Shell's cost-cuts fail to impress

THE INVESTMENT COLUMN

Shell has been pushed into the limelight by BP's renaissance over the past three years. It is a late convert to the creed of restructuring pioneered by its smaller sister and the City has taken a jaundiced view of the company's efforts so far.

The Billiton minerals operation has been sold off to Gencor of South Africa and over 1,000 jobs have been cut at the group's combined head offices in London and The Hague, but the results have yet to show up in the figures.

Yesterday, the oil giant disappointed analysts with earnings, cut 63 per cent to pounds 602m for the fourth quarter to December.

The results, which exclude the distortions of stock gains, were depressed by one-offs. Stripping out a pounds 502m gain in the last three months of 1994 and a pounds 249m charge, mostly relating to asset write-downs in the latest period, there was still a 24 per cent slump in earnings.

Chemicals was the area of most concern. Despite the merger of most of Shell's polypropylene and polyethylene businesses with Montedison of Italy in 1994, the business appears not to have found it easy to weather last year's downturn in the chemicals cycle.

Most of the pain came in operations outside the US, as competition squeezed prices and squashed margins. Stripping out funnies, earnings from non- US chemicals slumped from pounds 222m in the third quarter to around pounds 53m in the last three months of the year.

With destocking likely to continue and competition continuing to intensify, the slide is likely to continue into the first half of this year. Further out, improving polypropylene margins suggest the bottom may be in sight in the second half, but Shell's room for manoeuvre has been limited by the Montell joint venture, given that it is only 50 per cent owned.

Shell won few plaudits from analysts for its performance in the downstream oil business either. Here again, the non-US business was in the dog box. Excluding special charges, earnings sank 21 per cent to pounds 300m and were also well down on the third- quarter.

Refining margins held up, but there were clearly pressures at the pumps, given the well-advertised price wars, and Shell seems to be suffering a little in the promising Far Eastern market as others pile in.

For the full 12 months, Shell was helped by higher oil prices and production and three good quarters from chemicals as the cycle peaked. That pushed net income 7 per cent ahead to a record pounds 4.38bn, but the immediate outlook is for more unexciting growth unless Shell really does get to grips with costs.

Hints that it may deal radically with refinery overcapacity would be well received by the market.

In the meantime, the shares should be well supported by a prospective yield of 5.5 per cent, even if they look fully valued on a forward rating of 16, assuming net income of pounds 5bn this year. Given Shell's long-term outperformance against BP, they are a hold.

Right direction at Kingfisher

For a FT-SE 100 stock, Kingfisher has offered some unusual trading potential over the past three years. Anyone prescient enough to buy the shares in the autumn of 1992 could have picked them up for 400p, sold them at the end of 1993 for 778p and bought them back again a year later for half as much.

That reflects what has been and will continue to be an uphill struggle for the Comet, Woolworths, B&Q and Superdrug group to turn some of the high street's uglier sisters back into the Cinderella that Kingfisher was for many years in the 1980s. But for the first time in a couple of years, the company looks like it at least knows what it is trying to do.

The work going on at Woolworths is a case in point. Here is a business with a magnificent franchise, an almost unparalleled high street presence and sales of well in excess of pounds 1bn. To generate profits of pounds 50m, as Kingfisher managed to do in 1994, was plainly a triumph of mismanagement and the company admits it got it wrong with pricing, range and distribution - pretty much everything, in other words.

With a new divisional chief in place, Woolies has now realised that, with its bottom-end target market, to fail to compete on price makes no sense. Laying stores out better and refining the offer to suit the very different shoppers in local and city centre sites should mean that profits started moving in the right direction in the year to January just finished.

A pre-Christmas trading statement also pointed to an encouraging bounce in profits at Comet, the out-of-town electricals retailer. Darty, its sister chain in France, also performed well, although B&Q is still struggling in very difficult DIY markets.

So things are heading the right way again. What shareholders who have watched their shares appreciate by more than 25 per cent over the past year must decide is how much of the good news is in the price. On forecast profits of pounds 275m last year and pounds 320m to next January, the shares, at 521p, trade on a prospective price/earnings ratio of 15. With little dividend support, that is high enough.

Mersey sails through strife

Ignore the industrial dispute and ferry problems that hit yesterday's profits at Mersey Docks and Harbour Company, and the figures look pretty good. The pounds 4m cost of the strike action and pounds 3.3m incurred by its Eurolink Ferries division depressed pre-tax profits, which fell by almost pounds 2m to pounds 31.7m. Strip out the one-offs, however, and the underlying numbers were up 16.3 per cent to pounds 39m.

Despite the disruption to business at the Port of Liverpool, the group managed a record turnover of pounds 138m, with Medway Ports achieving volumes up 30 per cent, a figure unlikely to be matched this year by another UK port. The company continued to invest heavily and Mersey Docks will spend another pounds 30m this year, with most of the money invested at Liverpool.

Although the 330 sacked dockers have rejected a peace deal, business at Liverpool appears to be back to normal with a new labour force. Threats by dockers to seek support from workers at overseas ports, and worries that Mersey Docks may have to increase its pounds 8m "final offer" to settle the dispute, however, continue to linger over the shares.

Nudging 440p before the dispute started last year, they were down another 5p yesterday to 405p despite a 9 per cent rise in the final dividend, making 11.5p for the year. While that may be slightly unfair, the fall should mean that all Mersey Docks' problems now appear to have been factored into the price, and the shares are more likely to go up than down.

Nor should the problems at Eurolink be overdone. The passenger-freight service from Kent to Holland has clearly not performed and a new management team has until the end of this year to bring it close to break-even. With BZW forecasting an unchanged pre-tax profit of pounds 41m this year, and pounds 47m next, the shares currently stand at a 5 per cent discount. Reasonable value.