Companies: YULC ��

2006 was another tough year for speciality chemicals company Yule Catto, which continues to fight an uphill battle against fierce competition from the Far East and the rising tide of raw materials costs.

Figures for the year to December revealed waning revenues of �552m (�556m), and a drop in underlying pre-tax profits (before special items) from �34.4m to �31.5m caused by difficulties within the performance chemical businesses (which supply a wide range of chemicals including colorants and metal salts), where profits fell by �6.2m on flat sales. After one-off items – including among other things a disposal and closure, and a �20m asset write down – the group’s pre-tax profits plummeted from �32m to a lowly �13.6m.

Annual bright spots included a 13% rise in underlying profits at the polymer chemicals arm, which supplies water-based synthetic polymer lattices to the paper, surface coatings and textile industries, another solid turn despite fast-rising input costs and supply shortages. The management also flagged up encouraging development of the product range at the pharmaceutical business, which manufactures generic and ethical pharmaceutical actives and fine chemicals used in flavours and fragrances. Looking ahead, future results from performance chemicals should benefit from restructuring efforts and a focus on market sectors where margin and growth prospects are superior.

Overall, though progress has been made in shaping the group’s long-term development and a dividend increase to 9.3p (9p) offers a solid yield, we would urge investors to sell up and reinvest elsewhere given the competitive landscape and raw materials issues. Based on last year’s fall in earnings to 14.7p (16.7p), Yule Catto still looks rather expensive on a historic price-to-earnings ratio of 16. Sell.

Yule Catto	LSE	�335.22m	231.50p	-1.50p
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