The Investment Column: Times are tough for Yellow Pages, but don't dump them yet

Unilever; Invensys
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The Independent Online

Our view: Hold

Share price: 279.75p(-50.25p)

In the internet age the Yellow Pages phone book dumped at the front door is becoming increasingly redundant. Many are probably lobbed into the recycling bin before they are even opened.

Shares in Yell, the company which publishes the directory here and in the US, received similar treatment yesterday from a nervous City after warning of a sudden slowdown in sales.

Yell, stripped out of BT and floated in 2003, warned that growth in sales in the final quarter to March will be £8m lower than expected. The market's response was to lop 15 per cent or £390m off its value. It ended the day as the biggest faller in the FTSE 100.

The explanation offered for the slowdown, which will trim full-year growth from 3 per cent to 2 per cent, was that many advertisers are cutting back on their budgets after returning from the Christmas break. After taking a look at the prospects for corporate Britain, who can blame them?

Despite the hitch Yell will still hit other targets on earnings and margins. Nine-month profits were up from £175m to £216m.

Yell is clearly running at two speeds. While the printed directory enters what must surely be the twilight years of its usefulness – sales are currently 4.4 per cent down – the online version is growing at 50 per cent a year and accounting for 20 per cent of total revenue. In the US, from a much smaller base, the business is increasing at 70 per cent.

In the coming year Yell will benefit from the equivalent of a 6 per cent price rise as a cap on the rates it can charge advertisers comes to an end. But the real issue is whether demand from advertisers will pick up, and when, or remain at present subdued levels. There are little grounds for optimism.

The shares have lost 56 per cent of their value over the last year, briefly fluttering higher on vague talk of a bid from Google. The prospect of corporate action would inject some life into the shares. Hold.


Our view: Buy

Share price: 1598p (-57p)

Supermarkets are known for using their power to tell suppliers they will not accept price increases. Unless they are dealing with Unilever. The Anglo-Dutch food-to-soap giant delivered a thumping 6.1 per cent rise in sales during the final quarter of last year, of which half came from higher prices. Its brands are so important the supermarkets had no choice but to pay up.

The rises were forced on Unilever by rising commodity costs – something even it has little control over.

Unilever is a leaner, fitter group than in the past, when it was slow to spot trends and bureaucratic in its response to new opportunities. Best known for Hellmann's mayonnaise and Dove soap, it has shrunk the number of products it produces into a more manageable portfolio and is responding more quickly to changes in consumer tastes. So clear anti-dandruff shampoo has been successfully launched in Russia, and Lipton slimming teas in France. In Japan the company owns the leading deodorant brand within six months of launch.

Unilever reported pre-tax profits for the year of £3.8bn, up 11 per cent, reflecting a marked improvement in Europe. Sales rose 5.5 per cent, ahead of the group's own target.

Further growth is on the cards this year, although in a weakening consumer market its customers may adopt a more challenging attitude towards price rises.

Some dealers were disappointed at the buy-back programme for 2008, which is less than expected. Buy.


Our view: Hold

Share price: 246.5p (+23.25p)

The rehabilitation of the engineering group Invensys is well underway. Trading is strong in the parts of the group that matter, debts are being repaid, and there is talk of a return to the dividend list – although that may be a little way off. The shares went better in a weak market.

The company is benefiting from strong demand in industries served by its process systems and rail divisions, which are now generating nearly two thirds of total sales. They are the real engines of growth, supplying components and electronic systems needed in large-scale infrastructure projects. Their order books stand at £1.8bn. The picture was less rosy in its controls division, which experienced weaker demand in the US. It also lost one key customer.

At the operating level, profits for the third quarter to end December were 26 per cent ahead, but at the pre-tax level they were down £5m at £33m after one off charges and foreign exchange losses.

After a series of disposals of low-margin businesses, Invensys is now planning to pay off £343m of high-yield bonds as a prelude to eventually resuming dividend payments.

The shares have been weak over the past year on its exposure to the US, but the current performance suggests it has the resilience and spread of activities to withstand any short- to medium-term deterioration in market conditions.

The group is likely to turn in full year profits of £190m, putting the shares on a multiple of 14. Hold.