THE INVESTMENT COLUMN : BP looks like pick of the sector
Thursday 20 April 1995
Many were wrongfooted by the strong bounce in chemicals prices from the middle of last year, as illustrated in our table, which dragged up margins in their wake and helped offset poor performances elsewhere. On ethylene, the gross margin soared from 295 marks a tonne last May to 760 marks in February.
That had a dramatic effect on profits. Shell's revival was the more spectacular, turning a 1993 loss of £409m into earnings of £340m, but BP's chemical operations also returned to the black, reporting profits of £252m after losses of £68m the previous year.
Although prices and margins have fallen back a little in the first quarter, the strong recovery in chemicals after years of poor returns looks set to continue. Prices for contract deliveries - typically for six months - lag the spot market, so the dowry of last year's rises should continue through much of this year, even if the peak may have been reached for the time being.
Refining and marketing, the sick man of the industry last year, continues to be highly competitive. But as economic recovery seeps through to the consumer on both sides of the Atlantic, and given a more settled oil price, refiners will find it easier to widen their recent abysmal margins.
Although less important than once perceived, the price of crude remains crucial to the fortunes of the industry, both big and particularly small. After it rose strongly from last year's average of around $16 in the first quarter, analysts are now looking for the oil price to hold around the $18 mark this year. With the pound being dragged down with the dollar, that should feed more or less straight through to sterling profits in 1995.
That will give a fillip to reported figures for Enterprise and Lasmo, which dominate the exploration and production sub-sector. The former is accelerating its exploration spending to around £120m this year, which should go some way to restoring confidence in the company after last year's failed takeover of Lasmo. And although Lasmo fended off Enterprise, its share price continues to be buoyed by takeover speculation.
But for the risk-averse, BP should prove a safer beneficiary from the oil price, while also experiencing a continuing boost from its massive productivity improvement programme, which analysts believe will deliver the promised $3bn of net income long before the target date of December 1996.
There is greater scepticism over Shell's more limited cost-cutting plan, which recently saw the company announce the loss of 1,200 jobs in its two head offices.
On NatWest Securities' forecast dividend of 29.9p for the current year, Shell Transport & Trading shares stand on a prospective yield of 5.2 per cent, which compares with 3.6 per cent for BP, based on a forecast payout of 12.5p. BP still looks the pick of the sector, as the yield rises closer to the market average.
Good value in Smurfit
Jefferson Smurfit, the Dublin-based paper and packaging company, exceeded most profit forecasts for last year, turning in Ir£118.8m for the 11 months to December (reflecting a changed year-end), 70 per cent ahead of the 12 months to January 1994.
Europe was the star performer, helped by sharply higher demand for the company's linerboard and containerboard and the results of last year's £864m aquisition of Cellulose du Pin, a French competitor, which has been earnings-enhancing from the start.
Further price increases for Smurfit's main product lines have already been announced, providing yet more momentum.
So why is the stock so cheap? At last night's close of Ir359p, Smurfit is trading on a multiple of six and a half times 1996 projected earnings, compared with about nine times at a similar stage in the last cycle. The company earned about Ir£245m pre-tax in 1989, at the last peak, dropping to as low as Ir£45m during the worst of the recession. Given that analysts expect earnings of about Ir£350m-Ir£360m (Ir46p a share) this year, and perhaps Ir£460m (Ir56p) next, there should be plenty of growth still to come.
One reason for caution is that investors fear the industry will again build capacity just as the market peaks. Smurfit's management swears that will not happen this time. But Stone, a rival, has already announced additional capacity for 1996, while Smurfit is contemplating a new mill in Europe with a capacity of 350,000 tonnes.
The French acquisition means Smurfit has only recently brought its operations into rough balance between Europe and the Americas. As a result, it is planning to take investor relations in the UK much more seriously. It is planning a one-for-one scrip issue. A US listing through American depository receipts is also on the cards.
On fundamentals, Smurfit looks well run. Provided it uses its cash effectively (perhaps another strategic acquisition) rather than engaging in further capacity building, the shares look good value at current prices.
goes far enough
The strong run in the shares of Psion, the hand-held computer group, continued yesterday with a jump of 10p to 290p. They have now risen from a recent low of around 244p, hit just before the group announced 1994 profits more than doubled to £6.55m in mid-March.
The finance director, Michael Langley, could find no particular reason for the latest jump. However, he reiterated the message given at the time of the preliminary figures, that trading and margins had been strong in the first quarter. "That continues to be the case," he said.
Yesterday's buying appeared to be coming in lots of about 5,000 shares, suggesting small buyers rather than a predator waiting to swoop. Any bidder has left a move against the company rather late, as it has steadily clawed its way back from losses of £2.2m struck in 1991. A trade buyer would also have to contend with a 45 per cent board stake in the group.
More pertinent is Psion's attempt to move up from the Unlisted Securities Market. If the Stock Exchange authorities give the go-ahead at their meeting on Friday, that should see first dealings as a fully listed company on Monday.
A prospective p/e ratio of around 13, based on forecast profits of £7.5m for this year, suggests the shares are high enough for now.
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