A bargain to be made in Hays while it's marked down

The Investment Column
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The markdown yesterday in Hays' share price was a rather curmudgeonly response to another set of solid figures. The markets chose to ignore the underlying 18 per cent increase in interim profits to pounds 72m, concentrating instead on the higher-than-expected exceptional charges Hays incurred in respect of the aborted bid for fellow logistics group Christian Salvesen and the integration of the newly acquired courier business ICS.

A better figure to have concentrated on would have been the thumping great earnings multiple being forked out for the executive recruitment group Michael Page, which rather puts the value of Hays' own personnel services division into perspective.

Profits here increased by a third and, whereas Michael Page is being bought up at the top of the cycle, Hays' concentration on placing lower- grade staff in temporary employment makes it less vulnerable to the next downturn or a few star performers taking their client base elsewhere.

Nor should an incoming Labour government armed with a national minimum wage and the Social Chapter hold any fears for Hays since, if anything, employers will be encouraged to employ more part-time and contract staff.

As for ICS, which specialises in door-to-door deliveries, the pounds 5m rationalisation charge being taken in the half year seems a small price to pay. ICS is capable of turning in profits of pounds 9m a year, suggesting that Hays got rather a bargain in paying pounds 65m for the business last September.

While office support services such as mail delivery are likely to prove the area of biggest growth, it would be wrong to ignore the vast potential that continues to lie within Hays core distribution and logistics business. In particular, Hays has succeeded in cracking the vast German retail market with a five-year contract to develop and manage two large distribution centres for the supermarkets and DIY chain Kriegbaum.

For no capital cost, Hays has secured itself a toehold in the biggest retail market in western Europe. If its experience in France, where Hays has a relationship with most of the top retailers, is anything to go by, then this could be the start of a very successful and profitable foray not just into Germany but further east.

There is still some lingering disappointment that Hays never consummated the Salvesen deal. Despite having the firepower to pull off a big one with interest cover running at a colossal 16 times earnings, there were few hints yesterday that Hays plans to depart from its strategy of organic growth and modest bolt-on acquisitions.

This may not set the pulse racing but, as the share price graphic shows, it has served investors well. Profits of pounds 155m for the full year and pounds 176m in 1998 put the shares on a forward multiple of 21 times earnings falling to 19. You can buy cheaper but you cannot buy better.

BPI wraps up Europe

With very little fanfare, British Polythene Industries has grown to become not only the UK's but Europe's biggest producer of polyethylene film, a ubiquitous if mature product used in the wrapping of everything from bread to silage. This commanding position has been built on the back of a steady programme of vacuuming up the smaller fry in the UK industry at keen prices. Under chairman Cameron McLatchie, British Polythene has completed more than 50 acquisitions in the past 10 years or so, with pounds 23m being spent on 11 buys last year alone.

But, surprisingly, BPI has until now never made a purchase on the Continent. That is being put right with yesterday's announcement that it has agreed to pay around pounds 14m - equivalent to net asset value - for Wavin, a Belgian industrial film and sack business. The operation, which traded around break-even last year, adds turnover of pounds 47m and looks like a typical BPI turnaround acquisition which should provide a beach-head for further European expansion.

Back home, the company continues to demonstrate its ability to squeeze money out of an extremely competitive market. Pre-tax profits up 12 per cent to pounds 28m in the year to December included only pounds 170,000 from last year's acquisitions.

Those purchases are a dowry for the future. Bringing them up close to group margins of around 8 per cent over the next few years should add an additional pounds 6m or so to the bottom line, for an investment of pounds 2m in the latest two half years. But yesterday's figures also contain a reminder that buying cheap can have its pitfalls.

Reorganising Parkside, a confectionery to flour bags producer acquired in November 1995, kept it in loss last year, although BPI expects a pounds 1m turnaround into the black this year. More seriously, it is warning that Far Eastern competition in the commodity carrier bag business, already two thirds of the market, is being exacerbated by cheaper polymer costs there and the strong pound. So this year another pounds 2m will be spent reorganising the Alida Packaging and Bibby & Baron businesses, shedding jobs and concentrating on higher-margin promotional bags.

The extra costs have led Merrill Lynch to shave its forecast by 10 per cent to pounds 29m yesterday, putting the shares down 34p at 705p on a forward p/e of 15. Even with turnover approaching pounds 500m, the shares are high enough.

Family values at Millennium

Chief executive Edouard Gremlich's decision, genuine in this instance, to spend more time with his family is a blow to Millennium & Copthorne but one that the market took in its stride yesterday. The shares, which have motored since last April's placing at 278p, closed another 6.5p higher at 383p as analysts focused on a sparkling set of results for the year to December.

Pre-tax profits of pounds 39.3m were 63 per cent higher than 1995's pro forma pounds 24.1m and well ahead of expectations which had left brokers a good pounds 5m behind the game. Earnings per share of 23.7p left the 4.7p dividend for the eight months since flotation well covered. Arguably the best of last year's pack of hotel floats, M&C has not put a foot wrong since coming to the market.

As in any property-based business, the keys to the success of a hotel chain are location, location, location. With two thirds of its revenues coming from the booming London and New York hotel markets, Millennium has been in the right place at the right time. Despite heavy refurbishment programmes, occupancy in London remained safely above 80 per cent and even in the provinces, where weekend bookings are hard to come by, the Copthorne hotels were three-quarters full.

Just as important, the room rate achieved for those rooms rose in all four of the group's markets, even in France and Germany. In London there was an impressive 15 per cent rise to pounds 72 a room and the increase is still under way, the company says. Booming markets are doubly good for a high fixed-cost business like a hotel and Millennium reckons it converted two thirds of last year's extra sales directly into profit.

Looking ahead, the company is sticking with its prudent refusal to pay the frothy prices being demanded by hotel vendors and reckons it has plenty to go for internally. Certainly much of the benefit of refurbs is still to show through.

That should make Kleinwort Benson's forecasts of pounds 48m this year and pounds 57m in 1998 look conservative, compared with an earnings growth rate three times the average. Good value.

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