S&N keeps things nice and dull

THE INVESTMENT COLUMN

No one would pretend there is anything very exciting about Smith & Nephew's product portfolio, where reasonably well-known brands such as Elastoplast and Lil-lets are joined by stomach-turners like leg-ulcer bandages and plain boring pieces such as tongs to help the infirm pick things up off the floor.

There was little to get excited about, either, in yesterday's interim pre-tax profit figure, which showed an underlying 4 per cent rise to pounds 85.3m. That was before the pounds 148m exceptional item that blew a hole in last year's figures, as the company faced up to the disastrous cost of its investment in Ioptex, the US lens business.

Earnings per share, at 5.23p, were up by a similarly uninspiring margin and the dividend, 2.16p, was increased by 7 per cent, reflecting the underlying growth of the business.

But at the end of a summer that has been punctuated by unexpected profit warnings and gloomy trading statements, there is something eminently reassuring about a company growing steadily, nudging its market shares ever higher, and predicting more of the same for the foreseeable future.

And being dull does not stop the company being an extremely attractive bid target when it occupies first or second place in so many markets and has enormous clout with big buyers both in the UK and overseas, where 80 per cent of Smith's sales are now made.

The company poured water yesterday on the latest resurgence of the rumour that Johnson & Johnson is poised to buy it, but it is easy to see why the American giant might be interested.

Smith & Nephew's markets are undoubtedly mature - 2 per cent growth in volume and perhaps 1 per cent a year in price is a fair guess - so pushing turnover and profits ahead by a steady 8 per cent a year is not bad.

That is especially so when some of Smith & Nephew's more important markets, such as France and Spain, are as flat as a pancake. To achieve that sort of growth, managers have done much hard and unglamorous work, selling lower-margin operations and buying small niche-market leaders, spending a reasonably high proportion of sales on research to keep the new ideas flowing, and stripping out the fat from the company's European distribution system.

Whether that good work and bid speculation are enough to merit a p/e premium to the rest of the market of about 20 per cent, however, is far from clear. On the basis of forecast profits of pounds 181m this year, the shares, down 5p to 190p, trade on a p/e of 17 . That is too high given the dull growth prospects.

HSBC had to look better

Dismal results have their uses - a year later they can make any performance look pretty spectacular. That was certainly the case with the 250 per cent leap in dealing profits reported yesterday by HSBC, due in no small measure to 1994's well-below-par performance.

The turnround helped bolster a satisfactory set of headline figures for HSBC, which reported interim pre-tax profits up 19 per cent to pounds 1.7bn - a solid performance. The figures are rather flattering, however, and behind the dealing gains and the benefits from disposals and low provisions lurks plenty to give investors pause for thought.

Much of the strong earnings is coming from HSBC's peripheral regions - the Americas and continental Europe - while the core businesses in the UK (Midland Bank) and Asia are not doing as perkily as the headline numbers suggest.

If you strip out the gains from disposals and lower bad-debt provisions, Midland's normal banking operations in the UK have seen a fall in earnings in the region of 15 to 20 per cent. The huge dealing profits from around the world have also been credited to London and Midland, putting a much healthier glow than justified on the underlying performance.

With provisions now as low as they can possibly get, and dealing profits and disposals higher than normal, it is worth asking quite where the conventional banking business is heading from here.

The results in Hong Kong also appear worryingly pedestrian, and the future is full of risks. This makes trying to pass a judgement on HSBC more an act of faith than a reasoned assessment of the underlying business. If you believe that Hong Kong is a viable, continuing entity, and that HSBC's management will manage to do more with Midland than has been achieved so far, then HSBC's shares are not expensive on a prospective p/e of under 10.

Nor should they be, however, with growth expected to fizzle out next year and a prospective yield of 4.6 per cent underpinning the shares but providing little incentive to buy.

Budget cuts

squeeze Takare

Britain's ageing population and the Conservatives' privatisation initiatives gave nursing-home stocks such as Takare, the biggest in the sector, go-go status in the late 1980s and early 1990s. But Takare's shares have suffered since the 1993 Community Care Act passed responsibility for the elderly to local authorities, whose budgets are increasingly stretched.

Yesterday's half-time report to June showed that average occupancy levels, down from 96.5 to 95.8 per cent, are continuing to suffer, with no sign of the post-April pick-up as councils start a new financial year. There is also a growing geographical disparity in authorities' ability to cope. It is unfortunate that two apparently having difficulty, in Essex and Hertfordshire, are in parts of the south-east region being targeted by Takare.

That said, the company has shown commendable sensitivity to investors' worries by moving to depreciate land and buildings and cutting down on the practice of capitalising interest, lopping pounds 1.69m from interim pre- tax profits, up from pounds 9.39m to pounds 9.97m, and leaving earnings per share almost static at 6.5p.

Takare remains confident it can finance its pounds 55m-pounds 65m annual capital expenditure programme from its own resources - fears of a cash call have been another cause of shareholder jitters. Gearing has risen from 2 to 23 per cent since June last year.

Profits of pounds 25.5m this year would put the shares, up 3.5p at 191p, on a prospective multiple of under 14. Reasonable value, although Takare is exposed to Government financial stringency given that 86 per cent of its residents depend on state funding.

COMPANY RESULTS

Turnover pounds P/Tax pounds EPS Dividend

Argos (I) 474.7m(412.8m) 21.8m (15.3m) 4.82p (3.37p) 4p (2.65p)

Firstbus Group (F) 44.3m (-) 24.8m (-) 8.2p (-) - (-)

Flextech (I) 15.2m (8.6m) -7.4m (-9m) -7.88p (-9.03p) - (-)

HSBC Holdings (I) 2.45bn (2.24bn) 1.74bn (1.45bn) 46.11p (36.68p) 9.25p (8p)

Midland Bank -(-) 527m (443m) 39.6p (34.6p) - (-)

Microvitec 26.55m (20.9m) 1.6m (1.1m) 1.47p (1.24p) 0.4p (-)

Smith & Nephew 480.7m (457.4m) 73.1m (-65.8m) 3.84p (-8.61p) 2.16p (2.02p)

Takare 51.5m (42.5) 10m (9.4m) 6.5p (6.4p) 0.9p (0.8p)

(Q) - Quarterly (F) - Final (I) - Interim

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