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“How things have changed at ICI,” says Edward Simpkins in The Sunday Telegraph. Just a couple of years ago, the idea of investing in the sluggish and unfashionable chemicals giant was “about as appealing as spending the day inhaling the fumes of its Dulux paint”.
But the nausea that Imperial Chemical Industries (ICI, 323.5p, tipped by Simpkins at 322p) might once have induced has passed. Indeed, the recent announcement of its third-quarter trading figures was “surprisingly upbeat”. In the last quarter, the firm’s sales have risen 6% and pre-tax profit by 8% compared to the same quarter last year.
Given that petro-chemicals make up 40% of ICI’s mammoth £2bn raw-materials bill, the group is highly vulnerable to the soaring price of oil. Yet so far it has “succeeded in passing on its higher costs to customers”, says Tempus in The Times – helped by the fact that its US competitors have also been putting up their prices.
Chief executive John McAdam reckons higher prices are here to stay. Publishing the third-quarter results, he said, “We are expecting further raw material and transport cost increases in some of our key markets, which we will seek to recover through raising prices.”
This may not be easy, says Questor, considering that ICI’s customers are the likes of Kingfisher, owner of B&Q, which is desperately trying to cut its own costs as the UK high street hits harder times. That said, the firm has done a “pretty nifty” number on prices so far and the overall outlook is encouraging.
McAdam’s four-year plan aims to raise profit margins by 0.5% a year, increase return on capital by 1% a year, improve cash flow, and cut debt – enabling increases in the dividend yield. And on a p/e of 11, compared to a sector average of 14, shares in ICI are on an “undeserved” discount to its peers. Buy, says Questor.
Meanwhile, Merrill Lynch says there could be 25% upside to 2007 forecasts and Morgan Stanley thinks the stock is “too cheap to ignore”.
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Annunziata Rees-Mogg
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