View from City Road: Dawson's problems go deeper

The depth of the problems facing Dawson International, the textiles group that makes upmarket jumpers, surprised even the most pessimistic yesterday.

The Scottish company chose Budget day to announce an unexpected near-halving of its interim dividend from 2.9p to 1.5p as pre- tax profits fell 41 per cent to pounds 9.2m in the half year to 25 September. A 36p fall to 137p in the share price was a measure of the shock.

Dawson's difficulties, although inspiring sympathetic falls elsewhere in the textiles sector, are mostly specific and focus on the manufacture in the US of own- brand underwear, T-shirts and sweat shirts for sale in discount stores like K-Mart and Wallmart.

An uncomfortable mixture of falling demand and falling prices means that Dawson may make trading losses of pounds 8m from its troublesome Morgan Apparel subsidiary this year. Rationalisation is taking place and has cost pounds 2.5m so far. A quarter of Morgan Apparel's workforce is to go and Dawson is closing three of 10 factories.

Profits from Dawson's other US activities - making thermal clothing - covered losses at Morgan Apparel. But as a whole, the US profit contribution collapsed to a threadbare pounds 723,000 from pounds 8.5m.

The impact of the Morgan Apparel disaster was also softened by currency-inflated profits in UK- based branded jumpers. Operating profits from Pringle and Ballantyne Cashmere knitwear rose to pounds 12.8m from pounds 8.8m, but disregarding exchange rate effects, the performance was flat.

Before yesterday, most analysts were expecting Dawson to make pounds 30m pre-tax, just a little down from last year's pounds 32m. Now most expect a decline to pounds 20m, after a further pounds 1.5m of rationalisation costs, and a halved full-year dividend of 4.5p.

A prospective p/e ratio of 17 is in line with the textile sector but ahead of the market as a whole. This looks demanding, despite a yield of 4 per cent, after the Morgan traumas.