Glory days are over at Unilever

THE INVESTMENT COLUMN

For one of the stockmarket's largest companies, Unilever is frustratingly short on detail at the half-way stage. It gave just enough yesterday, however, to cast doubt on the group's earnings growth potential for the rest of the year. The red pen was taken to forecasts and the shares slipped 21p to 1,259p.

Interim profits were actually pretty much in line with expectations - the second-quarter figure of pounds 646m compared with a range of forecasts from pounds 619m to pounds 651m. That included advances in the US and Rest of World segments and Europe, where an improved second quarter clawed back some of the damage incurred in a dreadful first three months. The outlook for consumer spending in Europe, which still accounts for more than half group sales, is, however, worryingly flat.

The Persil Power debacle continues to leave a stain on detergent figures, with the company still struggling to repair its market share. Yellow fats are suffering from a fight-back by butter and a move downmarket.

Unilever has been a fine investment over the past 10 years, with the shares increasing five-fold. That's twice as good as the rest of the market, which the shares have outperformed in eight out of the past 11 years, often by a sizeable margin.

That is not surprising given the company's dominant positions in markets which have grown fast in line with disposable incomes. It owns some world- leading brands, from Oxo to Birds Eye, Flora to Vaseline. The outperformance also reflects Unilever's rock-solid finances: interest payments are amply covered by profits while borrowings as a percentage of shareholders' funds have been declining steadily for five years now.

But the market earns a living by looking forward and the outlook is less bright than Unilever's largely spotless past. Having pushed profit margins up steadily through the second half of the 1980s, they have stagnated in the 1990s. Return on capital, which almost doubled between 1984 and 1990, has hardly improved since then.

An oil tanker the size of Unilever can hardly expect to outperform the economies it operates in and analysts worry that downward pressure on inflation and public borrowing will provide an uninspiring backdrop to consumer expenditure in Unilever's important European markets.

In that context, Unilever's earnings growth will be pushed to outstrip the market as a whole and a prospective p/e this year of 14, on the basis of forecast profits of about pounds 2.6bn, looks to be asking a lot. After such a good run, and with an unattractive forecast yield of under 3 per cent, investors should take profits.

Brown &

Jackson poser

It's make your mind up time for Brown & Jackson's unfortunate shareholders, investors in the troubled discount retailer that trades under the Poundstretcher name. The company was rescued last year by South African group Pepkor, which has announced a capital reconstruction and a deeply discounted rights issue. Investors have until 1 September to decide whether to take up their rights.

Under the terms of the deal, Pepkorwill invest at least pounds 20m on top of the pounds 12m it spent in July. It is also underwriting a 17-for-3 rights issue at 10p. The shares went ex-rights earlier this week and have steadily fallen from a high of 387p in August 1993 to just 25p yesterday.

Brown & Jackson has been loss-making for eight years and is forecast to make a further pounds 4m loss this year. Clearly many investors have already lost a bundle on this company and have to decide whether taking up their rights will mean re-investing at the bottom or simply throwing good money after bad.

The answer is far from simple. On the positive side the investment by Pepkor makes the company a much stronger proposition than before. Pepkor says it will use Brown & Jackson as its vehicle for expansion in Europe so more acquisitions can be expected. Christo Wiese, the chairman of Pepkor and Brown & Jackson, is a shrewd investor and a highly regarded retailer.

So far the new management has made many of the right moves. It has either closed or disposed of poorly sited shops, reducing the number to less than 200. Recent figures show that like-for-like sales were up 8 per cent, a better performance than many retailers.

The down side is that investors will be mainly buying hope. The company lost pounds 9m in the six months to June which also saw a pounds 21m cash outflow. Williams de Broe is forecasting losses of pounds 4m-pounds 5m for the full year and break-even for 1996. Buying struggling retailers at the bottom can, as with Next, make a fortune for brave investors. But, with so many uncertainties, this one is best left to the underwriters.

COMPANY RESULTS

Turnover pounds P/Tax pounds EPS Dividend

Aviva Petroleum (I) $5.4m($4.5m) -$680,000(-$1.1m) -0.02c (-0.04c) -(-)

Burlington Group (I) -(-) 57,000(72,000) 0.35p (0.43p) -(-)

Haden Maclellan 215.4m(171.8m) 4.5m(2.3m) 2.7p (1.7p) 1.1p(1p)

Nightfreight (I) 24.6(21.8m) 1.4m(1.35m) 2p (2.62p) 1.13p(1.13p)

Portmeiron Potteries (I) 14.4m(12.7) 2.2m(1.9m) 13.93p (11.85p) 3p(2.5p)

Unilever (I) 15.1bn(14.3bn) 1.11bn(1.06bn) 37.95p (36.13p) -(-)

(Q) - Quarterly (F) - Final (I) - Interim