THE INVESTMENT COLUMN
Courtaulds' half-year figures were the ultimate curate's egg, with two divisions much better than analysts' forecasts and one considerably worse. Profit forecasts were spot on as a result, but for all the wrong reasons, and changed expectations were reflected in a 10 per cent rise in the share price to 399p, reversing a dramatic slide ahead of the figures.
The market had been expecting a sharp fall from last year's pre-tax profits of pounds 81m, thanks to the soaring cost of raw materials in the acrylics and viscose businesses, and the pounds 68m reported was at the low end of expectations. Earnings per share slipped from 15p to 11.3p and the well-covered dividend rose only 3.6 per cent to 4.3p.
The extent of the downturn in the problem businesses reflected a massive rise in the price of acrylonitrile and wood pulp and resulted in a slump in profits from pounds 42m to pounds 26m.
But the City was pleasantly surprised by improved performances from coatings, sealants and polymers, where combined profits grew from pounds 50m in the half to pounds 60m.
It really is a wonder that Courtaulds made any profit at all from its fibres and chemicals division in the face of a jump in acrylonitrile prices from $700 a tonne to $1,800 and all the way back again within a year. Running any business in such volatile conditions is next to impossible, and BP Chemicals and other suppliers have done the industry no favours at all in pushing through such destabilising gyrations.
But the good news is that acrylonitrile is back at a sensible level and wood pulp has plainly peaked. It can take as much as six months for price changes to work their way through the manufacturing system, but certainly by the first half of next year things will be looking at lot easier.
Other good news included buoyant sales of Courtaulds' new wonder-fibre, Tencel, a hit in Australia and Japan and set to make a mountain of profits for the company in the long term.
The jump in Courtaulds' share price yesterday underlined the difficulty the market has in valuing a company whose profits are so dependent on the vagaries of commodity markets, the fate of which is increasingly being determined in the boom cities of southern China. Such is the buying power of the Chinese that overdoing it even slightly in Shenzhen can send world prices soaring.
Courtaulds is still a highly cyclical business, operating in relatively mature industries and should be rated accordingly at a discount to the market. On the basis of forecast profits of pounds 180m in the year to March 1997, the shares stand on a prospective price/earnings ratio of 14. High enough.
FKI victim of
its own success
New management brought in from BTR and GEC in 1992 to sort out the sprawling FKI engineering group has been as good as its word. Three years down the line, the business has been focused on a few commanding niches and the promised near-doubling of margins to over 10 per cent is on track for this year.
But FKI has become a victim of its own success. After more than quintupling in three years, the shares have fallen steadily from a high of 248p in March last year on doubts the recent spectacular record can be maintained.
The strength of the group is confirmed by yesterday's half-time results, showing underlying profits 27 per cent ahead at pounds 39.4m in the six months to September, ignoring the pounds 12.4m loss on disposals last year. An interim dividend raised 10 per cent to 2.2p reflects a similar rise in earnings.
With little help from volumes, the margin story has continued in three of FKI's four divisions, pushing the group return on sales from 9 to 10.3 per cent. The only dud in the half-year was the hardware division, whose Truth subsidiary dominates the US market for window stays and the like. The collapse in North American housing sales, notably in Canada, cut turnover and margins, leaving operating profits down from pounds 20.8m to pounds 18.5m.
The company is cautiously pointing to the start of an upturn, but it is early days yet and analysts were shaving forecasts for the group yesterday. Group profits of pounds 85m would put the shares at 159.5p, up 4.5p, on a forward rating of 15.
More important to sentiment will be whether FKI can pull off another acquisition after raising expectations following its pounds 137m cash call in June. The potential is enormous: Amdura, the US lifting tackle group picked up in March, has seen margins more than double to nearly 11 per cent in just five months of ownership. FKI was pointing the market towards action in the Far East yesterday, but nothing is expected this year. The shares are likely to remain in the doldrums until a deal emerges. Hold.
Salvation lies in
Meyer International seems to have run into every catastrophe imaginable this year. Its leading position in UK timber importing has failed to protect it from price falls of up to 20 per cent in softwoods since January, while the Jewsons chain of wood and builders merchants has been cruelly exposed to the moribund housing market.
On top of all this, PontMeyer, the group's mirror-image operation in Holland, has been hit by a 35 per cent drop in wood prices and a five- week builders' strike.
However, Meyer has been warning of the problems for the past year and the group has done well to hold the fall in halfway pre-tax profits to pounds 7.3m, leaving pounds 20.1m for the six months to September. With news that the interim dividend is being pegged at 4.2p, the shares responded with a 15p rise to 378p yesterday.
Meyer confirmed its September profits warning. Analysts are looking for something over pounds 40m before exceptionals of pounds 31m, putting the shares on a hefty forward p/e of 18.
But there are signs that management is at last realising that salvation lies in its own hands. Action at Jewsons has already improved margins from a low of 4.6 per cent in the second half of last year to 5.9 per cent. Now around pounds 20m is to be spent over the next nine months to improve the branches, following on from the recent acquisition of 21 Builder's Mate outlets from Wickes. Meanwhile, stocks in the timber importing operation have been reduced to a 13-year low and Meyer's position strengthened with the acquisition of a similar business from Harrisons & Crosfield.
The problem is these investments are being made against an unpromising background. There is little sign of any upturn in UK housing, and expectations of a recovery in timber prices early next year are more of a hope than a forecast. The shares look high enough for now.
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