Sterling woos the City with P&O shake-up plan

Lord Sterling launched a charm offensive in the City yesterday and won immediate approval from analysts for his plans to reverse the recent underperformance of P&O, the cruises, ferries and transport conglomerate he has headed since 1983.

He confirmed widely leaked plans to spin off Bovis Homes, the group's housebuilding arm, in a flotation next year. Other cash raising measures include pounds 500m of sales from P&O's pounds 2bn property portfolio and a reduction in the group's exposure to bulk shipping.

Those steps underpinned P&O's dividend, which was maintained in 1995 at 30.5p. Fears about the company's ability to continue that level of payout had been the prime cause of a dramatic underperformance of the market by P&O's shares in recent years, making it at times the highest yielding stock in the FT-SE 100 index of leading companies.

Lord Sterling responded to recent criticism of P&O's performance by leading fund managers by saying: "We are single minded in our commitment to getting back to a higher return on capital employed and in the meantime making strategic asset disposals where appropriate. I am confident that what I have announced today will enable us to achieve enhanced shareholder value."

Announcing better than expected full-year results, Lord Sterling poured cold water on rumours that P&O is poised to swoop on Cunard, the cruise business owned by Trafalgar House. He is understood to believe that cash is better invested in new ships than in Cunard's increasingly tired fleet.

He upped the ante, however, in his acrimonious stand-off with the Government over whether or not further consolidation should be allowed in the overcrowded cross-channel ferry market. P&O is keen to reverse undertakings made 20 years ago by his predecessors at the company that it would not move on its rivals. An attempt to strike a deal with Stena Sealink is expected later this year to shore up the ferries' defence against the threat now posed by the Channel Tunnel.

Full-year pre-tax profits of pounds 320.4m compared badly with 1994's pounds 349.5m but were at the top end of analysts expectations. Combined with the restructuring plans they resulted in a 8p rise in the share price to 522p, well down on the high of 732p achieved at the beginning of 1994 but an improvement on the low reached at the end of last year before whispers of an imminent shake-up at the company underpinned the price.

Analysts welcomed the new openness from P&O after years of poor relative performance and an unwillingness to discuss group strategy with the City. UBS analyst Richard Hannah said he would be upgrading his 1996 pre-tax profit forecast to around pounds 350m from his previous estimate of pounds 340m and others followed suit.

One said: "The moves announced today are a good starting point for a rerating of P&O but it still can't change overnight from being an underperformer to an outperformer."

Nine of P&O's 11 divisions actually bettered their 1994 profits last year but their aggregate improvement was not enough to offset heavy falls from the ferries business, which was hit hard by the Channel Tunnel, and container shipping, where deregulation around the world has increased competition.

Profits from P&O Ferries tumbled from pounds 113.9m to pounds 74.8m, while containers slipped from pounds 63.2m to pounds 40.9m. Cruises had a strong year, rising from pounds 100.1m to pounds 110.7m and, but for the one-off cost of the division's Star Princess liner being grounded, profits would have risen by more than 20 per cent.

At the heart of P&O's presentation to shareholders was a cash flow projection that Lord Sterling claimed would secure the dividend at current levels for at least the next three years as well as ongoing capital expenditure requirements. Cash needs of about pounds 665m, according to the model, will be more than met by property sales, the flotation of Bovis and the probable exit from bulk shipping.

P&O's business plan is dependent on a return to the company's historic return on capital employed, which at 11.2 per cent in 1995 was well down on the average over the past 10 years of nearly 14 per cent. That programme will receive a boost from the flotation of Bovis Homes, which generates a lower return on assets than most of the group businesses.

Comment, page 21

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