The Investment Column : Lessons from Wolseley in doing shareholders proud

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It is a shame that Jeremy Lancaster's last year at the helm of Wolseley should have been marked by a 1 per cent fall in profits from pounds 245.4m to pounds 242.9m. It is not the end he would have wished to 22 years during which he and his colleagues have done shareholders proud.

Had you invested pounds 100 in Wolseley shares in 1974, shortly after he took over as chief executive, your stake would now be worth pounds 10,000. A 100- fold return in just over two decades is a remarkable achievement in anyone's book.

After a profits warning earlier in the year, yesterday's figures were slightly above most analysts' expectations and the company's faith in the future was underlined by a 5.6 per cent increase in the dividend payout from 9.8p to 10.35p. Excellent cashflow during the year meant borrowings fell almost 30 per cent from pounds 84m to pounds 60m, insignificant in the context of a company worth the best part of pounds 3bn.

Wolseley was candid about its problems yesterday even if its presentation was, as ever, shorter on financial detail than is usual for a company of this size. Volatile lumber prices in the US and declining building markets in the Europe lay behind squeezed returns in all trading areas.

In European building distribution, turnover increased by 11 per cent but profits were 7 per cent lower, principally because of sluggish trading in France and Austria. In the UK, the long-awaited pick-up in the new housing market failed to materialise. The US was better - profits up 11 per cent on an 18 per cent increase in turnover - despite highly volatile timber prices and a slowdown in housing starts in North Carolina. The good news there was offset, however, by a chunky 16 per cent reduction in profits from the manufacturing arm, where Ashley & Rock and Antiference struggled to get over their difficult first half.

Difficult markets should not distract, however, from what remains an impeccable management story. On the basis of forecast profits of about pounds 270m this year and earnings per share of 31.9p, Wolseley's shares stand on a prospective price/earnings ratio of 16, or 15 on a calendarised 1997 basis.

With further growth in prospect next year as well, they remain good value.

Seton weakened by OFT decision

This week's decision by the Office of Fair Trading to seek the end of price maintenance on over-the-counter medicines could have a significant impact on Seton Healthcare. It is the fourth-largest supplier of OTC medicines to UK pharmacists. And its OTC brands such as Paramol, Cuprofen and Medinol account for 40 per cent of group sales.

Though the OFT recommendations - if accepted - are unlikely to be enforced before 1998, they would mean lower prices for some branded non-prescription drugs. Supermarkets and other retailers are likely to put pressure on manufacturers to reduce their margins.

Seton admits it will suffer margin erosion but feels higher volumes will more than compensate. Far from shying away from supplying the supermarkets, Seton is trying to increase its exposure. It has even devoted a section of its marketing team to build relationships with Asda, Tesco et al. Given the well-known buying muscle of the superstores this may this seem a dangerous strategy. Seton says it is confident of maintaining margins on most its product lines.

Even so, the market took fright, marking the shares down 32p to 488.5p. Though pre-tax profits were up 29 per cent to pounds 7.9m in the six months to August, the shares were further depressed by the company's warning of flatter sales in the second half. This is because Seton is trying to flatten out its sales pattern as it tries to wean its customers off bulk discount purchases.

Seton has performed strongly since it came to the market six years ago. Twenty-six acquisitions later the company is still growing fast. UBS is forecasting profits of pounds 20m this year, putting the shares on a forward rating of 17. With the OFT decision likely to cast a shadow over the shares, they are no more than a hold.

Boxmore keeps growing

Boxmore has been a dream investment since the Irish plastics and packaging group came to the market in 1989. The shares took a while to get going but since the beginning of 1991 they have grown 10-fold. They are proof positive that when you find a good investment the most sensible thing you can do is lock the shares away and forget about them.

First-half profits yesterday continued the company's good run that has seen profits, earnings and dividends growing in double digits every year for 13 years. Profits before tax rose 39 per cent in the six months to June to pounds 7.6m, earnings per share were 15 per cent better at 7.6p and the interim dividend increased 12 per cent to 0.91p a share.

Like MY, which reported last week, Boxmore is benefiting from a strong market for pharmaceuticals packaging. That division received a huge boost from the acquisition of GCM and the creation of Boxmore Healthcare Packaging, which has become a one-stop shop for the likes of Glaxo Wellcome, able to provide them with plastic containers, the security lids to go with them and the labels and leaflets to identify them. It is a very specialised and high-margin business that helped the group return on sales increase from an already respectable 15.6 per cent to 16.7 per cent.

On the basis of forecast profits this year of pounds 14m and pounds 17m next time, the shares, up 5p to 343.5p, trade on a prospective p/e ratio of 20. That would appear to more than discount the good news to come and, after a strong run over the past year, the shares are ready for a breather.

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