Rexam's fall casts a long shadow

THE INVESTMENT COLUMN

The dramatic fall in packaging group Rexam's share price yesterday, down 73p to 422p, reflects the shock of a stock market that had been blithely ignoring economic reality as much as what was a relatively restrained trading statement.

When investors are flush with cash, and the market is testing new highs, the last thing they want to hear is the engine faltering. Grating noises from cyclical stocks, which are supposed finally to be basking in an upswing, are doubly worrying.

What is really alarming about the fall from grace of Rexam (which most of us still know as Bowater) is the speed with which trading appears to have deteriorated as customers who built up stocks in anticipation of higher prices put the brakes on in June.

Trading has not improved since the end of the second quarter and the company thinks demand will remain flat for the rest of the year. A pause, the company says - the market is unconvinced, with strategists pointing out that trends usually start as company-specific problems, then spread.

Following hot on the heels of Wilson Bowden's gloomy prognosis for the building industry yesterday, Rexam has given the market a severe case of the cyclical jitters. Inventories building up in a range of industries from textiles to metal manufacturing and paper to engineering suggest economic recovery on both sides of the Atlantic is fast running out of steam.

Which is a shame for Rexam, a company that has worked hard to knock a rag-bag of unrelated businesses into a well-focused printing and packaging group operating in growing markets around the world.

Since new management set about transforming the company in 1987, it has spent more than pounds 1.5bn on acquisitions, raised pounds 650m from disposals and given shareholders a healthy total return of more than 20 per cent a year.

Even ignoring the warning yesterday, however, interim profits were pretty dull. Most of a 14 per cent rise in sales was accounted for by passing on raw material rises. Underlying profits nudged up from pounds 109m to pounds 111m and the half-time dividend was raised a cautious 5 per cent to 6.1p.

Sharply revised forecasts of about pounds 230m for the year from pounds 260m, put the shares on a prospective p/e of 14. If the cycle is turning, that is too high a rating and the shares are expensive.

Things have been going well for Glynwed. Backed by a fair wind in the economy and an exchange rate that gives British manufacturers a cost advantage, the engineering group, which makes everything from Aga cookers to copper tubing, has been firing on all cylinders.

Yesterday's figures confirmed recent form. Pre-tax profits for the six months to July were up by 42 per cent to pounds 29m and all divisions apart from the loss-making tubes and fittings arm turned in strong profits growth.

Glynwed will today announce the level of acceptances for its pounds 147m bid for Victaulic, a pipes and tubes manufacturer, which would provide a neat fit with the company's existing operations.

The problem is that the City does not quite believe that the trend is sustainable, that Glynwed won't just turn down with the next dip in the economy.

Certainly during the last recession Glynwed was a classic early-cycle engineering company. In 1989, the peak of the boom, Glynwed's profits grew by only 7.6 per cent while peer group companies such as IMI and Vickers managed double that.

The composition of the group has hardly changed since then and the warning signs are already apparent in the current figures. Profits in the consumer products division grew at just 4 per cent compared with 27 per cent the year before. In spite of a 42 per cent hike in profits, the dividend is only being increased by 6 per cent.

Glynwed is a well-run company and has done many of the right things to insure itself against the vagaries of the cycle. It has reduced its cost base, increased productivity and tried to reduce its reliance on the UK economy. But the company is more exposed to the domestic economic cycle than it would like to admit. Williams de Broe is forecasting profits of pounds 87m for the full year. With the shares up 6p to 361p yesterday, that puts them on a forward rating of 13.

After a good run up from 183p in August 1992, the bottom of the slump, the shares now look high enough.

Glynwed still wed to economy

CU's strategy pays dividends

The market's reaction to Commercial Union's first-half figures looked pretty grudging, although hardly unexpected given the shares' good run recently.

The shares fell 17p to 626p yesterday despite a 25 per cent rise in profits to a top-of-the-range pounds 246m as the market focused on a disappointing dividend rise and worrying comments on the trend for premium income.

John Carter, chief executive, was happy enough, though. These were record profits, with improved results in most areas. Importantly, profits were neatly balanced - both life and general insurance operations contributing to the overall success.

The figures appear to bear out an important strand of Commercial Union's long-term strategy of diversification. Back in the mid-1980s, life business accounted for just 20 per cent of CU's premium income.

Today, that figure is 42 per cent. Not putting all its eggs in one basket appears to gave paid off.

Perhaps more important is the fact that CU's expansion of its life operations has not been confined to the stagnating UK market.

While profits from the UK end of the operation fell from pounds 24m to pounds 21m, other parts of the world picked up the slack.

CU's purchase of Groupe Victoire in October, not universally seen as a brilliant idea, seems to be proving its critics at least partially wrong.

The French company, it was argued, was at the mercy of stiffer competition from home-grown bancassurers, while exposure to the bombed-out Parisian property market was greeted warily.

Nine months later, things look marginally better, with Groupe Victoire contributing pounds 33m to overall life profits and pounds 740m to premium income.

Some analysts continue to be worried by CU's unwillingness to make more prudent reserves against general insurance claims, especially in the United States and, at a 19 per cent premium to net assets, the shares look pretty fully valued.

That said, a yield of almost 6 per cent is attractive.