Shares: ICI poised for comeback

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IF ICI can maintain its dividend, the shares, at 1109p, yield 6.6 per cent, which makes them an attractive source of income. But the real excitement is the potential for capital gains. The shares are depressed because of the recession, but the odds are that we are now at, or even past, the worst point of the cycle. Furthermore, the group is almost certainly going to be demerged into two quoted parts - ICI Chemicals and a new bio-sciences entity, Zeneca.

Previous demergers by industrial giants, such as Bowater, BAT Industries and Courtaulds, have proved highly rewarding for shareholders. The key date is 25 February, when full-year figures are reported and we shall hear if and when the demerger is to go ahead.

The view that ICI shares are a good investment is not universal. A leading stockbroker, Smith New Court, published a weighty circular recently, arguing that the chemical business in Europe had fallen off a cliff and that the likely value of the demerged businesses was more like 950p, with a serious risk that the 1992 dividend would not be covered by earnings and would therefore be cut.

Bears have certainly had a field-day with ICI since would-be bidder Hanson Trust sold its stake for pounds 14 a share in May. Not only is the buyer, stockbroker Goldman Sachs, thought to be sitting on 10 million of the shares it acquired, but profit forecasts for this year and next have been slashed.

Trading conditions have been dreadful. A year ago, analysts were forecasting that ICI profits in 1992 would top pounds 1bn, against the peak of pounds 1.53bn in 1989. Now, after reporting third-quarter figures of less than half those for the equivalent quarter a year earlier, there are fears profits will collapse to between pounds 500m and pounds 550m. Nor do the more bearish brokers expect much recovery next year, with some forecasts as low as pounds 600m.

But a leading bull of the shares, Andrew Porter of Nikko Securities, who brought out a 40-page buy circular when the share price dipped below pounds 10 recently, says the price takes account of all the gloom and is poised for a cyclical upswing.

There was certainly a suggestion of Murphy's Law (whatever can go wrong - will) about ICI in 1992. Expected economic recovery has not occurred. On the contrary, faint signs of improvement in May and June gave way to sharp deterioration over the rest of the year. At the same time, there has been a sharp decline in sales of the group's main pharmaceutical product, Tenormin, the heart drug - a patent expiry led to massive substitution by generic drugs.

To complete the picture, doubters claim there is structural over-capacity of chemicals in Europe, that Zeneca has a weak pipeline of new pharmaceutical products and that much of the company is actually concerned with less exciting specialist chemicals, seeds and agro- chemicals.

All this depression leaves me with the gut feeling that ICI, both the shares and the company, has hit the bottom and will soon start to advance, as a result of the furious paddling which has been taking place under the surface. Even before the demerger was proposed, the group was planning to cut around pounds 400m from its cost base, and much of that has already been achieved.

The recovery potential for the supposedly boring chemicals side looks dramatic. For 1992, sales by those companies that will comprise ICI Chemicals will top pounds 8bn, with profits of perhaps pounds 150m. Some observers think ICI Chemicals could quadruple or quintuple profits over the next few years as it reaps the benefit of massive restructuring.

There are equally positive claims for Zeneca. Sales of Tenormin are showing signs of stabilising at a market share of around 25 per cent, while other drugs are doing well.

Perhaps most important of all is the sheer innovative strength of ICI culture. ICI scientists have been remarkably productive throughout the 20th century, and the group has a formidable core of expertise, worldwide distribution and global leadership over a range of activities.

Investors should seize the opportunity to buy while the price is depressed.

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