The Investment Column: Ellis & Everard

BACK IN 1997 Ellis & Everard was tipped as the safe play in the chemicals sector, because it wasn't really a chemicals company but the market leader in chemicals distribution. That meant it was less vulnerable to the problems associated with the oversupplied bulk chemicals markets. All very well in theory, but the Asia crisis and recession in Europe pummelled the sector and Ellis's shares coincidentally fell with it, from 319p to 166.5p. They have since recovered to 221.5p. Investors who favour the stock now base their investment case on forthcoming recovery in the global chemicals markets. They should beware.

True, Ellis's sales, margins, and return on capital make it the UK's number one chemicals distributor. It is number four in the world. But tough conditions persist. Ellis's underlying turnover fell from pounds 732m to pounds 720m last year and its cost of sales rose. European sales, dominated by the UK, were particularly weak. Strong US growth partly offset that, but only thanks to last July's acquisition of Performance Polymers.

Economic indicators suggest chemicals prices may recover in a couple of years, but in the near-term any effect will be marginal. In the short- term, Ellis will have to pay for sales growth by making acquisitions. Meanwhile, it reported a weak second half and says trading - ahead of a traditional summer slowdown - is only satisfactory. Analysts expect pre-tax profits of around pounds 33m and earnings of 22p per share this year, putting the shares on a p/e of 10. Given the uncertainties, that's quite fair.