Time is running out for Norcros

Investment Column
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Should John Redwood fail in his challenge to John Major, he could do worse than apply his reputedly widespread talents to bailing out Norcros, the company he used to chair. But he may not have much time.

The building products to printing conglomerate has seen almost continuous restructuring since the current chairman, Michael Doherty, joined as chief executive in 1988, the year before Mr Redwood left. Yesterday, it all but threw in the towel as it confirmed that a slew of restructuring charges and write-offs foreshadowed in a profits warning in February had pushed it into loss in the year to March. Pre-tax profits of pounds 17.1m turned into a deficit of pounds 51m, hit by pounds 30m rationalisation costs which will slice 600 jobs from the workforce and pounds 29.8m for losses mostly relating to this month's sale of the Crosby Sarek windows and doors and Crosby Kitchens businesses. As expected, there is no final dividend.

This could be the final restructuring at Norcros. Negotiations are under way to sell two of the remaining building products businesses, and the board is looking at "releasing shareholder value" in the print and packaging division through a separate flotation, an outright sale or a joint venture arrangement.

It would leave the ceramics operation out on its own and the Norcros rump wide open to a bid. Any break-up value for Norcros depends on how successful Mr Doherty is at cleaning up the remaining businesses. Most of the pain last year came from building products, particularly Crittall Windows, which is thought to have run up losses of about pounds 5m. Restructuring could shave costs there by up to pounds 2.5m in a full year, for a one-off cost of pounds 13.5m. Together with Cego, a handles and PVC profile operation, the sale of Crittall could fetch pounds 20m, analysts estimate.

A further pounds 5m of annualised savings are expected from the pounds 12.4m restructuring of ceramics, which could fetcharound pounds 100m for the division. Profits there were a flat pounds 9.2m last year.

The big question mark hangs over print and packaging, last year's best performer, raising operating profits from pounds 10.7m to pounds 12.7m before pounds 2.1m of restructuring charges. The business is a world leader in niche markets like supermarket price labels and underground tickets with the "clever" magnetic stripe. It could be worth between pounds 100m and pounds 150m to the right buyer.

With debt at around pounds 75m, a sum of the Norcros parts might not be too far adrift from the current market capitalisation of pounds 140m - a far cry from the pounds 570m at which Norcros was valued by the Williams Holdings bid in 1987, but the recovery potential should take profits to pounds 16.5m this year, according to the brokers Smith New Court. That puts shares at 80p, down 2p, on a prospective multiple of 12. Hold.

Sears is still a curate's egg

A succession of retailers over the past few years have seen light at the end of the high street tunnel only to find it is really an oncoming train. Sears joined their ranks yesterday when the Selfridges to Freemans group issued a profits warning just two months after a bumper set of full- year results.

The announcement will have helped many in the investment community make up their minds about Sears, a sprawling retail conglomerate which even after large-scale restructuring includes more than 3,000 stores. The company remains a curate's egg of a business - good in parts but always prone to containing a few nasties. Usually, the foul taste has been British Shoe, or Olympus Sports. Yesterday, Miss Selfridge emerged as another problem area.

The stock was placed on some analysts' sell lists yesterday as profit forecasts for next year were downgraded to between pounds 150m and pounds 155m.

But there is a wider issue of corporate Darwinism here. As the tough trading conditions on the high street continue, the market is gradually beginning to polarise between the weak and the strong.

Though there remain exceptions, the larger players are increasingly making their size count through higher spending on store refurbishments and spending on distribution and stock ordering systems. Top of the table are Marks & Spencer and the mail order group Great Universal Stores. Boots is another possible member of the muscle club, though it is exposed to increasing competition from the likes of Sainsbury and Tesco.

Bubbling under is a second tier that contains more risk but more potential rewards. This group includes the recovering Storehouse and Next, where a recovery story is also in progress. Prospects are also improving at Dixons as the electrical stores group fights off competition from the regional electricity companies and Comet.

Languishing in the mud are WH Smith and Kingfisher, both of which are struggling against the supermarket groups. Other investment weaklings include the department store group House of Fraser and now Sears, which have both shown that stock control is a recurring weak point.

Yesterday's gloomy tidings pulled Sears' shares down 3p to 97.5p, where they join HoF on a forward rating of just over 12. That is a substantial discount to the sector average of 15, but the prospects for both look unexciting.

Berkeley can keep performing

Berkeley Group is one of a handful of housebuilders that have demonstrated a consistent record of growth through the recession. Last year proved no exception. Yesterday the company announced trading profits of pounds 37.6m for the year to April, up from pounds 28.6m before a pounds 10.9m gain on a sale of certain commercial assets the previous year. Turnover advanced 24 per cent to pounds 283m and the dividend is hoisted 11 per cent to 7.75p, after a final of 5.65p.

Part of the secret of Berkeley's success is its insulation from the first- time buyer, hardest hit by the negative influences currently afflicting the housing market. The average price of a Berkeley home was pounds 190,000 last year, well out of the reach of the bottom of the market and a pounds 30,000 uplift on the previous year.

That increase was the main reason for the strong profits rise and was part of a conscious effort to target the wealthier customer.

Out of nearly static house sales of 1,411 units, 40 per cent were in the pounds 200,000 bracket or above and several sold for more than pounds 900,000.

The strength of the central London market, where Berkeley is well represented, was also a factor behind last year's figures, although Graham Roper, chairman, said the overall market was pretty consistent last year.

It is not easy to be as sanguine about the outlook for the next 12 months. Mr Roper believes land prices could fall by 10-15 per cent if the current uncertainty surrounding the market is not lifted by some government action. House sales were running at 10 per cent below target even before John Major's resignation, which is only likely to heighten the jitters in the market.

But given the impressive record and negligible borrowings, Berkeley is well placed to perform again this year. Profits of pounds 39m would put the shares - at 360p, down 4p yesterday - on a prospective price/earnings ratio of under 11. Fair value in the circumstances.