Smaller companies: Claremont's no fashion victim

Markets

For investors in the beleaguered textiles industry, there is rarely a ray of sunshine to lighten an otherwise unremitting diet of bad news, writes Richard Phillips.

Over 10 years, the textile sector as a whole has woefully underperformed leading blue chip stocks. Nevertheless, when a sector is out of favour, it can sometimes mean that companies can be tarred by the same brush as their peers. Ideal, if you are looking for value.

Claremont Garments, on a market valuation of pounds 54m, is currently one of the sector's many problem children. Floated at 170p in 1991 through a demerger from Alexon, it now trades at 107p. It has made several acquisitions, notably the pounds 53m it paid for Magellan in 1994, an intimate apparel manufacturer as it is dubbed in the trade - or lingerie and swimwear maker.

The shares came through the tail end of the recession in good shape, registering steady gains before hitting a high of 383p in 1994. Since then, however, it has been downhill all the way. In 1995, profits declined by pounds 2m, to pounds 12.9m. Much of this was down to a squeeze from Marks & Spencer, which purchases 92 per cent of its clothes; the rest are bought by Next.

Some might worry that such reliance on one outlet would hold back the shares, and it is true that M&S exerts strong control over its suppliers. But at the same time, it will not want to see its suppliers squeezed out of existence.

Then for 1996, it dived into the red, with losses of pounds 3.1m, after exceptionals of pounds 7.1m. Things, indeed, look bleak.

But salvation could be around the corner. The pounds 7.1m related to a fundamental business review, as chief executive Peter Weigand called it. This saw some radical surgery introduced. It has closed four production sites, including its Glasgow factory, at a cost of 700 jobs, and has pulled out of its branded sportswear business, Avec.

It has also started to push ahead on sourcing production overseas - from only a small amount a few years ago, it now produces 15 per cent of sales overseas, and wants to reach 20 per cent for the current year.

Significantly, annual cost savings from the reorganisation will be pounds 7m, more than enough to offset the exceptional costs within one year.

Stockbroker Henry Cooke, Lumsden forecasts pounds 10m for this year, which leaves the shares trading on a lowly 8.1 times earnings. On that basis, there should definitely be room for the shares to move ahead.

Whether Claremont can ever reclaim the high ground of previous years remains open to question. And given the intense competitive pressures the industry remains under, especially from cheap Third World producers, it will be many years before the industry regains a truly global competitive edge. But for now, the shares are a buy, but be willing to take profits. The long term is too hard to predict.