Bottom Line: Room for optimism despite Yule Catto setback

A FALL of 17 per cent in pre-tax profits at Yule Catto yesterday looked depressing, but there is significant room for optimism at the chemicals company.

Most of the fall from pounds 22.2m to pounds 18.2m in the year to December was due to losses incurred closing a Dutch building materials subsidiary. Profits from continuing businesses were slightly down as well.

But take out a pounds 4.6m loss on the Dutch operation and profits fell only 5 per cent to pounds 23.2m from pounds 24.3m.

Excluding the Dutch losses, operating margins declined from 9.1 to 8.7 per cent.

But to concentrate on last year's figures is to ignore the potential only now becoming apparent.

Yule raised pounds 30m in a rights issue last September, reducing gearing from 20 to 5 per cent at 31 December. That will lighten the interest charge this year. More importantly, the rights money has given Yule the balance-sheet strength to enhance profitability through acquisition.

New businesses integrated last year earned Yule profit margins of 14 per cent - well above the return on sales in the rest of the group.

In addition, closure of the Dutch business means Yule is relieved of the cost burden and trading losses associated with it.

Taken together, the positive influences could result in a 50 per cent profits bounce this year.

Admittedly, a big leap in pre-tax profits will not be precisely mirrored by earnings per share because of the rights issue, but pounds 28m of taxable profits should feed through to a 30 per cent jump in earnings.

Yule's attractions do not come as news to the stock market. A 7 per cent rise in the dividend for the year from 5.8p to 6.2p means the shares offer a relatively stingy yield of 2.6 per cent.

But the company's popularity was sustained yesterday, with a 9 per cent rise in the share price to 299p. That puts the shares on a prospective price/earnings ratio of 17.5 times - a premium to the market but a discount to the sector, reflecting the fact that a third of Yule's sales are on the still-depressed Continent where the timing of recovery is uncertain. It is a fair rating.