Investment: Kalon painted into a corner

TOUGH MARKET conditions have painted Kalon into a corner. The UK's largest paint maker has been hit by a double whammy of slowing demand, especially among retailers, and increased buying power from the large do-it-yourself chains.

Imperial Chemical Industries (ICI), its biggest rival, responded to the challenge with a fierce price-cutting campaign which put a dampener on Kalon's sales. To make matters worse, a bout of unseasonably bad weather in France, Kalon's other core market, deterred DIY enthusiasts and added to the slowdown.

Factor in a pounds 1.9m currency loss, and yesterday's 14 per cent fall in interim profits to pounds 21m should come as no surprise. Prospects are also rather bleak as Kalon itself admits that market conditions will remain tough in the second half. The expected slowdown in the UK housing market will add to Kalon's woes.

It is not all doom and gloom, though. The fact that Kalon has managed to retain high margins, way ahead of ICI's, is proof of management's ability to deliver efficiencies despite the poor trading environment.

Market share outside the UK has also held steady during the half, and turnover in constant currency terms was actually up 4.8 per cent. And if Kalon's promises of sales-boosting overseas acquisitions are kept, growth for the year should remain relatively solid. The shares have come down a long way since their year high of 193p reached last April, and after yesterday's 5p slide they are trading at a five-year-low of 87.5p. This is a multiple of just 13 times 1998 earnings, forecast at around pounds 42m. At these levels they are certainly worth holding until better times arrive.