Bottom Line: Yule Catto's rare formula

DESPITE its strong financial record stretching back more than decade, Yule Catto is a stock market enigma.

A thousand pounds invested in the specialty chemicals and building products group in 1982 is worth about pounds 14,000 at present. And so far this year, the shares have outperformed the market by more than a fifth.

But for a company that can boast an uninterrupted 12-year growth in profits, earnings and dividend, Yule Catto has yet to attract the dubious status of a 'hot stock'.

Apart from a faithful band of City fans, few know it well enough to identify any unique feature that can explain its resilience during a deep worldwide recession in chemicals.

Part of the answer is that Yule Catto has a strong management that has pushed up profit margins in the core specialty chemicals business by tight cost control and constant product development. Although Yule Catto's products - such as paint resins, adhesive and latex backing for carpets - ultimately depend on a strong housing market, its activities are also widely spread geographically.

The strategy has helped it to maintain market shares as well as profits even when trading conditions remained tough. Taxable profits last year rose marginally to pounds 22m. Shareholders receive an almost 10 per cent boost in their dividend to 5.9p a share on earnings up from 16.1p to 16.4p. With the results in line with market expectations, the shares eased a penny to 293p.

But they have further to go thanks to the company's strong cash position, which provides it with ample headroom for expansion. After paying for two acquisitions in Malaysia, the company still managed to generate net cash of pounds 1.4m, reducing borrowings to pounds 10m - equivalent to 20 per cent of shareholders' funds and some six points below the previous year's level.

That should put Yule Catto in a powerful position to invest in new markets, though management remains cautious about the trading outlook because of the economic slowdown in continental Europe. While Britain appears to be showing some signs of revival, it is likely to concentrate on small selective purchases and internal growth.

The company is capable of making pre-tax profits of about pounds 25m this year, rating the shares on 16 times earnings. They are trading on a 20 per cent premium to the market but remain a good long-term bet.