Lookers moves up another gear

THE INVESTMENT COLUMN

The announcement by Lookers of flat underlying profits and the acquisition of Northern Ireland's largest motor dealer neatly encapsulated the motor trade's two driving themes this year. Trading is difficult and likely to remain so, and the spoils, such as they are, are being enjoyed only by large groups able to capitalise on a marked shift in the way cars are being sold in the UK.

The acquisition of the Charles Hurst group for pounds 25.3m will be part-funded by a one-for-three rights issue at 125p a share, 19p below yesterday's unchanged close of 144p, and well below the peak of 279p reached at the start of 1994. As the chart below shows, Lookers has been one of the sector's worst performers recently, with analysts critical of the speed of its dealership development programme. Before yesterday's acquisition, the size and location of many of the group's outlets were considered pretty second-division.

For the year to September, profits slipped from pounds 7m to pounds 6.4m, due largely to a pounds 435,000 charge for the closure of a Nissan depot. At 1.5 per cent of Looker's sales of pounds 399m, the pre-tax margin was unexceptional and underlined the problems still afflicting a business where, as the chart shows, sales are still well below their 1989 peak. Earnings per share of 15.2p were down on last year's 19p, although the payout rose 5 per cent to 7.9p.

The Northern Ireland deal is probably good news for Lookers, taking it into an area of the UK economy that since 1992 has grown much faster than the average. The car market there has increased 32 per cent over that period. It has also taken Lookers into the new retailing concept of motor villages, increasingly the future of the business.

These offer potential car buyers a range of makes on one site, in effect a car supermarket, in contrast to the traditional single franchise sites that have reflected the stranglehold manufacturers have always held over their distribution chains.

The company has also appeared to pick up on the trend for successful dealers to increase the proportion of profits generated from used car sales. This has been crucial in the light of greater price awareness among customers and a savage reduction in dealer discounts offered by manufacturers where mark- downs of 17 per cent have been replaced by cuts of 10 to 12 per cent.

On a single-digit price/earnings multiple many of the doubts about Lookers' management and strategy are factored into the price. But in an increasingly two-tier market, where the best franchises fall to the bigger, more successful players, the only attraction remains a chunky 7.4 per cent yield.

Rising costs

hurt Holliday

Life on the stock market has been a miserable experience for Holliday Chemical Holdings. Floated at 195p nearly three years ago, the shares have had a switchback ride and are languishing at an all-time low following yesterday's 45p plunge to 119p.

After a series of unhappy brushes with the City, the profits warning that prompted yesterday's fall is the worst news yet from the company.

Analysts have been revising down forecasts for 1995 since Holliday warned of difficult second-half trading conditions when it announced its interims in August.

But the outcome has been much worse than expected, with management accounts pointing to pre-tax profits cut from pounds 19.3m to pounds 15.4m for the 12 months to December, even before net exceptional costs of pounds 3.3m.

Like a string of other chemical companies forced to issue profit warnings recently, Holliday has been hit by rising raw material costs, which it has been unable to pass on in higher prices. That added pounds 3.9m to last year's costs.

With raw materials prices cooling a little, the more worrying news from the company is the slowing of demand in the US and Continental Europe.

The turndown in plastics demand hit sales of high-margin blue pigments, cutting profits by pounds 1.8m. But the impact of this lower demand has been felt right across the group - reducing sales by pounds 6.4m between the first and second halves.

The destocking by customers that is said to have caused the problem is thought to be at an end, but the company admits that it does not know what the future holds.

The caution may prove to be short-lived, but it could herald a new recession in the chemicals industry.

Holliday is moving to restore its battered reputation in the City by raising efficiency, cutting an unspecified number of jobs and writing down plant for a total one-off cost of pounds 3.5m. That may prove insufficient if bleak conditions return to the industry and profits fall to, say, pounds 14m this year. On a forward multiple of 13, the shares look fully valued, although at this level they could attract a bidder.

Unitech still

looks good

The market's reaction to yesterday's results from Unitech was grudging in the extreme. Shares in the power supplies group fell 10p to 499p in spite of a 45 per cent increase in pre-tax profits to pounds 23m in the six months to 20 January. Sales were also up a healthy 20 per cent at pounds 207m.

The share dip was largely due to the company's cautious noises about European markets. It said that sales had slowed in France while profits in the US fell 13 per cent mostly due to hiccups with some military contracts. But in spite of these local difficulties Unitech still has plenty of growth ahead.

The oddity of this company is its 50.6 per cent stake in Nemic Lambda, a Japanese power supplies group which contributed pounds 14m of the group's pounds 23m profits. There has been speculation that the company may seek to dispose of part of its stake as Nemic transfers to the full Tokyo stock exchange. Unitech does not want to reduce its stake but may have to do so in order to comply with Japanese regulations

The other cloud which is hanging over Unitech is the 20 per cent stake held by Electrowatt, a rival electronics group. Electrowatt is currently involved in the purchase of Landis & Gyr and the Unitech stake may be sold to reduce gearing. The possibility of this stock coming on to the market at below the current price is casting a pall over the shares.

But at the trading level, longer term prospects look good. Forecasts suggest that the power supply division could grow profits by around 20 per cent a year for the next couple of years.

The market for power supplies is expected to grow and Unitech is in a strong position to grab a healthy slice, particularly in the growing Far East market.

After a strong run up from 124p in 1992 the shares have dipped since last September's 577p peak. A period of drift may follow until the Electrowatt position is resolved but with analysts forecasting full year profits of pounds 49m, which puts the shares on a forward rating of 16, the shares still look reasonable value.