Generous Reckitt looks good value

The Investment Column

Perhaps the City expects too much of Reckitt & Colman. Leaving aside those left at home to wield the feather duster, the household products and foods company is unloved. Where is the growth in carpet cleaners, disinfectant and air fresheners, investors ask?

Hopes that Unilever or Procter & Gamble will bid for the group has put zip into the share price recently. Since Unilever said in February that it was selling its chemicals division to focus on household and healthcare, Reckitt's share price has taken off, beating the FTSE by almost 20 per cent. Yesterday's 20.5p slump in the shares to 961p was partly a correction after Vernon Sankey, chief executive, dismissed takeover rumours at the group's interim results.

Bid froth apart, Reckitt has been an unrewarding investment. Since 1993 and before the Unilever excitement, shares in the company underperformed the market by a sorry 22 per cent.

But perhaps the sceptics need to rethink. Reckitt's half-year results to July looked good against its peers. The 5.5 per cent underlying sales growth, excluding the currency hit, looks paltry, but household products and foods are both mature. Nestle has repeatedly failed to meet its 5 per cent sales growth target and Unilever has struggled to produce similar growth.

Reckitt's strategy of avoiding commodity markets like detergents, while directing marketing and research muscle into developing niche brands is right. Some 70 per cent of the group's products are number one or two brands.

Sharing product technology between countries has been another success. Buying L&F in the US in 1995 has enabled Reckitt to spread the Lysol faith to faster growing countries like India. Australia's strength in pest control has been successfully exported to South Africa and Sri Lanka. And it is not surprising that Mr Sankey wants to keep the health products business. As well as being Reckitt's fastest growing division, technology from products like Dettol are being used to develop even better surface cleaners.

There are black spots. Currency aside, growth in Thailand and Malaysia is slowing. Brazil, half of the group's Latin American sales, is worryingly weak as retailers destock. All this is bad news given the maturity of Europe and the importance of emerging markets for Reckitt's growth. The group's far-flung exposure to unpredictable economies has always been a concern. But given the potential for growth from emerging markets, Reckitt would be wrong to play safe.

Broker SBC Warburg is forecasting full-year profits of pounds 310m for 1997- 1998 and pounds 337m next year. Though a forward PE ratio of 19 is fair enough now, Reckitt looks good value longer termgiven its generous policy on cash handouts and fading bid prospects.

Slough waits on developments

Slough Estates, Britain's biggest industrial landlord, went through a fallow patch in the mid-1990s, but since the beginning of last year the shares have taken off, outperforming the rest of the stock market by 15 per cent. Part of this re-rating reflects a new dynamism evident at Slough since Sir Nigel Mobbs, veteran chairman of the group, relinquished some of his management responsibilities to Derek Wilson, who moved up from being managing director to chief executive early last year.

Some 18 months on, the group is in the midst of the biggest development programme in its history, with around 2 million sq ft of new space under construction or due to be started in Britain alone this year. This big expansion comes at a propitious moment for the group. Helped by gains on the sale of a portfolio earlier this year and lower interest charges as a result of disposals, pre-tax profits jumped from pounds 37.4m to pounds 50.5m in the six months to June. Gearing of 53 per cent and uncommitted facilities of pounds 300m leave plenty of financial leeway.

More importantly, the developments come after five years which have seen precious little new industrial property being built in the aftermath of the recession. The resulting pent-up demand is clearly becoming evident. Slough's estate is in effect fully let, with occupancy up from 94 to just under 97 per cent in the first six months of the year, while the group is seeing rent rises for good properties in good locations in the South- east of England.

That is just as well, as around two-thirds of the portfolio is based in the prospering M4 corridor of the Thames Valley. If market forecasts are borne out, the firmness of the retail market should soon start to feed through to industrial property.

That should make Slough a good later cycle play on the property market, with a useful exposure to the retail sector, set to rise from 17 per cent last year to more than 20 per cent of the portfolio when the 600,000 sq ft Buchanan Galleries in Glasgow opens in the spring of 1999.

Brokers' estimates suggest net assets per share have grown from 285p to 299p over the past six months and could be 336p by this time next year. That suggests the shares, down 2p at 320p, are fairly rated.

T&N gets the

better of ghosts

Not so long ago, T&N could never be mentioned without the dreaded word "asbestos" being muttered in the same breath. As Turner & Newall, it used to produce tons of the stuff, only to be sued decades later by asbestosis sufferers on both sides of the Atlantic.

Then last year it came up with a clever ruse to cap its liabilities at pounds 1.2bn by taking out a pounds 500m insurance policy.

But just as it laid one ghost to rest, others began to appear. Analysts pointed to an apparent slowdown in its car parts business and falling margins due to an indifferent world-wide car market.

They also argued that, like the rest of the engineering sector, T&N's exports, would bound to be hit by the rising pound. To cap it all, the asbestos claims came back to haunt T&N in June when a US judge threw out a class settlement, which opened the door to the possibility, albeit a small one, of higher payouts to sufferers.

Yesterday's results for the six months to June did much to dispel these new fears. Underlying operating profits were flat at pounds 85m, despite City expectations that they would fall to around pounds 75m.

A combination of cost-cutting and reducing stocks helped push margins up 1 percentage point to 10.6 per cent, leaving plenty of scope for further improvement. And T&N should be able to continue to gradually increase volumes and prices by picking up market share.

The good figures pushed T&N's shares up 16p to 163.5p. Even so, they remain cheap on fundamentals and bidders are still likely to be circling the group as the industry continues to consolidate.

Panmure Gordon has upped its underlying current year profit forecast from pounds 137m to pounds 154.6m, putting the shares on a prospective price/earnings ratio of under 9. Good value.