China Clays rejig bears some fruit

THE INVESTMENT COLUMN

English China Clays, the kaolin and paper chemicals group, has been thoroughly reshaped over the past five years under Andrew Teare, chief executive. Out have gone most of the building materials business, demerged as Camas in 1993. In have come speciality chemicals, mainly through the $302m (pounds 201.3m) acquisition of Calgon in the US two years ago.

These changes have tended to distort the underlying picture in the past but, with the restructuring almost complete, the fruits are starting to ripen. Half-year figures released yesterday show pre-tax profits creeping up from pounds 52.2m to pounds 55.3m, with earnings per share rising 7 per cent to 12.3p in the six months to June.

Stripping out the remaining construction activities - set to go by the year-end - operating profits jumped 36 per cent to pounds 55.8m.

To crown Mr Teare's labours, China Clays has announced the first rise in the dividend since 1991, hoisting the interim 2.8 per cent to 5.5p. How- ever, yesterday the stock market's response was to mark the shares down 7p to 387p, as worries lingered over the group's ability to ride the paper cycle.

Analysts are fretting over two immediate problems. In Europe, volumes rose a healthy 6 per cent and, with margins also responding, operating profits rose 46 per cent to pounds 33.2m. However, sales to the paper industry were only 2 per cent ahead, hit apparently by US imports, putting a question mark over the group's gearing to the current upturn in the market.

Meanwhile, Mr Teare's attempts to mitigate the downturn, through diversification into paper chemicals and water treatment, have yet to prove themselves. Operating profits were up 14 per cent to $10.4m (pounds 6.6m), but this was all because of the paper chemicals side. Water treatment is facing tough competition in the US market, which held divisional margins at just under 8 per cent and well short of the group figure of about 14.5 per cent. It is hoped that European acquisitions will help in some way to redress the poor returns from the business.

Profits of pounds 102m this year would put the shares on a prospective p/e of 17. Mr Teare believes his efforts have reduced the cyclicality of China Clays, and margins could rise comfortably above the last peak of 16.5 per cent in 1991. But, with the top of the cycle in sight, the rating is demanding and only the prospective 5.5 per cent yield supports the shares.