Bottom Line: Crunch time ahead

IN AN INDUSTRY awash with stock and faced with recession-scarred customers who will not stomach price increases, Highland Distilleries did well to produce a 35 per cent rise in pre-tax profits.

Admittedly most of the increase was due to a change in the accounting treatment of its 35 per cent stake in Robertson & Baxter, but a 9 per cent advance in underlying profitability is still creditable.

Much of the underlying rise was due to a 14 per cent increase in sales abroad as Highland benefited from a link-up with the French group Remy Cointreau. At home volumes fell 3 per cent, in line with the industry average.

Highland is better positioned and better managed than most of its rivals. Famous Grouse is a respected brand, which has enabled Highland to hang on to a policy of premium pricing. Overall operating profit margins last year inched up to from 12.9 to 13.7 per cent.

But crunch time comes this Christmas, with the likelihood increasing that whisky producers will engage in a price war.

The longer-term outlook is also uncertain. Growth in sales of Famous Grouse in Britain is running out of steam and overseas markets, after the initial boost from Remy, may prove harder to infiltrate than Highland thinks.

The market expects pre-tax profits of pounds 40m or so for the year to August 1994 putting the shares, up 1p at 330p, on a forward multiple of 15 times. That is ahead of the market and the sector. Handle with care.