Bottom Line: Demerger cure-all lets Courtaulds down

DEMERGERS of big industrial companies such as ICI and Courtaulds are not the panacea some might have believed.

Sold as a corporate elixir to revive flagging financial performance and share price, the change has left Courtaulds a far stronger company than it was three years ago. But as yesterday's disappointing first-half figures show, the initial benefits of demergers are not everlasting.

Excluding exceptionals, pre-tax profits were about pounds 10m adrift of market expectations, partly because of the knock-on effects of a credit squeeze in China. With the recession also dragging on, Courtaulds has been forced back to basics with a pounds 50m restructuring that will integrate its US and European aerospace coating and sealants businesses.

It is rather late in the economic cycle to wield the knife to this extent. Courtaulds may have put too high a reliance on the demerger effect to carry it through hard times. That over-confidence has cost its shareholders dear - the shares, which were already trading at a discount to the sector, slumped 44p to 432p yesterday.

A gloomy outlook for the remainder of the year, with an anaemic US market coupled with recession in Europe, all suggest that Courtaulds, and much of the chemical industry, is still a year from any meaningful recovery. Figures from BOC conveyed pretty much the same message earlier this week.

After yesterday's sharp downgradings, Courtaulds should make pre-tax profits of about pounds 150m before exceptionals this year, rating the shares at about 16 times earnings. They, along with the sector, could weaken further.