The Investment Column: P&O focuses on ferry routes

P&O, the shipping to property group, has suffered badly from the City's disdain for conglomerates. Even after last week's rebound, the shares have underperformed the rest of the stock market by 27 per cent over the past five years. But the fashion of the moment is to sharpen the focus of sprawling empires and, like his peers at Hanson and BTR, Lord Sterling, executive chairman, has at last started to shake the tree.

In March he outlined a pounds 1bn disposal programme and last week he unveiled the pounds 2.6bn merger of the group's container business with Royal Nedlloyd of the Netherlands to create one of the world's biggest shipping companies. Now the emphasis is turning to the European ferry routes, where P&O has been slugging it out not just with traditional shipping rivals but a Eurotunnel rapidly reaching full working capacity. The group's 60 per cent share of cross-Channel car-ferry traffic has more than halved to 29 per cent in just 18 months or so. The pounds 25.3m acquisition yesterday of the other half of North Sea Ferries, also from Royal Nedlloyd, is hardly significant in itself unless it presages a more significant rationalisation across the more important Dover-Calais route.

Lord Sterling and his crew have faced a guerrilla campaign from some fund managers and yesterday's half-way figures to June give a clue why. Pre-tax profits crept ahead from pounds 132m to pounds 135m, hit by a pounds 19.2m rise in the interest charge to pounds 98.4m after spending on the Oriana cruise ship and a property portfolio from Britannic.

But even the more respectable 11 per cent rise to pounds 229m at the operating level hid a rag-bag of results from P&O's operating divisions. Cruise ships were one of the stars, roaring up from pounds 48.2m to pounds 67.5m on the back of full contributions from the new giant Sun Princess, as well as Oriana. Property development, always somewhat erratic, chipped in an extra pounds 25.3m to reach pounds 29.3m. The group has agreed sales from the portfolio worth pounds 219m and is well on the way to achieving the target of over pounds 500m in three years.

But the ferries business is in danger of drowning despite a booming market. Profits crashed from pounds 24.8m to just pounds 500,000, with the western Channel routes moving into loss. Bulk shipping is another dog where P&O hopes that rationalisation of capacity should bale them out next year.

Asset sales agreed to date should bring year-end gearing well below the current figure of 93 per cent. That should fall further with more property sales, the Bovis Homes flotation next year and the possibility of the container joint venture following the same track. Full-year profits of pounds 330m would put the shares, down 1p at 593.5p, on a forward p/e ratio of 15. The City remains to be convinced, but things seem to be moving towards P&O's target of a 15 per cent return on assets. Stay aboard.