The Investment Column : RTZ hammered by plunging prices and production snags

Last year was an inauspicious time to launch the marriage of the UK mining giant RTZ with its Australian associate CRA. Copper prices sank over a fifth in the wake of the Sumitomo copper scandal and Kennecott, the copper and gold mining group acquired from BP, continued to suffer gremlins in its new, state-of-the-art smelting facility at Bingham Canyon in the US.

Together, those two items decimated profits in the year to December, leaving them 15 per cent lower at $1.1bn (pounds 701m), or nearly a quarter down on the group's favoured basis, stripping out exceptional items. As well as the merger itself, the comparisons are further complicated by the group's decision to move to reporting in dollars rather than sterling. It is perhaps appropriate that the combined group should be wiping the slate clean by changing its name back to Rio Tinto.

RTZ certainly had its problems last year. Every 10 cent fall in the copper and aluminium price knocks $100m and $55m off group earnings, so the 29 cent average fall in the former last year and a 13 cent drop in the latter would inevitably be painful. But RTZ could hardly be blamed for the $324m those two metals shaved from earnings.

More easily controllable were the continuing problems at Kennecott. Had it been running at full design capacity last year, earnings from the copper smelter would have been $150m more than they actually were, RTZ said. It ran at under 50 per cent. Analysts are relatively reassured that the problem is over. However, work to upgrade the casting capability in the early summer will see the operation closed down for another six weeks.

Elsewhere, RTZ continues to show its class, with another 10 per cent rise in mined production volumes last year, building on the 7 per cent average annual increase maintained since 1989.

The group's gearing is back on the way up again, rising from 16 to 22 per cent last year as capital expenditure is jacked up to between $1.5bn and $2bn over the next few years. Crucial to the future will be Indonesia. At its Grasberg unit, a $960m expansion will see production there rise from 118,000 tonnes of ore to nearly 200,000 tonnes by the middle of next year. So while the group's copper output is likely to be flat this year, UBS is forecasting an 11 per cent increase in 1999 on the back of this extension. The icing on that cake will be the likelihood of more discoveries.

UBS are leaving their earnings figure for this year unchanged at $1.23bn, putting the shares, up 5p at 950p, on a forward multiple of 18. That blue-chip rating is fully deserved. Hold.

Lex moves

up a gear

It has been a difficult transition for Lex from flamboyant Sir Trevor Chinn's US electronics to Volvo imports conglomerate of the early 1990s to a more focused, UK-based motor group with an earnest, numbers man at the helm. Less fun perhaps, but ultimately what the City likes.

Lex's shares, which traded at 554p three years ago have taken a pasting in the meantime but yesterday's 12p rise to 343.5p underlined a palpable sense of relief that the company has finally pointed itself in a sensible direction. Profits for the year to December were impressive enough at pounds 51.4m, up from pounds 42.2m.

Earnings per share of 31.3p were 14 per cent higher than 1995's 27.5p and a final dividend of 9.6p made a full-year total of 16p, a 1p rise.

But it is the strategic direction that catches the eye at new-model Lex, with its alarmingly youthful new chief executive Andrew Harrison dividing its businesses into those that are firing on four cylinders and need building, those in dire need of a service and a handful of new operations itching to tear up their L-plates and try their luck on the corporate motorway.

Those in the first group include the leasing arm, Britain's largest, which still appears to have plenty of growth. The Hyundai importership has got over initial teething problems; Multipart has good skills which could be used elsewhere in the group and Lex's position in lift trucks is strong.

The challenges lie in the other two areas, however. Car retailing's returns are below its peers and, by the company's own admission, inadequate. The truck market is also oversupplied and in need of attention. The new businesses - autocentres, bodycentres and used car sales - need to grow but the City welcomed the suggestion yesterday that Mr Harrison will only do so when he is convinced the formulas are right.

On the basis of Panmure Gordon's forecast of pre-tax profits this year of pounds 58.5m and pounds 66.8m next time, the shares trade on a prospective price/earning ratio of nine. Lex is never going to trade on the same sort of rating as its more flexible, entrepreneurial peers like Reg Vardy, but it looks cheap none the less. Good value.

A hat-trick

for Wembley

Wembley grabbed a hat-trick yesterday with its first dividend since 1992, a return to the black at the full year and better-than-expected profits. Not bad for company on the brink of extinction a few years ago.

The shares perked up 9.5p to 405p, though it is worth remembering that they are still a tenth of their value in 1992.

Overseeing Wembley's recent rehabilitation has been Claes Hultman, the Eurotherm chief executive who was recently reinstated after a board room bust-up resulted in his temporary ousting. The massive re-financing of 1995 has been followed by the re-negotiation of the company's bank agreements on more favourable terms. All this has removed the drag of the group structure from the operating activities which have delivered improved profits for the past four years.

Yesterday's figures continued the good news. Pre-tax profits of pounds 17m compared with the previous year's pounds 8m loss. The Wembley complex, which still accounts for half group profits, performed strongly as did the US track venues.

Wembley hosted 29 events last year including 22 sporting fixtures and concerts by The Eagles and Tina Turner. U2 are already pencilled in for this year.

The only problem areas was UK greyhound tracks where performance is still being hampered by competition from the National Lottery.

Wembley's nomination as the preferred location for the National Stadium will help the company though the financial details of the deal have yet to be sorted out.

Wembley has been a huge disappointment for many investors before but with strong cash flow and good management it looks in better shape than for some time. On 1997 forecasts of pounds 27m the shares trade on a forward rating of 11 which is reasonable value.