Fool's Eye View

[ November 20, 2000 ]

Hanson Diddled Down Under

By Rob Davies (TMFEssex)

Carburton Street, London -- There is an art to reading corporate press releases. It's really a big game with the company and its PR advisors on one side, putting the best possible spin on everything, and the investors on the other trying to peer through the spin to the real story. Today's profit warning from Hanson (LSE: HNS) is a classic example.

Of course it doesn't say it is a profit warning, it says it is a trading statement. And it assumes a level of knowledge with the company that few will have, other than a handful of analysts who spend their lives looking at the sector. The statement starts off by assuming we are familiar with its first half figures by saying "As with the first half..." Personally, I haven't got a clue what happened in the first half. There are 1,700 companies on the LSE and I try and keep my eyes on as many as possible, with special interest in some that I follow closely: this is not one of them. When companies presume I know their details it irritates me.

The statement goes on by saying "In common with others in the sector..." This is a classic piece of corporate speak saying that you can't blame us, everyone else is suffering too. In this case the culprit is energy prices and the associated cost increases which will cost the company £40m for the year as a whole.

The weather in the UK provides another great excuse for slower activity in the domestic market, and unrest in Israel for problems there. But the reason I love the best is the "expected decline in Australian demand following the Olympics..." I don't recall the company saying that at the time of the Pioneer acquisition earlier this year.

All these reasons together will combine to give a lower pre-tax profit this year than the £314m it made in 1999. Given that the company spent £1.7b on buying Pioneer and expanding the business that is rather disappointing. That indicates that the additional profits from Pioneer have not been enough to offset the decline in its existing activities.

However, Hanson is optimistic for 2001, especially for the US market which accounts for 50% of turnover. In the UK the company expects the government's focus on improving transport infrastructure to be good for it because it is the second largest supplier of aggregates and related products.

After the decline in the shares from 600p last year to the current 346p they only trade on a price to earnings ratio of 9 and yield just under 4%. However, the mean estimate of earnings at 38p is sure to come down and next year's estimate of 43p will almost certainly suffer cuts as well. Value investors will undoubtedly start to sniff around the stock, but the £1.9b of net debt at the end of June will deter most. The group has improved its balance sheet through its recently arranged $750m 10-year dollar bond at 7.875%. Even so, a combination of falling earnings and debt equal to 72% of its market capitalisation means that a dividend cut must be on the cards.

What Next?

The Hanson discussion board will have more comment, and the Value share discussion board will tell you what to look for in value shares.