Asda bandwagon gathers speed

THE INVESTMENT COLUMN
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The Asda bandwagon seems to have built up such momentum as to appear unstoppable. After a triumphant year in which it has successfully challenged the Net Book Agreement and taken a well publicised tilt at the price maintenance of over-the-counter drugs, the supermarket group has continued to deliver industry-beating results.

Yesterday's figures continued the pattern. Half year profits were up 27 per cent to pounds 138m and like-for-like sales up a thumping 12.6 per cent.

This is double Tesco's figure and streets ahead of struggling Sainsbury, whose most recent figures show a 2.2 per cent drop.

Asda has established itself as the lower priced alternative to Tesco and Sainsbury and has continued to use lower prices to drive sales. Yesterday Archie Norman, chief executive, said he hoped the group could deliver like-for-like sales increases of 5-10 per cent over the next few years.

True, lower prices mean a slimmer margin but Asda has even managed to improve this from 4.2 per cent to 4.6 per cent. There should be more to come as the company invests in new technology such as sales-based ordering systems which most rivals introduced some time ago.

Asda's view is that the UK grocery market is mature and that small points of difference will count. Asda plans to use its larger stores to offer services which rivals may have little space for, such as bakeries, rotisseries and salad bars.

The George range of clothing will be promoted heavily, building on the designer background of George Davies, the founder of Next. The label accounts for 4.7 per cent of sales and could reach 8 per cent within three years. That means pounds 200m more sales.

Asda also has a new Market Hall store format which is lighter, less like a warehouse and presents goods in sections or stalls rather than mile- long shelving.

The concept is working and others will gradually be converted. Though planning restrictions will limit new openings, six more should open per year which will all be in the Market Hall format.

If there is a potential problem for Asda it is the actions of Sainsbury, which is certain to flex its muscles in the New Year to reverse its decline. But even this is unlikely to rock Asda's boat too much. After busily upgrading yesterday, most analysts have settled near NatWest Securities' forecast of pounds 304m for the full year.

The shares have had a strong run this year, rising by 50 per cent. With yesterday's 1p rise to 106.5p they are on a forward rating of 15. Still attractive.

Doubts spread at Securicor

Securicor's shares have had a dreadful run since the summer, hit by a DTI ruling forbidding BT from buying the company's 40 per cent stake in Cellnet and a growing realisation that the outlook for that mobile phone business is deteriorating. The shares, which reached 1,125p in August, closed another 15p lower yesterday at 870p.

Pre-tax profits of pounds 99.4m in the 12 months to September were well up on the pounds 80.6m achieved last year but at the bottom end of expectations and analysts rejigged their forecasts accordingly. After a rise in earnings per share from 37.5p to 44p, however, an 18 per cent dividend rise to 4.02p was paid.

Securicor's shares rose sharply in the first half of the year as the market span a web of complicated valuations for the share in Cellnet, sums which some analysts now believe were as misleading as they were arcane. Price-tags of up to pounds 1.5bn for the Cellnet minority are now seen as much too optimistic.

They were always going to be acts of wishful thinking given the number of assumptions involved - the amount to which a comparison with Vodafone should be discounted to take account of Cellnet's traditional reliance on less profitable non-business users, the discount for being a junior partner to BT, and the extent to which capital gains tax would eat away at notional profit.

Now Securicor looks to be saddled with its profitable but inflexible investment, attention has turned to its underlying performance and here too doubts are creeping in. With the industry's growth increasingly focused on digital rather than analogue networks, Cellnet now finds itself competing with three other suppliers rather than one. Operating margins are thought to have fallen from 40 per cent in 1993 to maybe only 27 per cent currently.

So how to measure the shares? Probably on the assumption that with earnings still growing at a useful 15 per cent or so a market rating is appropriate on fundamentals and then some to account for the residual bid premium. On the basis of profits of pounds 115m to next September, the shares stand on a prospective price/earnings ratio of 17. About right.

Paper problems at Daily Mail

Daily Mail and General Trust, owner of the eponymous daily newspaper, remains very much a family business. Control of the voting shares is still firmly in the hands of the Rothermeres and, to rub the point home, yesterday DMGT appointed Jonathan Harmsworth, a 28-year old scion of the family, to the board.

Any paternalism within the group has not prevented the national papers cleaning up during the recession. But the soaring cost of newsprint has stopped the trend in its tracks this year. Pre-tax profits slumped from pounds 92.1m to pounds 66.8m in the 12 months to 1 October, hit by an extra pounds 20m on the paper bill and an estimated pounds 10m additional spending on the editorial content of the newspapers.

The company warns that newsprint costs will continue to be a factor in the coming year - analysts suggest that a 10 per cent rise in January could follow this summer's 25 per cent increase - but refused to let that dampen their underlying bullishness.

The omens are good. The Associated offshoot, owner of the Daily Mail, Mail on Sunday and Evening Standard, has seen record advertising revenues - up 10 per cent on last year - and further gains in circulation. Autumn cover price increases should offset pressure from the costs side, allowing the expected buoyancy in advertising to fall through to the bottom line in the current year.

There may also be scope for Associated to push up rates, given circulation increases and the collapse of Rupert Murdoch's Today, which should tighten the advertising market. Meanwhile the Northcliffe regionals business has had a storming year.

The 70 per cent-owned Euromoney has had its own problems. But assuming this year's problems are past and with cost savings due to kick in, DMGT could produce between pounds 110m and pounds 115m this year, putting the non-voting shares, down 18p at pounds 11.20, on a forward multiple of 16. Up with events.

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