View from City Road: Spanish reaction dents Guinness

Guinness' first profits decline for 13 years was greeted by a 17p fall to 468p in its share price. In a depressed market for luxury, premium priced goods a downturn had been widely expected. The price fall had more to do with concern that the company has responded too slowly to the recession in Spain, which has badly gored Guinness's Cruzcampo brewing business.

In fact the pre-tax profits fall from pounds 900m to pounds 795m was exaggerated by pounds 125m of reorganisation costs. After adding those back, and the previous year's pounds 56m cost of settling the Distillers issue with Argyll, the underlying decline was barely 4 per cent.

Guinness may have been slow to recognise Cruzcampo's problems, but it has the ability to solve them. This year's performance in Spain will be less dramatic than the one-third fall in trading profits to pounds 41m endured in 1992. In any case the Spanish contribution was just 4 per cent of total trading profits of pounds 1.02bn. One of the biggest setbacks was the reduction in the pre-tax contribution from the company's cross-shareholding in LVMH, the French luxury goods and champagne group, which fell from pounds 123m to pounds 100m.

Spirits kept their end up with flat volume sales despite the depressed UK and Japanese markets. But there were compensations from price increases and currency movements so trading profits from spirits rose from pounds 749m to pounds 769m, a rise of 3 per cent or 1 per cent at level exchange rates.

Progress in the spirits business this year should be steady with a minor leg up from the Chancellor in his Budget. For the longer term, there is plenty of scope for boosting volume sales of the Johnnie Walker Red and Black Label brands. Large parts of South America and the Pacific are under-exploited. The huge Chinese and Indian markets have yet to be cracked open on any meaningful scale.

Trading profits from brewing rose by 3 per cent to pounds 252m, but fell by 1 per cent on level exchange rates. Overall sales volumes were marginally down, although as much Guinness, the stout, was drunk last year as in 1991.

The balance sheet is strong. Borrowings, purely because of translation effects, rose from pounds 1.8bn to pounds 2.03bn, pushing gearing up from 50 to 56 per cent. Free cash flow, after dividends, was a very healthy pounds 205m.

For existing shareholders, whose dividend payments are being boosted by 10 per cent to 11.85p, there are no pressing reasons to sell or to add to holdings. Profits should rise to between pounds 950m and pounds 960m this year, rating the shares on a p/e of slightly more than 14 - a 5 per cent discount to the market. Better to wait for the next round of results.