Gases still firing for BOC : The Investment Column

BOC continues to demonstrate the rock-steady virtues of its industrial gases business. While the rest of the chemicals sector is riding the down slope of the industry's roller-coaster cycle, BOC is still just beginning to benefit from the increasingly mature world economic recovery.

Yesterday's announcement of pre-tax profits up 12 per cent to pounds 217m in the six months to March owed much to another strong result from the core gases operation. Although there continue to be some concerns surrounding the US market, the caution expressed by new chief executive, Danny Rosenkranz, in February seems in retrospect to have been more to do with the severe winter weather than any fundamental weakness. Indeed recent price increases have stuck in America and good demand and firm prices seem to have boosted profits in nearly all the main gas markets of the world. As a result, operating profits from the division firmed 10 per cent to pounds 198m.

There continues to be no shortage of investment opportunities. Capital expenditure was jacked up from pounds 212m to pounds 324m in the six months, and most of that related to gases. The focus there remains the US, and although demand for large gas separation plants for customers like US Steel is now starting to slow, BOC reckons there are still 12 to 18 months of demand to go for.

Further out, the potential for stepping up construction of similar plants in rapidly growing Pacific economies is huge. But while there are plenty of opportunities to invest, the challenge remains to lift gas margins from the 14.8 per cent they reached in the second quarter to nearer the 18 per cent or more achieved by the industry's best like Air Products and Praxair of the US.

Elsewhere, the vacuum and distribution operations continue to motor, raising profits 39 per cent to pounds 43.6m in the latest period. A flattening in demand from the semiconductor industry may slow growth in the short term, but the fundamentals remain sound.

BOC's Achilles' heel remains health care, where US hospital consolidation and spending cut-backs hit sales of anaesthesia machines and divisional profits slumped 9 per cent to pounds 28.4m. But the real problem is in inhaled anaesthetic gases, where the newer Suprane is only just offsetting the contined decline of the original Forane, off-patent since 1993. Despite BOC's defiance that the business is not for sale, it is not clear where it is going.

On James Capel's forecast of profits of pounds 450m this year, the shares, up 7p at 931p, are a firm hold on a forward p/e of 16.