The investment column: P&O disposals fail to bring cheer

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The Independent Online
Lord Sterling yesterday made much of his revitalisation plan for P&O, which is supposed to raise return on capital at the shipping to exhibition centre group to 15 per cent. But the City remains highly sceptical. Although disposals to date are said to be running at pounds 650m, investors have yet to see much of the cash. Indeed, gearing has risen from 72 to 80 per cent since December.

Meanwhile, the much-vaunted merger between P&O's ferry operations in the eastern English Channel and those of arch-rivals Stena Line, intended to meet the challenge of the Channel Tunnel, has run into the bureaucratic sand. The omens are not good, given the new Labour government's apparent predilection for blocking mega-mergers, such as Bass with Carlsberg-Tetley.

So the jump in results from the P&O Ferries business, where profits leapt from pounds 500,000 to pounds 11.3m in the six months to June, may prove a false dawn. The 57 per cent surge in freight volumes was all down to last November's fire from which the Tunnel has only just recovered. With Eurotunnel getting back into its stride and apparently unconstrained by normal financial considerations, P&O is under increasing pressure to slash costs on its Dover-Calais operation.

The one merger Lord Sterling has pushed through so far, last year's link- up between P&O's container business with that of Royal Nedlloyd of Holland, has yet to prove itself. P&O's share produced a pounds 1.9m loss in the latest figures, down from pounds 20.9m when the operation was wholly owned.

A New York float is vaguely planned before the end of the century, and Bovis Homes in Britain should bring in pounds 250m when it launches on the UK stock market just before Christmas.

But with the group's return on capital unchanged at 10 per cent in the half-year and a barely covered dividend that has not been raised since 1990, Lord Sterling still has a lot to prove.

Full-year profits of pounds 335m would put the shares, up 11.5p at 679.5p, on a forward multiple of 17.

A possible break-up value of 770p provides some support, but otherwise they are unattractive.