Fat Prophets take profits
Imperial Chemical Industries (NYSE: ICI) has been a strong performer since inclusion in the Fat Prophets Portfolio.
| "...the slimmed down group also makes an enticing takeover target for rivals wishing to grow by acquisition such Akzo Nobel." |
New management arrived several years ago and instituted a four-year plan with several specific financial targets, including annual cost savings of £140. Now these targets have largely been met, signaling the symbolic conclusion of ICI's turnaround phase.
Last year, sales and pre-tax profits from continuing operations were up 6 and 8 percent respectively. Given the challenging market conditions, we believe this is a resilient result. Furthermore, it highlights the group's successful recovery plan and ability to push through price increases necessary to claw back higher raw material expenses.
But clearly not content to rest on their laurels, ICI have embarked on a second 'transformation program'. This time the goals are to "accelerate profitable growth, improve operational effectiveness and develop a culture of sustainable improvement". Cost savings of £170 million per annum is again an important feature.
Recent non-core disposals will give ICI the financial firepower to pursue these new ambitions. The sale of Uniqema and Quest has enabled ICI to reduce net debt by over £1 billion and reduce the pension deficit by nearly half to £840 million.
Flush with cash, ICI have signaled their intent to make an acquisition(s) to complement the remaining core businesses. On the other hand, the slimmed down group also makes an enticing takeover target for rivals wishing to grow by acquisition, such as Akzo Nobel.
Either way, given current management's recent track record, we believe investors are in an ideal position to benefit. Unfortunately, part of ICI's efficiency drive includes delisting from the NYSE. The decision should generate cost savings of around £4 million per year, not to mention the elimination of Sarbanes-Oxley compliance requirements.
ICI intends to file the delisting documents today as well as those for deregistering and terminating reporting requirements with the SEC.
Therefore, once again we find ourselves in the position of prematurely taking healthy profits on a stock. Despite maintaining our position in the UK due to our favorable outlook, considering the ADRs imminent delisting, we recommend Members with a holding in Imperial Chemical Industries to sell around $40.35.
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