m in March. The group reckons it has firepower for pounds 25m of acquisitions, but nothing is imminent. In the meantime, it will be pushed into borrowings again by a pounds 12m capital expenditure programme this year.
Part of the spending will help service a pounds 6m-a-year contract to supply Cadbury with wrappers and should also improve efficiency. Sidlaw also claims to have won back most of the customers lost during its difficult patch.
The problem remains, however, that the group is still highly dependent on mature or declining markets like biscuit packets and bread bags, which remain at the mercy of the supermarket price wars. Even with innovative products like its P-Plus "breathable" fresh-produce wrapper, it still has to prove it is not just running to stand still.
Profits of pounds 3.5m in the full year would put the shares, down 3p at 103.5p, on a forward p/e of 23. The shadow of previous rights issues at 275p and 180p hangs over the shares, but they are probably still worth holding.
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