The Investment Column; The spirits are lagging at Allied

This was a dismal performance from Allied Domecq but the market had been fully briefed and, in the event, investors shrugged off a 24 per cent fall in pre-tax profits from pounds 416m to pounds 317m and the shares fell only 5p to 497p.

That will come as cold comfort, however, to anyone in the stock for any length of time. They have underperformed the market by 20 per cent over the past year, 30 per cent over three and a depressing 40 per cent since 1991.

It is little wonder that investors have pinned so much hope on new chairman Sir Christopher Hogg, the wunderkind of Courtaulds and Reuters and one of the founding fathers of what many see as Allied's best road to salvation, demerger.

For a market obsessed by the mantra of focus, Allied is a totally unacceptable mish-mash of interests, with a portfolio of mainly second-string spirits brands competing for management attention with an illogical, if better placed, retailing side, taking in managed pubs, Victoria Wine off-licences, Baskin Robbins and Dunkin Donuts.

Whether the company has the chutzpah to take the radical steps required to create a rational group, however, is unclear. While Sir Christopher is seen as a catch for Allied, City analysts will tell you privately of their doubts over the quality of the rest of the top management. They are at least on notice that they need to shape up or ship out.

Certainly the group has a patchy record, even disregarding the difficult markets in which it currently trades. It plainly overpaid for Pedro Domecq, the ill-fated Spanish/Mexican drinks business that continues to suffer from high Latin American inflation and the collapse in value of the peso. And it can fairly be questioned for the price it achieved in the recent sale of a clutch of former Lyons food businesses.

The challenges facing Allied are rather more simple to enumerate than to overcome. It must try and push through price rises in the spirits arm where a 1 per cent improvement would add pounds 27m to trading profits; it must focus on its leading brands - Ballantine, Kahlua, Beefeater and Sauza; it must make inroads into the pounds 350m of its cost base over which it has some control; finally it must bring to fruition the long overdue exit from the Carlsberg Tetley brewing venture.

Looking further ahead, though, shareholder value is only likely to be created by focusing on what it is good at, retailing, and getting shot of the spirits arm it is struggling to make a success of. On the basis of some analysts calculations such a deal might put a value of maybe 670p on the shares.

In the meantime, forecasts of about pounds 604m in the year to August and pounds 689m next time put the shares on a prospective price/earnings ratio of 14 falling to 12. With a same again 24p dividend likely, the shares yield 6 per cent, which puts a solid floor under the price. Good value.