Awaiting terms at Thorn EMI

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The Independent Online
Pity Sir Colin Southgate at Thorn EMI. He unveils pre-tax profits dead on expectations, and announces what analysts call the best pre-Christmas new release line-up at music giant EMI. But no one's interested. All they want to know is when the two sides of the business - music and rentals - will be demerged and on what terms.

This is unsurprising, given that it is the demerger that has powered the company's share price in the past few months, pushing it through 1,500p, although it closed 24p lower yesterday at 1,523p. Shareholders have been promised that value will be maximised, and that means two quoted companies rather than one, for a combined value of, perhaps, pounds 7.5bn, or 1,700p a share. A separate quotation for the rentals business, which includes Radio Rentals in the UK, would allow the profitable music and retail operations to enjoy a re-rating.

Some still expect a predator to step in before the demerger plan is put into effect sometime next spring. There is no lack of potential suitors, with Disney topping the list. Moving before the demerger is put through, but after all the painstaking administrative and accounting work is done, might well appeal to the potential buyers.

Sir Colin maintains that the group's performance is its best defence against a hostile takeover. And the numbers for the six months to September, unveiled yesterday, give him some support. Operating profits rose by 27.4 per cent to pounds 194m, helped by the streamlined consumer products business (since Rumbelows was closed) and better results from EMI's music recording and publishing businesses.

HMV, which includes the Dillons bookstores, reported seasonal losses of pounds 8.9m, in line with expectations. It is here that the company may be able to add real value in the coming months. It is already overhauling Dillons, applying some of the lessons learned at the HMV music shops.

The music recording and publishing business is still weaker than it should be in the US. But the European operations are strong, buoyed in part by growing sales of titles by regional artists in local markets. The third quarter, which includes Christmas, is likely to be a vintage period for EMI. It will include the red-hot new Beatles Anthology, as well as the first Queen album since Freddie Mercury's death earlier this year.

Analysts expect pre-tax profits for the year of pounds 515m, or about 71p a share, for a full-year multiple of about 21 times. That, of course, hardly matters: the real driving force will be demerger plans or a takeover bid, and the shares are still good value.

De La Rue hits

much lower note

De La Rue, the banknote printer, has lost its growth stock rating since completing its pounds 682m bid for Portals, the security paper group, earlier this year. The shares' 14 per cent one-day plunge in March was outdone yesterday when a second profits warning sent them spiralling down 182p to 718p, which leaves the price nearly one-third off its peak in February.

For the chief executive, Jeremy Marshall, and his team, the problems have resulted from an accretion of small setbacks. The high-margin banknote business, the backbone of the group, has lost out on "bonanza" business in the first half. Accounting for around a fifth of the normal total, this one-off work for state banknote printers that cannot meet unforeseen spurts in demand, is the icing on top of the solid core of repeat business.

De La Rue has also suffered from the surge in US bank mergers this year, causing a "hiatus" in sales of electronic banknote sorters, printers, dispensers and the like. Finally Giori, the banknote machinery-making associate, has had a poor first half after a dearth of delivered orders. That combination added up to a disappointing 5 per cent drop in pre-tax profits to pounds 69.1m for the six months to September, and prompted yesterday's warning on full-year earnings. Given that unrepeatable profits from project management work chipped in an additional pounds 9.7m at the operating level in the half year, and Portals added a further pounds 10.3m, the underlying picture was much worse than the headline figures showed.

Analysts yesterday sliced full-year profit forecasts from over pounds 170m to between pounds 140m and pounds 150m, putting the shares on a forward p/e of between 15 and 16, only slightly ahead of the market. The company will have to work hard to regain its old reputation, but the fundamentals remain sound. De La Rue's banknote volumes may not return to the 20 per cent compound growth of the past, but its market leadership and low costs bode well for the future. Meanwhile, the financial world is moving increasingly towards its automated banking equipment and cashless plastic card technology. Hold.

Exciting message from Vodafone

As a pure mobile phone play, Vodafone offers investors access to one of the fastest growing, most exciting markets in the world. Having achieved the premier position in the UK market, the company is repeating the formula across a range of overseas territories. It is an enticing prospect, even if it comes at a seemingly steep price using traditional stock market measures.

Half-time figures from the company yesterday confirmed the attractions. Turnover up 19 per cent to pounds 666.4m generated a 12 per cent increase in pre-tax profits. Earnings per share rose by a similar margin to 4.39p, while shareholders were rewarded by an even more impressive 20 per cent rise in the interim payout to 1.97p.

Despite vicious competition from Cellnet, Orange and Mercury, and the enormous cost of attracting subscribers with handsets at ludicrously low prices, profits continue to be driven by the rapid transformation of mobile phones from business tool to consumer accessory. NatWest Securities estimates more than 12 million UK subscribers will have been connected by 2000, three quarters of them consumers.

Overseas there is also enormous scope, with Vodafone exposed to as many potential subscribers as at home. Losses from these start-up operations are reducing fast, down to pounds 18m in the six months to September. In the long run these operations will contribute a significant profit, maybe 20 per cent of the total by the end of the decade.

The difficulty with a company embracing an increasingly mature UK market and a still-embryonic overseas arm is in attaching a sensible valuation. A mixture of earnings multiple, for the operations at home, and discounted cash flow for the rest seems the most appropriate measure and according to one calculation could put a value of 300p on the shares, well above yesterday's close, down 15p at 239p. Although pricey on a pure earnings multiple, the shares are good value.