THE INVESTMENT COLUMN

Geest slips on a banana glut

Poor old Geest has slipped on yet another banana skin. Last year it was Hurricane Debbie that wrecked central American harvests. Earlier this year Tropical Storm Luis inflicted similar damage on some of the Caribbean islands on which Geest relies heavily. Now over-supply has resulted in a price slump and forced the company to issue a profits warning.

The pounds 5m restructuring charges in the first half have been topped up with another pounds 7m. Analysts are now expecting negligible profits for the year to December instead of the anticipated pounds 14m. Some are forecasting a loss.

The shares fell 23 per cent yesterday to 107p, a record low and a far cry from their 479p peak in 1993. Geest, led by chief executive David Sugden, must feel under pressure after a flurry of profits warnings in the last three years. It must surely long to be rid of its banana interests but refused to comment yesterday about the division's future. The key problem, of course, is that although Geest may be keen to sell, it is far from clear in the current climate who would want to buy.

The nub of the problems is a change in quotas for bananas imported from the larger, lower-cost Central American plantations.

Earlier this year Brussels increased the quotas of these "dollar bananas" from 2.1 to 2.2 million tonnes. This increase in supply was exacerbated by the timing on new licences for bananas from Afro-Caribbean and Pacific producers. The result is that banana prices were 30 per cent down in October compared with last year, with little hope of recovery.

The worry for Geest is that the volatile trading in its banana division is always threatening to wreck attempts to build up a more stable prepared- foods business supplying own-label soups, pasta, speciality breads and sauces to clients such as Marks & Spencer. In spite of the pounds 2m loss at the Necta prepared pineapple subsidiary, the prepared foods division made a pounds 7.5m operating profit last year and is forecasting pounds 10m this year.

For bananas, the outlook is bleak and getting bleaker. From 2002, the European market will be open not just to dollar bananas but to some of the large American banana traders. Geest must find new sources of bananas if it is to compete effectively against the more cheaply produced dollar products. But this uncertainty will only confirm City fears that a large chunk of Geest profits is subject to matters outside its control. Panmure Gordon forecasts a pre-tax loss of pounds 4m after exceptionals. Though the shares have fallen close to book value, they should still be avoided.

BOC boosted

by gas rise

As a late-cycle company, it is no surprise that the gases group BOC is performing well at this stage of the recovery, but few investors would have expected the outperformance of the past six months. Part of the change in sentiment is due to the ending of the precipitous decline in health-care profits after its mainstay drug, the inhaled anaesthetic Forane, came off patent in 1993. But the best news has been the return to form of the core industrial gases business.

The storming performance of the operation was the main reason for the 13 per cent rise in annual pre-tax profits to a record pounds 402m before exceptionals. The turnaround in prospects for gases began last year and recovery has accelerated during 1995, culminating in the 16 per cent profits growth recorded in the final three months to September. That is at least double the rate of growth recorded by BOC's biggest competitors.

Much of the improvement is due to a three-year restructuring programme begun in 1994. The original pounds 85m cost, which cut headline pre-tax profits to pounds 253m in 1994, has been raised to pounds 89.2m, but cost savings last year were a higher-than-expected pounds 43.5m.

However, higher volumes also played their part and there is more to come. The group has been catching up with the increasing demand for lower-cost production of gases such as oxygen at customers' own premises. In the last 12 months alone, BOC has won orders that will increase its worldwide on-site capacity by 50 per cent, including a doubling in the US and the North Pacific.

The 10 to 15-year take-or-pay contracts provide a solid base well into next century. The plants should also enhance margins, notably from increasing supplies of argon, a gas in short supply in the US. Health care may take longer to put right, but a recent marketing deal with Baxter Healthcare of the US should help.

Group profits of pounds 450m for 1996 would put the shares at 876p, up 12p, on a forward price/earnings ratio of 15. With BOC forecasting a 9 per cent rise in the dividend to 27p next year, the shares are fairly rated.

GA slips into pounds 40m hole

A catalogue of disasters, from Hurricane Marilyn to this summer's West Country bus crash, knocked a pounds 40m hole in General Accident's underwriting profits - taking the shine off third-quarter figures and leaving analysts' expectations high and dry.

The shares tumbled 7p to 629p as a result, leaving them a tenth below their recent high of 686p. At that level they look interesting, with a yield of 6.2 per cent forecast for the year and arguably more stable earnings than other big composite insurers. GA is widely perceived to have the best-quality UK business among its peers, having been more aggressive than the others in turning away business which it believes is not properly priced.

Elsewhere, the US underwriting loss fell by more than a quarter, and GA's future there looks relatively optimistic. Losses also fell by more than a third in Canada, despite a surge of weather-related claims.

GA still seems to be expanding its life insurance business, bucking the trend in a troubled industry. This is likely to remain the case in coming years with efforts being made to expand outside the UK. Life profits at the company have grown strongly in recent years and are now one of its clear strengths.

Composite share prices have been strong this year, reflecting the market's frenzied search for the next takeover or merger - GA has risen from a low of 491p last December. But the market still appears to have largely ignored the potential for better quality earnings which could and should stem from technology-assisted management of the insurance cycle.

If better information does lead to a flattening of the cycle and the sector's heavy losses at the bottom are eliminated, then the way these shares are valued will have to change accordingly and investors will demand less income to compensate for the cyclical risk. On that basis GA looks well-supported.