Brickbats turn to bouquets for utility
Sunday 03 December 1995
SEVERN TRENT (670p) has been the recipient of frequent brickbats since it embarked on what has subsequently been seen as a misconceived diversification binge. One acquisition on the trail was Biffa, a waste management business for which Severn paid pounds 212m in 1991.
But the water company's shares have been slowly regaining acceptance in the City, as analysts and investors have come round to the company's way of thinking.
Biffa, where profits are growing strongly, is in fine shape, as the recent interim results confirmed. While Severn Trent's sales rose 6.6 per cent to pounds 569m, and operating profits grew by 12.7 per cent to pounds 214m - reflecting sound cost control - Biffa's contribution of pounds 10.2m represented a 34 per cent increase.
Stockbroker Nikko Securities is one fan, predicting dividend growth of more than 12 per cent a year through to 2000. Analyst Donna Lury predicts full-year profits of pounds 347m, up 16 per cent on 1994/95. Buy.
THE UK newspaper market has been in upheaval over the past year, what with the price war, rising newsprint costs, and sluggish growth in advertising revenues.
In the past few months, the severity of the situation has led to a shake- up, with speculation over the future of the titles owned by Express News- papers, and the closure by News International of Today.
The story is the same in the regions, with a number of significant deals going through in the past few months, including the Barclay Brothers purchase of the Scotsman, and the pounds 205m management buyout at Reed Regional Newspapers.
Last week, Adscene, a regional free-sheet publisher, entered the fray. Although still a small player, Adscene may be a company to watch. It launched a recommended offer for titles owned by the Tamworth Herald, Lichfield Mercury, and Emap's Kent business.
The offer values the Tamworth and Lichfield businesses at pounds 23.3m. Adscene will pay pounds 9.85m in cash for the Emap titles. The hoped-for outcome is that Adscene can impose its own margins, currently around 15 per cent.
Emap Kent could only muster margins of 4.5 per cent on sales of pounds 5.65m last time round. Adscene will also be able to bolster its operations in Kent, and cost-cutting should open the way to more attractive packages for advertisers.
At 265p, the shares trade at a discount to the sector, which suggests they represent good value. Buy.
THE Budget (one): good news for some, especially whisky drinkers, and of course, whisky makers.
The share that gained most on the day, Highland, was up 20p, before easing back 10p to 357p. Given half its sales and more than half its profits are made in the UK, the rise may seem a reasonable move.
However, stockbroker BZW was quick to point out the flaws in this assumption. If it sells an extra 1 million cases of Scotch, a 1.3 per cent rise in volumes would be worth no more than a pounds 0.5m rise in forecast profits of pounds 45m, or a 1 per cent upside. The shares, up 5 per cent, have over-reacted. Sell.
THE Budget (two): What the Chancellor giveth with one hand, he taketh away with another.
The news he would increase the duty on strong ciders of over 7.5 per cent alcohol by volume sent shivers down the sector - although strong cider accounts for negligible volumes at all the quoted producers.
What is more worrying is the likelihood the Treasury will ultimately seek to bring the levels of duty on ordinary ciders into line with those on beer. At present, cider pays 13p a pint, in contrast to 23.2p a pint for beer.
So even after the Budget increase, the duty on beer is still 4p higher than the new level of duty on strong ciders.
Share-price falls in the sector were probably fair warning of what might be to come. Until the Treasury moves one way or another, the sector is probably one to avoid.
AMBERLEY GROUP, a small speciality chemicals business, is making its biggest acquisition to date - the pounds 12.5m purchase of Bousfield Printing Products, a maker of specialist printing inks.
Bousfield, with sales of pounds 18.39m, will more than double Amberley's sales of pounds 12.97m to around pounds 41.6m by 1997.
The business should make a good fit, Amberley's management has a strong record, and the working capital requirements at its new purchase price can be reduced.
The transaction is being funded by a placing and open offer to raise pounds 10.7m - equivalent to a rights issue of one new share for every 2.805 in issue, at 61p to existing holders against 70p in the market.
But although the deal has its attractions, it is a large chunk to digest in one go. Ignore the rights.
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