Investment: Tough times expected for Ellis

ELLIS & EVERARD, the Bradford-based chemicals and polymers distributor, yesterday joined the growing ranks of companies issuing profits warnings when it cautioned that profits would at best be flat in the second half as the economic outlook deteriorated.

The company announced a 3 per cent rise in profits to pounds 17m for the six months to the end of October. Turnover rose by 8 per cent to pounds 392m, but margins narrowed.

Chief executive Peter Wood warned that full-year profits excluding exceptional items would be broadly in line with last year's total of pounds 32.1m, implying a fall of more than 3 per cent to pounds 15m in the second half.

The company has taken immediate measures to try to reduce costs by consolidating the distribution of bulk solvents and packaged goods in the UK and its business in the Benelux countries. This will create an exceptional charge of pounds 1.6m in the second half and swallow up the pounds 1.5m exceptional profit from the sale of the group's minority interest in its Italian partner, Novaria, which was announced yesterday.

Jonathan Taylor, the chairman, was quick to say that the company had the right strategies in place for long-term growth. The European sales alliance continues to attract new customers, suppliers and partners. Operating profits in the UK were unchanged, although sales were actually a touch lower, and prices were under pressure from the autumn onwards.

But, given that over half the turnover and almost half the profits are generated in the US where until the last few days the overall economic position remains remarkably optimistic, the outlook can no longer be ignored. Sales in the US rose by 18 per cent, but this came mainly from acquisitions and volume gains were being offset by falling prices.

Analysts immediately downgraded forecasts for the full year from pounds 34m to pounds 32m, and the shares fell 17.5p to 201p - above their low point of 166p last October, but well down on the 300p-plus at the start of 1998.

Forecasts still put earnings at 24.4p a share, which would adequately cover a repeat of last year's dividend of 9.5p a share. But at just over eight times earnings, the market fully anticipates tough times ahead. Growth depends on further acquisitions in an industry ripe for further consolidation.