Bottom Line: Granada thrives on Midas touch

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The Independent Online
GERRY ROBINSON could not hide his disappointment at failing to pick up the National Lottery contract. But having gobbled up LWT, more than trebled the value of Granada's shares in two years and presided over a 51 per cent increase in interim profits, the upstart caterer could be forgiven for thinking he had the Midas touch.

To get the quibble out of the way, profits and earnings - themselves two-fifths higher - were flattered by the seasonality of acquisitions. For the full year the increase is likely to be closer to 25 per cent.

That aside, the view from Coronation Street is as rosy as it has been since 1991, when the company was swamped with debt, saddled with a disastrous computer services arm and faced with the worrying possibility that it might lose its North-west TV franchise.

All divisions increased their profits, the balance of the group is better, cash flow is strong and the new additions to the group are adapting to the Granada mould more quickly than expected.

Profits from television received a helpful one-month boost from LWT in March, but the underlying picture is one of higher volumes of programme sales, better prices and a long overdue rise in advertising revenue.

That is vital in a business with high operational gearing, and as the synergies of the two regional stations emerge the relative cost base will fall further. After all, margins at last year's acquisition - the contract caterer Sutcliffe - rose from 4 to 7 per cent.

The third bright spot, leisure, saw profits motoring ahead by 38 per cent as higher volumes washed over the division's largely fixed cost base.

With a third of profits coming from the cash-generative but declining rental side and a third from the improving television arm, Granada should be able to grow profits sharply over the next couple of years and eliminate its 70 per cent gearing by 1997.

On forecast profits from Paribas of pounds 260m for the year to September and pounds 317m the following year, the shares, having fallen 18 per cent so far this year, trade on a prospective price/earnings ratio of 16, falling to 14.

Some retreat after previously powerful share price outperformance was inevitable. But a small premium to the average market rating is fair after the past two years' achievements by the current Granada management. Buy at 501p.

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