Bottom Line: Small step for ICI

THE MOOD of cautious optimism emanating from Imperial Chemical Industries may be a welcome relief after four years of unremitting gloom, but investors would be wise to heed the warning against euphoria from the chairman, Sir Denys Henderson.

With pre-exceptional profits of just pounds 290m on sales of more than pounds 8.4bn, the group is still a long way from an acceptable return on sales. Signs of growth in the US, already reflected in volume increases of about 1 per cent last year, and the patchy recovery in Britain should push profits forward. But the impact will continue to be dampened by the European recession - not to mention last year's pounds 35m of currency benefits that is as likely to be reversed as repeated.

ICI is to be congratulated on the zeal with which it has pursued its restructuring programme, now being emulated by its European competitors. Without the extra pounds 150m savings achieved last year, profits would have looked much sicker. There should be another pounds 80m to pounds 100m to come this year. The success is also reflected in the balance sheet where gearing, albeit helped by the pounds 1.3bn rights issue for the Zeneca demerger, is now down to less than 10.3 per cent.

As it said yesterday, that puts it in a strong position to capitalise on the opportunities ahead. The question is where those opportunities will come - it has so far proved easier to find things to sell than to buy.

The one-third drop in capital spending last year partly reflects the new rigour in approving investments, after the profligacy of the 1980s, but it also underlines how difficult it is to find investment opportunities with an acceptable return.

One place the funds will not be going is into shareholders' pockets. ICI made it clear that rebuilding dividend cover will take precedence, which could mean no increase in the dividend until 1996. That makes the 4.6 per cent yield look realistic rather than generous, while the 23.8 per cent multiple, on forecasts of pounds 400m, is already assuming recovery enough.