Pilkington's glass is half full

Date: 2 June 2003
Source: Timesonline

Date: 2 June 2003

The glass, dark for so long, is beginning to clear at Pilkington. A marked improvement in the amount of cash thrown off by the business — £138 million before dividends for the year to March — indicates that the company might just be on the road to recovery.

Pilkington made no bones about the bleak propspects for its market. The company’s main buyers, the automative and construction industries, are depressed and not expected to bounce back any time soon. Pre-tax profits fell to £153 million from £183 million, though this was at the top-end of analysts’ forecasts.

Not that Pilkington’s management has been idle during this fallow period. The balance sheet, so long a concern for investors attracted by the company’s juicy yield, has been patched up: debt has been paid down so ensuring that the manufacturer keeps its BBB credit rating and out of the clutches of the junk bond market. Of course, there is still room for improvement. Interest cover is three times, when many investors would feel more comfortable if that figure were closer to five.

Cashflow improved during the year. After payment of the dividend, held level at 5p, Pilkington has about £80 million in reserve. True, the kitty could fall to as low as £40 million over coming years until demand returns. But at the moment the dividend remains twice covered. That, and a yield of 7.6 per cent, makes this an attractive investment for anyone with a craving for income.

Stuart Chambers, chief executive, has also continued the programme of cost cutting. Pilkington has shed some 14,000 jobs since 1996, leaving it with a workforce of about 25,000. Further cost-savings and improvements in the use of working capital should provide some support for profits during the next couple of years. After that, assuming an upturn in the global economy, Pilkington might start to shine again.

Amid the current gloom it is worth remembering Pilkington’s strengths: it is the world’s second largest glass maker with a deserved repuation for technical innovation. Sure, the stock may go sideways in line with the company’s markets for a while, but don’t forget that dividend.

Many analysts were in despondent mood yesterday: Dresdner Kleinwort Wasserstein maintained its sell recommendation. The stock trades on a forward price/earnings ratio of nine, a modest rating. But just look at that well-supported yield. An obvious candidate for any income investor’s portfolio
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