View from City Road: Problems mount for Hillsdown

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SENTIMENT has been running hard against the food processor and distributor Hillsdown since last October's rights issue. It raised pounds 280m at the time, but more than half the issue was left with the underwriters.

A year later the anti-Hillsdown sentiment is as deep as ever. Despite talking about restructuring and refocusing the company, it seems to have done little with its cash.

The shares are trading at barely one-third of the rights price. To make matters worse, and despite the rights issue, debt is on the increase.

Yesterday's interim results were no help. They were dominated by the appearance of pounds 88m surprise debt, which helped to push up gearing from the 12 per cent stated at 31 December to 27 per cent at the 30 June half year-end. The additional debt was the primary cause of the 21 per cent fall in the value of the shares yesterday.

The picture was blackened still further by pessimistic comments on second-half trading by Sir Harry Solomon, the chairman. And, as if Hillsdown did not have enough problems, news came yesterday that it will drop out of the FT-SE 100 index later this month.

Pre-tax profits actually rose to pounds 78.1m from pounds 77.6m, but only because the rights issue meant the interest bill was reduced. Operating profits decreased 12 per cent and earnings per share, again feeling the effects of the cash call, fell from 9p to 7p.

Not for the first time this year stockbrokers reduced full-year forecasts. Henderson Crosthwaite now thinks Hillsdown will make pounds 170m pre-tax, down from pounds 185m.

Such is the uncertainty about Hillsdown's prospects that even a firm commitment to maintain the full-year dividend, after holding the interim, was all but ignored.

There is no evidence from operations to suggest Hillsdown is about to disappear into a black hole, but its yield suggests investors believe something is amiss. The shares yield 14.1 per cent, assuming the annual payment is held. The earnings multiple on Henderson's forecast is 5.5 times.

Unless - or until - Hillsdown proves it can use the rights money profitably the shares will go nowhere. But it is not clear if there will be much left from the rights after taking on the extra debt and providing for possible write-downs.