Burmah looks East for markets with promise

The Investment Column

Burmah can't quite believe how lucky it was to get out of petrol retailing in the middle of last year, just before the blood started splashing on the forecourts. Persuading James Frost to hand over pounds 83m for a business on the brink of a ruinous price war was a triumph of timing.

The withdrawal from fuels, now more or less completed by recent deals in Turkey and Sweden, was a useful piece of good news in what was something of a curate's egg of a set of results. The Castrol juggernaut continues its relentless progress and the ill-fated 1990 acquisition of chemicals business Foseco finally seems to be coming right, but elsewhere there are worrying signs of slowdown in the mature economies of the West.

The good news, however, outweighed the nagging doubts and, as a result, profits for 1995 emerged yesterday higher than expected at pounds 253m, up 15 per cent. The share price, which has enjoyed a good run so far this year, nudged 10p higher to 1,067p. At that level it has more than doubled since the beginning of 1992.

The Castrol success story continues, with volumes rising 5 per cent around the world despite total market growth of only about 1 per cent. Profits grew even faster, by 13 per cent to just over pounds 200m as existing customers were persuaded to trade up to higher-margin synthetic oils.

The real attraction of Castrol is its strong toe-hold in the developing markets of the Far East, where volumes increased by an impressive 20 per cent during the year, compared with flat sales in Europe and even a slight decline in the US. With estimates of GNP growth in the mature G7 economies now little more than a pedestrian 2 per cent, the Asia story takes on an even greater urgency.

Chemicals profits continued the impressive recovery from the recession, the length and intensity of which caught everyone, Burmah included, napping. Profits of pounds 62.4m were 28 per cent better than in 1994 and stripping out reorganisation costs taken against the profit and loss account, the underlying return on sales is now 9 per cent, within a whisker of the targeted 10 per cent margin.

Burmah is a good long-term investment for anyone who takes the view that the economic future lies in Asia. If the growing middle classes of India and China take to the motor car with anything like the alacrity of their Western counterparts, this is a growth story with years still to run.

In the short run, however, the shares appear to have caught up with the good news. On the basis of pre-tax profits of pounds 145m this year, the shares stand on a prospective p/e ratio of 15. At a premium to the market, they are now high enough.