ICI profits slump 50% as debt proves hard to shift

Francesco Guerrera
Thursday 22 October 1998 23:02

IMPERIAL CHEMICAL Industries, the troubled chemical giant, painted a dismal picture of its business yesterday as it revealed a collapse in profit and dampened hopes of a near-term reduction in its debt mountain.

Sir Ronald Hampel, ICI chairman, blamed the disappointing performance in the third quarter on tough trading conditions in its commodity chemicals businesses, the strength of sterling and the fall-out from the Asian economic turmoil. The three factors slashed pre-tax profits by nearly 50 per cent to pounds 70m. Trading profit in the quarter slumped 33 per cent to pounds 151m, heavily hit by a pounds 23m loss in the industrial chemicals division.

The results were at the bottom end of market expectations and triggered a raft of earnings downgrades for this year, with analysts expecting a 1998 profit of around pounds 300m, down from pounds 350m previously.

Shares in ICI, which have more than halved since May, shrugged off the revisions and rose 7.5p to 506.5p, boosted by the company's reassurance that it would not cut its final dividend. However, the figures heightened the City's fears over the company's plans to sell its low-margin commodity chemicals, such as plastic and petrochemicals, to concentrate on high- return speciality chemicals such as food flavourings and fragrances.

ICI bought the speciality chemicals operations of rival Unilever last year for $8bn (pounds 4.7bn) and sold pounds 3bn worth of commodity products. However, its efforts to sell the rest of the industrial operations have been hampered by a cyclical downturn in the sector and a series of regulatory problems in the US. City analysts said the fall into the red of the industrial chemicals division would hamper ICI's plan to dispose of the businesses and reduced the chance of fetching its target price of pounds 1.5bn.

"The problem is that ICI is saddled with these on-going losses which make it difficult to get a good price," said Martin Evans, head of research at broker Sutherlands.

The company is under pressure to dispose of the businesses to repay its pounds 4.4bn debt mountain - well above its pounds 3.6bn market value - accumulated at the time of the Unilever acquisition. In the third quarter the company paid pounds 242m of interest on the debt. The disposals' proceeds would also be used to buttress ICI's interest cover - a measure of how easily a company's profit can finance interest payments - now standing at just 2.2 times.

Alan Spall, the ICI finance director, yesterday admitted that the cover and the balance sheet were "stretched", but said the company was confident it would be able to finance the debt. He said that a good performance from the food flavourings, adhesives and fragrances divisions in the third quarter "vindicates the strategy of focusing on speciality chemicals".

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