Bottom Line: Thorn makes sweeter music

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The Independent Online
THORN EMI's critics have so far been proved wrong on Virgin. An operating profit contribution of pounds 53m in the year to 31 March is, if anything, slightly better than was forecast on its acquisition a year ago and has enhanced, not diluted, earnings.

At the same time there are finally signs that rental activities outside the US are shaking off years of lethargy. Australia has turned round and the UK operation, including a revamped Rumbelows, is taking business away from Granada with a rise in market share from the low fifties to 60 per cent.

While Thorn EMI patiently sheds unwanted baggage - Thames TV and fire equipment have gone and defence, security and lighting cannot be far away - the combination may be enough to breathe life back into the share price, which has struggled to find its feet in the past year.

Fears about the impact of the Monopolies and Mergers investigation into British CD prices - affecting maybe 5 per cent of group sales - could also be misplaced, but the nine-month inquiry will undoubtedly cast a long shadow.

Nevertheless, some start was made yesterday as the shares rose 26p to 856p in response to better-than-expected full-year results generally and a highly impressive performance from music in particular.

Pre-tax profits nearly doubled in spectacular fashion from pounds 157.9m to pounds 289.9m but, shorn of FRS3 exceptional provisions and contributions from acquisitions including Virgin, there was a more modest, underlying 16 per cent rise in operating profits.

The star turn was music, which lifted operating margins from 11.1 to 13.1 per cent on pounds 1.5bn worth of sales and showed an underlying 15 per cent rise in profits. Virgin integration benefits - a slimmer roster, more products channelled through EMI's manufacturing and distribution facilities - have much further to run.

Rental profits growth of 9 per cent was led from the US. The revamped UK is running hard to stand still despite pounds 27m of annualised cost savings, but is generating cash to reinvest in the growing US market.

Defence did its prospective sale price - rumoured at pounds 120m - no good with losses on fixed price fusing contracts. This undid progress in security and commercial electronics and led to a collapse in divisional profits from pounds 13.2m to pounds 1.5m. But lighting enhanced its sale prospects with a 20 per cent profits rise.

Disposals could clear much of the group's pounds 470m debt. Beyond that a demerger of rental from music, once the shadow cast by investigations is removed, opens up some topside. Meanwhile, a market rating of 14.4 on pre-tax profits of pounds 375m this year and a yield of 4.7 per cent comfortably underpins the price.

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