THE INVESTMENT COLUMN : ICI performance short of steam

The advantage of quarterly reporting from the investor's point of view is that it gives a pretty accurate sense of when a cyclical recovery has run out of steam. That appears to have happened for ICI in the three months to September and it was no surprise that the shares fell 24p to 779p on yesterday's third-quarter results.

Looking at the nine months' figures could give the impression that everything is still going swimmingly for the chemicals giant. Pre-tax profits before exceptionals jumped a mighty 108 per cent to pounds 758m (pounds 393m), with earnings per share rising an even more impressive 128 per cent to 61.7p.

Reading between the lines, however, underlines how little of the good news was added to the equation since the summer.

Plainly, the petrochemicals cycle is approaching its peak, volumes are starting to flag and the growth that has been achieved has come from the delayed effect of price rises rather than any underlying buoyancy in the market.

That said, there were some pleasant surprises. Profits from ICI's materials businesses jumped an unexpected pounds 83m to pounds 144m on the back of improved selling prices.

The same story gave a lift to industrial chemicals, which at pounds 422m contributed more than half of group profits, and regional businesses, more than doubled at pounds 112m, benefited from good trading in Australia.

But reading the fine print of the third-quarter figures shows that a 12 per cent rise in third-quarter turnover actually disguised a 4 per cent volume fall, with the slide more than made up for by price rises worth 14 per cent. No problem says the company; with little new capacity coming on stream in Europe there's no chance of a slump in prices. Investors with long memories have heard that sort of claim many times before.

Attention will now focus on the extent to which ICI can continue to squeeze the cost base. Back in July another pounds 300m-pounds 400m of savings was promised and it remains to be seen how achievable that is. With profits unlikely to recapture until next year the level enjoyed in 1989, it is becoming apparent just how much of a lifesaver the cost-cutting programme of the past four years has been.

Smith New Court has pencilled in pounds 970m this year, followed by pounds 1.05bn in 1996, when earnings per share will reach 84.5p, putting the shares on a prospective price/earnings ratio of 9. That is not demanding, and a forward dividend yield of 5.3 per cent will give the shares some support, but they are unlikely to do more than tread water until the benefits of the latest cost-cutting programme start to become clear.

Eurovein still seeking a pulse

Eurovein, the Sheffield-based engineering group, is not the worst of the many new issue flops of last year, but it is certainly a serious candidate. The duffer of '94 was Aerostructures Hamble, the aviation group chaired by former British Airways chairman Lord King. After floating at 120p it was eventually taken over last month at 32p a share after four profits warnings in little more than a year.

Eurovein's brief life as a public company has been almost as calamitous. Floated at 141p last November it issued two profits warnings in its first three months on the market. The shares have slumped to 40p, unchanged yesterday.

Yesterday Eurovein reported losses of pounds 1.1m for the 12 months to July, roughly in line with the adjusted forecasts. Sales fell from pounds 35.7m to pounds 32.6m.

The problems were chiefly caused by deferred orders in the surface treatment division and difficulties with low-margin contracts. One German order, taken on as a loss-leader in the hope of making a return on spare parts, turned in a thumping loss.

Since then Eurovein has parted company with its group managing director and several other divisional changes have been made.

Cuts have been made at both the French and German operations where engineering activities are being trransferred to the UK. The job losses that accompanied the move necessitated a pounds 700,000 provision against last year's figures.

The outlook is not exactly thrilling. The economic prospects are uncertain in the UK, which accounts for a quarter of Eurovein's sales. Though Germany is doing well, the French market is also weak. The limited good news is that the delayed contracts came through in the second half and the cost benefits from a product rationalisation and redundancy programme should boost the current year's figures.

Elsewhere the company says marketing efforts have been strengthened and margin and production control procedures have been revised. The company says the order book to January is healthy, with the figure up from pounds 11.3m to pounds 11.9m at the end of September.

Albert E Sharp, the broker which sponsored the issue, is forecasting profits of pounds 1.6m for the current year. That puts the shares on a forward p/e of five. A possible recovery play, but given this company's grim record, the shares are best treated with extreme caution.

Westbury shows

its resilience

Another solid set of first-half figures from Westbury confirmed that the South-west and Midlands housebuilder has put behind it the loss- making, provision-dogged years of the early 1990s. After a dismal reporting season for the sector, these were surprisingly resilient results and the shares closed 6p higher at 161p, 30 per cent higher than they traded in March.

Pre-tax profits of pounds 6.5m were 13 per cent better than the first half of last year, benefiting from a widening in operating margin from 8.2 to 8.9 per cent. Partly that reflected higher sales, with turnover up 12 per cent to pounds 89.6m, but it was impressive in the face of rising incentive costs.

The cost of persuading buyers to complete increased from 2.8 per cent of total selling price to 3.6 per cent, and half of all the company's trade-up detached houses are now sold on a part-exchange of the buyer's old property.

Only Westbury's focus on the lower end of the market, where demand has remained stronger than further up the price scale, has protected it from the underlying sluggishness of the housing industry. Private house sales increased 8 per cent in the period, to 1,275, and the average price increased 7 per cent to pounds 67,370 as more larger, detached houses were sold - like- for-like increases were negligible.

The decision by a string of diversified groups over the summer to pull out of housebuilding confirms that the only groups likely to prosper in what will continue to be difficult markets are specialist builders operating, like Westbury, in relatively strong niches. The land that comes onto the market as a result of those withdrawals should enable the stronger players to bolster their land banks at sensible prices.

That said, Westbury is as dependent as any other builder on a reduction in the uncertainty dogging potential buyers, an improvement in weak underlying prices and a slowdown in the rise in raw material costs. Matching last year's sales and margins suggests profits are unlikely to beat last year's pounds 12.6m by a great deal and, on a prospective price/earnings ratio of 12.5, the shares are fairly priced.

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