Bottom Line: Castrol smoothes Burmah's path
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Your support makes all the difference.STOCK market worries about a variety of influences, including the impact of exchange rates and underlying performance in chemicals, are obscuring the benefits Burmah Castrol is drawing from the strengths of its core lubricants business.
Last year growth in profits at Castrol, the lubricants operation, underpinned a healthy improvement in group-wide results.
A combination of introducing new synthetic oils in North America and rapid growth from the emerging Asian economies helped operating profit from lubricants to advance by an impressive 22 per cent to pounds 155m. The stock market, however, chose to focus its attention on questions about short- term growth prospects.
Worries are that Burmah will be hard pressed to increase current year earnings per share. A second enhanced scrip dividend could mean that dilution will amount to about 5 per cent.
In addition, this year Burmah will have to do without pounds 7m worth of provisions released, which has inflated profits each year since 1989.
The market is also troubled by Burmah's chemicals division, and particularly the performance of the Foseco businesses bought in 1990 for pounds 260m. Operating profits from chemicals were held back by Foseco, but profits still increased by 8 per cent.
Sentiment towards Burmah yesterday took a further knock because a good chunk of last year's profits advance was due to favourable movements in exchange rates.
A gross yield of 4.2 per cent gives Burmah considerable income attractions. But, blissfully free of oil exploration and production, there is promise in underlying trading as well.
Castrol is a strong brand, is well marketed and has a growing global presence. Earnings may tread water this year but that makes Burmah's p/e ratio of 15, falling to 12 in 1995, all the more attractive. Buy.
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