View from City Road: Guinness goes flat as prices fizz

GUINNESS should have been one of the major beneficiaries in yesterday's soaring stock market, when share prices of companies with only a modest exposure to overseas markets shot up. After all it is Britain's most profitable exporter and earns 85 per cent of its profits overseas. But its shares struggled to gain just 5p to close at 534p.

Why? Far from encouraging investors in their hopes of imminent recovery, Tony Greener, the chief executive, brought them back to earth with a bump, reminding them of present economic difficulties. Demand in the UK, which accounts for only 15 per cent of sales, was getting worse, and conditions are difficult elsewhere, especially in Japan.

In May Sir Anthony Tennant, the outgoing chairman, promised 'acceptable profits growth this year'. But now the talk is of an 'acceptable increase in operating profits.' This raised the prospect - dismissed by most followers - of a fall in the pre-tax result from last year's pounds 956m.

After increasing interim profits by pounds 3m to pounds 353m in the six months to 30 June, analysts expect profits to reach pounds 970m or so in the full year. Until yesterday they were forecasting more than pounds 1bn. Any increase will reflect savings from merging salesforces.

Some of the disappointment reflects the City's belated appreciation of the difficulties of selling upmarket drinks in these markets. But some reflects Guinness's own problems. In Japan, it was late to see the downturn and in Spain, Union Cervecera is still loss-making. At home it faces a pounds 15m profit fall both this year and next through the ending of contracts to supply commodity whisky to brands it sold six years ago.

Though the fall in the value of the pound will be helpful, Mr Greener dampened down expectations of any bonanza. Just as Guinness's profits were protected from the effect of the weak dollar by its exports of bourbon from the US, the benefits of weaker sterling on its exports of whisky from Scotland will be diluted by the group's international spread. It managed to increase exports from the UK from pounds 376m to pounds 413m in the first half, when currencies were against it.

Backed by strong cash flow, the interim dividend was increased by 10 per cent to 3.35p a share, giving hopes for a similar increase at the full year. But investors in other big drink companies can look forward to the same boost, without having to pay as much of a premium for the shares. Buy Allied Lyons, with 50 per cent of its earnings overseas, instead of Guinness.

(Photograph omitted)