ICI fit, but getting past the peak

ICI is on a roll - pre-tax profits in the first half of the year were more than the company made in the whole of last year and three times the profits at the bottom of the recession in 1992. A five-year cost-cutting programme and soaring bulk chemicals prices combined to allow new chief executive Charles Miller-Smith to mark his debut with an unexpected dividend hike, the first since 1989.

He and his team are in more confident mood than anyone can remember and with good reason. Having pushed through almost pounds 500m of cost savings, sales per employee jumped by an impressive 19 per cent during the half year. A 15 per cent return on capital employed may be some way shy of the company's 20 per cent target across the cycle, but it is a more acceptable return than for some time.

Fans of ICI believe the lumbering behemoth of the past really has changed - the company is leaner and fitter, is buzzing with new ideas from newly imported management (another first) and is taking seriously the high-growth markets outside the English-speaking world.

Stars of the show were materials (profits up from pounds 47m to pounds 86m) and industrial chemicals (almost tripled from pounds 109m to pounds 298m). As the biggest two divisions, they helped group trading profits leap from pounds 273m to pounds 533m.

It would be churlish to dismiss that performance but it is important to put it in context. Even after adjusting their forecasts upwards after yesterday's figures, analysts still believe ICI will make less this year than in 1989. Their figures suggest that the rate of growth in profits has seen its best.

That was confirmed, sotto voce, by the company itself, which warned that bulk chemicals prices are likely to sag in the third quarter. It also hinted that sales volumes in America have peaked.

To keep the City sweet, investors are promised another pounds 400m in productivity gains in response to a string of, it has to be said, obvious observations from three different outside consultants. Areas to watch, ICI was told, include purchasing, manufacturing, administration, pricing and control of suppliers - the whole business, in other words.

The market remains rightly sceptical about the savings claimed already and chances of achieving proposed improvements. On the basis of pre-tax profits of pounds 950m this year, the shares stand on a prospective p/e of just over 10 and offer a yield of 4.6 per cent.

That is not demanding, but neither should it be, both at this stage in the cycle and after more than 20 years of relentless underperformance against the rest of the market. After a good run since March, the shares are likely to flag.