The Investment Column: Profits bounce back at LIG

The recent history of London International will give encouragement to those who still preach the virtues of business focus. LIG's massive losses in 1993/94 were due to the sale of an ill-starred diversification into photographic processing and hefty provisions to enable the group to be rebuilt on the foundations of its original Durex condoms to rubber gloves business. Even after a pounds 115m rights issue at 70p, there were sceptics aplenty two years ago who said that new management led by chief executive Nick Hodges still faced an uphill task in setting the group to rights. But their doubts are rapidly being proved misplaced.

Yesterday, LIG reported pre-tax profits lifted 72 per cent to pounds 26.2m for the year to March, the second of the new management's promised three year recovery programme. The group looks on target to meet its aims of a 15 per cent operating return by next July. Last year's 10.1 per cent margin (see table) would have been 11 per cent but for continuing problems in making the new Avanti polyurethane condom, which accounted for an additional pounds 3.1m of costs.

The cost savings promised in 1994 are also coming through, albeit slowly. Around half of last year's pounds 4.6m savings are said to have come through from the pounds 45m plant rationalisation programme, with possibly up to pounds 3m more to come. There should be further benefits from the pounds 8m shake-up at Aladan, the US consumer and surgical gloves group acquired for pounds 46m in April into which the existing US operations are now being poured.

But with most of the unwanted brands like Wrights Coal Tar Soap and Woodward's gripe water gone, the main part of the restructuring is now over and the market is increasingly looking to where LIG goes from here.

The marketing budget, starved under the old regime, is rapidly being restored, climbing 37 per cent to pounds 31.4m last year. As a result, volumes contributed around a third of last year's 15 per cent underlying rise in condom sales to pounds 117m. That is around 1 percentage point ahead of the growth in the market, which is an impressive performance for the world leader. At around 22 per cent, LIG already has close to double the share of its nearest rival so against the background of slow growth in the overall market, LIG needs to show that it can continue to both push through price increases and maintain its thrust into new markets like the Far East, Latin America and eastern Europe.

New products like Avanti - stronger and less smelly than latex condoms - and the Biogel Neotech non-latex, powder-free medical glove should also help margins, if not sales. But assuming profits hit pounds 38.5m this year, the shares, 3p higher at 153p, are well up with events on a forward p/e of 20.