Apocalypse now for Gas shareholders

The Investment Column

Tipping British Gas was always going to be risky, as we acknowledged when we suggested the shares in our sister paper, the Independent on Sunday, at the new year.

The gamble was always that Ofgas regulator Clare Spottiswoode would be more lenient than expected in her review of the future regulation of TransCo International, the pipeline business to be demerged next year.

As it happened, instead of the expected pounds 300m cut in revenues, her initial thoughts unveiled earlier this week point to the new company's pounds 3bn sales being slashed by as much as pounds 850m. The dividend is now clearly in doubt and the shares have crashed by 53.5p to 174.5p over the past week alone, after a further 14p fall yesterday.

Even without the intervention of the regulator, British Gas is already being savaged by the onset of competition. This year's first quarter should have been boosted by the return of a traditional cold winter. Sure enough, profits for the three months to March, revealed yesterday, got a weather- related lift worth around pounds 150m compared with the same period of 1995, but competition in its various forms still conspired to more than wipe that out. Operating profits just crept ahead by pounds 1m to pounds 969m, but interest charges doubled to pounds 60m cut the pre-tax total from pounds 954m to pounds 933m.

BG's trading arm, the "customer facing" parts of the business, bore the brunt of the attack from competitors. The maintenance of the regulatory requirement that it publish price schedules until the middle of 1995 meant the group's customers were easy to pick off by rivals and BG's share of the commercial and industrial market has accordingly sunk from around 55 per cent to 35 per cent.

The slump has been stabilised, but at some cost to margins. Operating profits from the trading business slumped from pounds 187m to pounds 121m in the latest period, while turnover was broadly static at pounds 2.9bn.

That, however, is only a foretaste of things to come. The high-priced North Sea gas contracts, typically at around 19p a therm, which are being inherited by the trading business, put it on course to lose around pounds 400m this year, given that the current spot price of gas is nearer 10p a therm.

These take-or-pay contracts forced the group to fork out around pounds 500m for gas it did not buy last year and could mean another pounds 300m payment in 1996. With restructuring costs this year and last adding another pounds 1bn or more to cash outflow, it is little surprise that gearing has risen from 10 per cent to 17 per cent in the 12 months to March. These problems are bad enough, but it is the apocalyptic scenario opened up by Ms Spottiswood's proposals that will drive the share price in the short term. A Monopolies and Mergers Commission reference may not bring much relief to British Gas, so the prospect of a 50 per cent dividend cut looms. That would suggest a yield of over 5 per cent at the current share price, which must give it some sort of floor. One only for the brave.

Grand Met

offers little fizz

For a company that has developed an unfortunate reputation for large-scale provisions, continually re-stated figures and Byzantine accounting, Grand Metropolitan is threatening to become almost conservative.

Yesterday's interim results included only pounds 6m of exceptionals and were the second set of figures in a row that did not re-state those of the previous year.

There is even talk of a possible share buy-back to increase shareholder value, replacing the acquisition-fuelled stategy that was such a feature of the Lord Sheppard years.

The reshaping of the portfolio that started under Lord Sheppard, who stepped down as chairman in March, is poised to continue.

Yesterday, Grand Met announced that the underperforming Pearle opticians business will be sold, although Burger King is staying put in spite of persistent speculation that it too will be off-loaded.

But for all the group's re-shaping, Grand Met shares have still underperformed the rest of the market by 27 per cent over the past five years and yesterday's results showed that the job is only half done.

Pre-exceptional profits for the six months to the end of March edged up just 3.2 per cent to pounds 455m, with much of the growth due to the performance of the Pillsbury food business in the United States.

Pillsbury's operating profits grew by 47 per cent, helped by a full six months' contribution from last year's Pet acquisition.

Profits at the IDV drinks business were flat at pounds 211m but this is a better performance than rivals such as the struggling Allied Domecq. Price increases of 1.5 per cent have been pushed though with volumes up by 5 per cent.

Burger King is doing well in America, which accounts for 80 per cent of its sales, but the performance in Europe is more patchy. The UK recorded a loss and sales have fallen by 11 per cent since the end of March due to the BSE scare over beef.

Grand Met shares have been treading water recently and fell a further 6p yesterday to 440p.

Given the difficulties in the drinks market, the outlook remains dull. On analysts' full-year profit forecasts of pounds 970m, the shares are on a forward rating of 14. Unexciting.

Compass digests

acquisitions

Compass, the contract caterer where Granada chief Gerry Robinson earned his spurs, has moved quickly to establish itself as one of the big players in its field. The finishing touches are being put to a two- year acquisition binge that has seen Compass pay pounds 310m for Canteen in the US and pounds 589m for a 33 per cent stake in Eurest of France.

According to chief executive Francis McKay, only a "few legal hoops" stand in the way of it acquiring a controlling stake in Eurest after the company's managers last month voted to sell their 33 per cent shareholding for pounds 83m. The legal technicalities relate to rival caterer Sodexho, which was involved in separate talks to buy Eurest.

Assuming the Eurest deal goes ahead, Compass will command the number three positions in the US and France, joint first position in the UK and, most significantly, market leadership in Germany, Europe's biggest catering market.

The task now is to drive margins up to generate the double-digit earnings growth that would justify the group's premium rating on the stock market. Yesterday's half-year figures were a mixed bag on this score. Stripping out the pounds 20m exceptional gain on the sale of the health-care division, pre-tax profits rose to pounds 47.8m from pounds 31m. Margins in the US rose, were flat in the UK and fell in Scandinavia. No figures were available for the rest of Europe.

Great opportunities exist in Germany, where recession-hit companies increasingly focus on non-core areas such as catering to outsource and save costs. That should provide a good long-term opportunity. But with debts of pounds 305m and negative shareholders' funds, it looks very exposed if interest rates start rising again.

BZW is looking for full-year underlying pre-tax profits of pounds 114m this year, putting the shares, down 7p at 528p, on a multiple of 20. High enough.

News
people'It can last and it's terrifying'
Sport
Danny Welbeck's Manchester United future is in doubt
footballGunners confirm signing from Manchester United
Sport
footballStriker has moved on loan for the remainder of the season
Sport
footballFeaturing Bart Simpson
PROMOTED VIDEO
New Articles
Olivia Colman topped the list of the 30 most influential females in broadcasting
tv
News
Kelly Brook
peopleA spokesperson said the support group was 'extremely disappointed'
News
The five geckos were launched into space to find out about the effects of weightlessness on the creatures’ sex lives
i100
Life and Style
techIf those brochure kitchens look a little too perfect to be true, well, that’s probably because they are
Sport
Andy Murray celebrates a shot while playing Jo-Wilfried Tsonga
TennisWin sets up blockbuster US Open quarter-final against Djokovic
Arts and Entertainment
Hare’s a riddle: Kit Williams with the treasure linked to Masquerade
booksRiddling trilogy could net you $3m
Arts and Entertainment
Alex Kapranos of Franz Ferdinand performs live
music Pro-independence show to take place four days before vote
News
ebooksAn unforgettable anthology of contemporary reportage
News
news Video - hailed as 'most original' since Benedict Cumberbatch's
News
i100
Life and Style
The longer David Sedaris had his Fitbit, the further afield his walks took him through the West Sussex countryside
lifeDavid Sedaris: What I learnt from my fitness tracker about the world
Arts and Entertainment
Word master: Self holds up a copy of his novel ‘Umbrella’
booksUnlike 'talented mediocrity' George Orwell, you must approach this writer dictionary in hand
News
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SQL Implementation Consultant (VB,C#, SQL, Java, Eclipse, integ

£40000 - £50000 per annum + benefits+bonus+package: Harrington Starr: SQL Impl...

Head of IT (Windows, Server, VMware, SAN, Fidessa, Equities)

£85000 per annum: Harrington Starr: Head of IT (Windows, Server, VMware, SAN, ...

Technical Software Consultant (Excel, VBA, SQL, JAVA, Oracle)

£40000 - £50000 per annum: Harrington Starr: You will not be expected to hav...

SQL DBA/Developer

£500 per day: Harrington Starr: SQL DBA/Developer SQL, C#, VBA, Data Warehousi...

Day In a Page

'I’ll tell you what I would not serve - lamb and potatoes': US ambassador hits out at stodgy British food served at diplomatic dinners

'I’ll tell you what I would not serve - lamb and potatoes'

US ambassador hits out at stodgy British food
Radio Times female powerlist: A 'revolution' in TV gender roles

A 'revolution' in TV gender roles

Inside the Radio Times female powerlist
Endgame: James Frey's literary treasure hunt

James Frey's literary treasure hunt

Riddling trilogy could net you $3m
Fitbit: Because the tingle feels so good

Fitbit: Because the tingle feels so good

What David Sedaris learnt about the world from his fitness tracker
Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Second-holiest site in Islam attracts millions of pilgrims each year
Alexander Fury: The designer names to look for at fashion week this season

The big names to look for this fashion week

This week, designers begin to show their spring 2015 collections in New York
Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

'I like Orwell's writing as much as the next talented mediocrity'

Will Self takes aim at Orwell's rules for writing plain English
Meet Afghanistan's middle-class paint-ballers

Meet Afghanistan's middle-class paint-ballers

Toy guns proving a popular diversion in a country flooded with the real thing
Al Pacino wows Venice

Al Pacino wows Venice

Ham among the brilliance as actor premieres two films at festival
Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

Neil Lawson Baker interview

‘I’ve gained so much from art. It’s only right to give something back’.
The other Mugabe who is lining up for the Zimbabwean presidency

The other Mugabe who is lining up for the Zimbabwean presidency

Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

The model for a gadget launch

Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
Alice Roberts: She's done pretty well, for a boffin without a beard

She's done pretty well, for a boffin without a beard

Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
Get well soon, Joan Rivers - an inspiration, whether she likes it or not

Get well soon, Joan Rivers

She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

A fresh take on an old foe

Doctor Who Into the Dalek more than compensated for last week's nonsensical offering