The Investment column: Sparkling Far East props up Burmah

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The Independent Online
Reporting on the same day as Manchester United, it was appropriate that Jonathan Fry should describe 1996 results at Burmah Castrol, where he is chief executive, as a game of two halves. For Burmah that meant disappointment in the developed world of Europe and North America, where the engines of growth are grating alarmingly, but another sparkling showing from the developing regions of South America and Asia, where they are purring smoothly.

Burmah has been a champion of the Far East for years now - about 75 in the case of India, where it hung on through the dark years of state ownership - and it is now reaping the benefit of liberalised markets in spades. Having overtaken North America in profit terms, the region looks set to leapfrog Europe by the millennium to become the group's biggest earner.

That is just as well because it is an uphill struggle in the old first world to persuade consumers that lubricating oil is anything other than a commodity product and with Mobil attempting to get its recent marriage to BP off to a loving start, price competition is intense. In some ways Burmah has become the Guinness of the petroleum sector, its Castrol suffering the same problems as Johnnie Walker - stagnant markets, a price war to establish market share and the need to back the sales effort with ever- increasing amounts of marketing spend.

Elsewhere the Foseco speciality chemicals acquisition at the beginning of the 1990s nudges ever closer to Mr Fry's neck-on-the-block promise of 10 per cent margins by this year. It should just about make it in time, after last year's 8.3 per cent, but it takes the sort of cheerful optimism that Burmah's ebullient boss specialises in to view that deal as anything but ill-timed, just ahead of recession in the steel and construction markets it serves. It is no wonder that big deals are firmly off the agenda, despite halved gearing at just 22 per cent, until his retirement next year.

The biggest problem facing the company in the short term, however, is the strength of sterling, which took the shine off last year's figures, but threatens to knock a pounds 20m hole in profits this time if the pound stays at current levels. As a result of that, and the reversal of this year's one-off tax benefit from paying a greater proportion of the final dividend as a foreign income payout, profits will have to rise by about 13 per cent simply to stand still at the earnings line.

Assuming they achieve that, the shares, up 16.5p to 1,014p, trade on a prospective price earnings ratio of 14. A good long-term hold thanks to the company's enviable toe-hold in the Far East but the shares, down from a peak of 1,167p last October, won't excite in the short run.