Gloomy view at China Clays

Investment Column

English China Clays, the world's biggest producer of minerals for the paper industry, has precious little to show for five years of restructuring under outgoing chief executive Andrew Teare. The shares, down 19p to 316p yesterday, have gone nowhere in that period and profits still remain short of the pounds 100m they reached in 1990.

It is now clear that September's decision to raise the half-way dividend for the first time since 1990 was premature. The pounds 2.1m increase in full- year profits to pounds 95.1m unveiled yesterday was well short of expectations. But what really hit sentiment was ECC's gloomy view of the paper market, which accounts for 70 per cent of the volumes of the group's two main minerals businesses.

Despite a string of profits warnings from paper companies, the extent of the destocking which became evident from last autumn plainly caught the group unawares.

What makes it worse for ECC is its apparent inability to cash in on a rise in the cycle, which was still in full swing in the first part of 1995. The lion's share of last year's 11 per cent rise in operating profits to pounds 62.2m in the European minerals business came from cost savings. Price rises were a meagre 2 to 3 per cent at a time when paper prices were soaring.

ECC continues to face the problem that its main kaolin business is losing market share. At the same time, the speciality chemicals business based on Calgon, acquired in 1993, has not lived up to expectations. Margins remain well short of the promised 10 per cent, slumping from 8.6 per cent to 6 per cent in 1995.

Against that uninspiring background, a forward p/e of 15, assuming profits of just pounds 93m this year, suggests the shares are high enough.