Guinness problems need time

THE INVESTMENT COLUMN

Guinness shares have enjoyed the party over the past six months, comfortably outpacing the rest of the market. Interim figures yesterday brought investors back to earth - it will take time to overcome the challenges facing the beer and spirits group, and the shares slipped 7.5p to close at 508.5p.

Chairman Anthony Greener has been pointing to the hard road ahead for a couple of years now so yesterday's "steady progress continues to be made" was nothing new. What is really surprising, against that backdrop, is the fact that the shares have done so well at all.

The difficulties facing Guinness shone through clearly in the paltry 1 per cent rise in operating profits to pounds 370m from a rise in turnover for the six months to June of 4 per cent to pounds 2.04bn. The scope to raise prices above the rate of inflation, which served the company so well in the Eighties, is now a forgotten dream.

Along with that problem, is the longer term task of cultivating a younger crop of Scotch drinkers in the main markets in the UK, US and Europe. Guinness lost touch with the higher spending 25-35 year olds during the Eighties, when more fashionable drinks like vodka took up the running.

Guinness has also had to endure turbulent emerging markets, such as Mexico and Venezuela, and being buffeted by the volatility of currency markets. Elsewhere, operating profits in all three major geographic regions fell in the six months. The profit contribution from the UK fell 8 per cent, in North America by 9 per cent and in Europe by 13 per cent.

Despite what the numbers might suggest, Guinness is doing all the right things - from cost control to brand support - but progress remains governed by events outside its control, particularly the slow climb out of recession by many economies and the accompanying consumer resistance to price increases on luxury goods.

However, Guinness stout gave some cheer with operating profits from the Guinness Brewing Worldwide division rising 5 per cent to pounds 113m, helped by last year's World Cup in America and greater brand awareness in Europe from the rapid openings of Irish pubs.

Nonetheless, the overall 6 per cent increase in pre-tax profits to pounds 340m - including a 52 per cent higher contribution of pounds 35m from the Moet Hennessy associate - was, as Mr Greener would say, little more than steady progress.

Full year profits should show a 3-4 per cent improvement to pounds 946m, putting the shares on a prospective p/e of 16. A gross yield of 3.6 per cent offers little support and the shares are fully priced.

Redland up but still in trouble

Yesterday's 12 per cent rise in interim profits at Redland gave the shares a much needed respite - up just 7p to 370p. However, they have barely begun to repair the damage caused since they peaked at the beginning of last year at 634p.

Pre-tax profits of pounds 165m, which led to earnings per share of 14.3p, up 11 per cent, were pretty much in line with expectations but lurking behind the headline figures were some worrying signs.

Volumes are under pressure in almost all Redland's markets, cashflow is still poor and, despite slashing the dividend by a third six months ago, the company is still facing an ACT write-off - having bitten the bullet and cut the payout it now seems plain Redland didn't cut it enough.

The hoped for upturn in the UK, which would have justified the level of dividend reduction, has not happened and while profits at home increased from pounds 19.2m to pounds 26.5m that was only achieved by pushing prices higher across the board in the face of sharp declines in demand. Perhaps the industry has learnt its lesson from the price war of 1992 but logic dictates that falling volumes must eventually lead to lower prices.

More worrying is the stalling of the German juggernaut that has driven Redland in recent years. A 2 per cent overall fall in tile volumes masked a much sharper fall in the west German market, which accounts for three quarters of Redland's business there - the east is still moving ahead.

Volumes are expected to fall in the second half and next year as well so the increase in profits from pounds 78.8m to pounds 88.3m is plainly running out of steam.

Redland is often, and rightly, compared to RMC, the other British building products company to make a large chunk of its profits in Germany. It is not a comparison out of which Redland emerges well.

RMC generates good cash flow, it now owns the whole of its German subsidiary (as opposed to Redland's 51 per cent stake in Braas) in which it has invested heavily, it offers investors a growing dividend stream, has no ACT problem and hardly ever issues shares.

Despite the yawning gap in quality, its shares trade on a prospective p/e ratio of 11.2 for 1996 compared with 10.4 for Redland, assuming pre- tax profits of pounds 380m.

Even after the cut Redland has a more attractive 5.6 per cent yield (3.3 per cent at RMC) but, given the other worries, that is hardly a recipe for outperformance.

Express group takes a beating

The market took revenge on the hapless United News and Media yesterday after the publishing and exhibitions group announced it was pegging its interim dividend. The decision not to raise last year's 7.75p payment was seen as marking a change in the previous progressive dividend policy.

The 19p drop in the shares to 514p was an over-reaction, but that is not to say there are no doubts about the central strategy. The increasing emphasis by management on plans to exploit opportunities in "new media" invites scepticism. In reality, the only secure growth in profits in recent periods has come from the exhibitions business. Newspapers, including the flagship Daily Express and Sunday Express titles, have been hit by the cover price war and sharply higher newsprint prices. "New media", whatever that might mean, is still but a glint in the eye of executive chairman Lord Stevens.

The company also seems unsure which way it is facing over its newspapers. It is an open secret that the Express titles are for sale, at the right price. Yet United admitted yesterday that it was looking at the regional newspaper titles put on the auction block by Reed-Elsevier. Is the company in or out of the difficult UK newspaper market?

The results themselves were hit by provisions for 220 redundancies at the Express group and other operating costs.

As a result, pre-tax profits fell to pounds 65.1m from pounds 69.9m. The full year's figures will be affected by further restructuring charges, while UK newsprint prices have yet to peak. Recovery is expected in 1996, when advertising spending is expected to have picked up, the cover price war abated and the benefits of the restructuring will come through

Analysts are sticking with full-year profits of between pounds 125m and pounds 135m, rising to pounds 153m next year, for a forward multiple of 12 times. There are better media prospects elsewhere.

COMPANY RESULTS

Turnover pounds Pre-tax pounds EPS Dividend

Aberdeen Steak (I) 7.37m (6.76m) 0.19m (-0.14m) 0.6p (-1.2p) nil (nil)

Aerostructures Hamble (I) 28.2m (35.6m) -2.07m (2.38m) -2.5p (3.45p) nil (nil)

Brent Walker (I) 862m (868m) -51.4m (-73.5m) -13.67p (-20.8p) nil (nil)

Chesterton Intl (F) 69.3m (55.8m) 5.3m (5.2m) 7.1p (7.1p) 3p (2p)

Forte (I) 975m (859m) 105m (54m) 5.6p (4.2p) 2.75p (2.75p)

Higgs & Hill (I) 166m (120m) 0.59m (0.65m) 0.7p (0.9p) 1p (1p)

Redland (I) 1.30bn (1.27bn) 165.2m (147.4m) 14.3p (12.9p) 5.5p (8.25p)

Renishaw (F) 62.7m (50.9m) 13.5m (8.22m) 18.04p (10.87p) 7.21p (6.27p)

Sherwood Group (I) 85.5m (76.4m) 7.24m (5.96m) 3.6p (3.1p) 1.3p (1.15p)

Trinity Holdings (I) 101m (71.6m) 7.5m (6.25m) 9.7p (8.1p) 2.6p (2.25p)

United News & Media (I) 528m (508m) 65.1m (69.9m) 17.2p (19.1p) 7.75p (7.75p)

Yule Catto (I) 195m (160m) 15.9m (13.2m) 9.5p (8p) 3.2p (2.8p)

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