Company Spotlight: Profits are flooding in along the waterfront

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The Independent Online

It is a fair bet that the National Marine Aquarium has had a bumper summer. Located on the waterfront in Plymouth's Sutton Harbour, the aquarium is the ideal wet-weather attraction for soggy holidaymakers the length of the Devon and Cornwall coastline. There will have been no shortage of them this year.

The aquarium only opened six years ago, another step in the regeneration of what had, until the end of the 1980s, been a declining port. Since then, Sutton Harbour has been transformed. There is a new fisheries complex, a 250-berth marina, a number of imposing residential and mixed-use developments, a Dartington Crystal visitor attraction and the aquarium. New lock gates have made the harbour non-tidal. All of this has been accomplished by Sutton Harbour Holdings, which is listed on AIM.

So successful has the regeneration been that Sutton has been courted not only by Plymouth City Council but by other local authorities in the South-West to repeat the feat elsewhere. It has a development partnership with Plymouth, running to 2008, which allows it to take a developer's margin and a share of the profits in each development, without having to put up any capital. A similar deal is on for the redevelopment of the Penzance waterfront. There is another in St Austell, Cornwall, and a number of public-private partnership schemes are under discussion. There should be more news on these deals with the half-year figures in three months.

But Sutton is not just a property player. Four years ago it bought Plymouth City Airport, which was then used principally by British Airways' CitiExpress operation and Air Wales. Last year British Airways relinquished its Newquay- and Plymouth-to-Gatwick routes and Sutton set up its own airline, Air Southwest, to take them over. It has since added a number of other routes, including a flourishing one to Manchester.

What started as a move to protect the company's investment in the airport has turned into a real winner. By the end of July, Air Southwest had sold 140,000 tickets since its inception in October last year and looks set to make a decent profit in its first full year of operations. Air Wales has also announced a new service out of Plymouth.

Despite all this activity over recent years, Sutton had hardly set the stock market on fire - until, that is, it announced in June that it had received a bid approach from a cash shell company. The all-paper bid was worth the equivalent of 107.5p a share, allowing for the subsequent one-for-one split in Sutton's shares.

The shell company was capitalised at just £8m, which compared with a then value of about £25m for Sutton. This cheeky offer is thought to have come from Conygar, a company set up by Robert Ware, a former director of the property company MEPC. Not surprisingly, it was rejected as inadequate.

Nevertheless, it put the spotlight on a company whose shares were still trading at a discount to the value of its assets (117p a share) and which was spearheading so much regional development. The chairman, Ellen Winser, who in her days at the stockbroker James Capel was the first woman to become a partner of a stock exchange firm, promptly went out and bought an extra 250,000 shares at 110p a time, to take her holding to 7.3 per cent.

The shares have since risen by a third. The price action will have pleased the company's biggest shareholder, Dan McCauley, who used to run Plymouth Argyle football club. McCauley has a near 30 per cent stake in the company.

Sutton is an interesting mix of earnings and assets. There is good, reliable income from running the marina, from managing Plymouth Fish Market (don't laugh - this is worth £500,000 a year profit) and from the development fees due on the various partnership deals. That should now be supplemented by profits from Air Southwest and rising revenues from the airport. The asset base is set to grow as more properties around the harbour are redeveloped. As the area comes up further, rents will rise - giving an additional boost to property values. There should also be a contribution from the public-private schemes and other local projects in which Sutton is involved. Falling debt levels will help, too. Strong cash flow could eliminate borrowings within 18 months.

The company's broker, Rowan Dartington, forecasts a 12 per cent rise in profits this year to £1.8m, though it admits it has taken a conservative view of the likely contribution from the property side since it tends to be unpredictably lumpy. Sutton could do a lot better. One way or another, the shares look a solid lock-away.

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