Rugby held in its own territory
Tuesday 12 March 1996
After that write-off, the pre-tax number slipped 40 per cent to pounds 45.8m (pounds 76.1m) and earnings per share fell a similar amount to 4.5p (8.1p), just about covering the year's dividend of 3.6p.
Most of the damage was caused at the famously difficult US distribution subsidiary, acquired at the wrong stage of the cycle and the cause of anguish ever since. The latest restructuring appears to be a root-and- branch revamp and an admission at last that it was a bad deal.
Elsewhere there is evidence that last year's resignation for health reasons of Rugby's longstanding chief executive, Peter Carr, is having a tonic effect on the group's strategic direction. The planned sale of the metal building products arm, which makes steel structures and reinforcing wire, is a welcome concentration on the core businesses.
Some would say it is also about time too. Rugby has been well and truly overtaken by Blue Circle in the cement business and its margins are now half those of its bigger rival. Replacing half its capacity with new plant will help, but the effect won't be felt for two or three years.The cost of that, at about pounds 100m, was outlined yesterday. It will necessitate another write-off of almost pounds 10m.
In the doors and windows business, it is also hard to see where profits are going in a market still dogged by overcapacity.
The housing market is expected to pick up in the second half of this year but the sort of anaemic recovery currently being forecast will hardly be enough to make up for the complacency which has arguably seen the company sitting for too long on its leading position in the industry.
On the basis of forecast profits of pounds 77.5m this year and pounds 87m next time, the shares, down 2p to 113p, stand on a prospective price/earnings ratio of 12.3. That is ahead of the sector, which seems demanding given the limited prospects, putting too much faith in what is a fairly attractive sales-to-price ratio, a good return on capital and strong balance sheet.
Rugby is touted as a potential bid target because it has much better cash flow than its earnings figures would suggest. That provides a floor to the shares, but with a sub-market yield (a legacy of the parsimonious Mr Carr) and no clear strategic view, they are likely to remain flat.
Sports brands lead at Pentland
Pentland has built a portfolio of some of the best-known brands in sports, including Speedo swimwear, Berghaus outdoor clothing and Ellesse shoes. That is the glamorous side of the business and it has forged ahead; there is an ugly sister too, however, and it has been letting the side down.
Pentland's other division is consumer products which includes three businesses that make electrical appliances, greeting cards and wrapping paper. Last year all three had a torrid time.
In the full year to December, pre-tax profits were flat at pounds 38m on sales 19 per cent higher at pounds 755m. While profits at the footwear, clothing and sports division jumped from pounds 14.5m to pounds 18m in the year to December, profits in consumer products slumped from pounds 9m to pounds 7.6m. Interest receivable also fell on lower cash balances of pounds 40m.
The fan heater business was hit by soaring plastic prices and while sales were up by 50 per cent, margins were squeezed. Wood Industries, an American business which supplies electrical accessories to the DIY market, has been affected by retailers running down their stocks as well as higher raw material prices. Hanson White, the greeting card and gift wrap business, was put under pressure by intense competition and higher paper prices.
Pentland is now conducting a strategic review which might see the disposal of these businesses. Some analysts expect a sale this year though as all three are profitable there is plainly no rush.
Of the sports brands, Pentland has high hopes of Speedo this year due to exposure at the Olympic games. Authentic Fitness Corporation, the Speedo licensee listed in New York, increased its contribution to Pentland's profits by 41 per cent last year to pounds 6m.
Mitre, the supplier of footballs which was acquired last year for pounds 9.5m is not expected to make a profit until 1997 but Ellesse and Berghaus increased both sales and profits.
Pentland's shares have fallen sharply from their peak of 146p last August and slipped a further 2p to 103p yesterday. With analysts forecasting profits of pounds 44m this year and a forward rating of 14, the shares look unexciting.
D&G requires a long view
After being knocked back by the negative publicity surrounding extended warranties, revenues have started growing again at Domestic & General, the specialised domestic products insurer. But the 6.8 per cent rise in profits before tax for the six months to 31 December 1995 to pounds 5.39m confirms that the heady expansion of the late 1980s and early 1990s has now steadied to a more pedestrian rate.
Turnover, which had fallen by around 5 per cent in the first six months of 1995, reacting to the criticism of extended warranties by the Office of Fair Trading, recovered to show 5 per cent growth in the latter half of last year. Net retained income, which is a key performance indicator, increased by 9.5 per cent. The dividend per share was raised to 12.25p.
The results suggest that demand for extended warranty products is more robust than the OFT or the Consumers Association would have us believe. Despite their scepticism as to the value of prolonging product insurance once the manufacturer's guarantee for a washing machine or video recorder has expired, D&G continues to have very high renewal rates among its 2.7 million customers. HSBC James Capel estimates full-year profits of pounds 11.4m, with an EPS of 111p, putting the stock at just under 15 times earnings, or a similar rating to the market as a whole.
But investors need to look well beyond the current results to form a view on D&G. The company is currently spending heavily in an attempt to replicate on the Continent, especially in Germany, its phenomenal pioneering success in the UK. Early results are moderately encouraging, but this is a green-field venture, and will take time. If five years from now the company can demonstrate significant progress in Germany, then the current pounds 16 share price looks cheap. But it is a big if and financial service concepts are often poor at crossing national boundaries. High enough.
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