BT braces for the challenge from cable
THE INVESTMENT COLUMN
Friday 19 May 1995
For the first time, BT's domestic network shrank in the three months to March under the onslaught of its newest competitor. Underlying growth in the group's 20.6 million domestic subscribers remains about 2 per cent a month, but since Christmas cable groups have been pinching a little more than that, cutting annual growth to less than 1 per cent.
BT, though, is clearly capable of looking after itself, as yesterday's modest fall in profits for the year to March, both before and after funnies, illustrates. The costs of the last year of the massive redundancy programme soared from pounds 517m to pounds 820m as more expensive senior staff were drawn into the net, but that was partially offset by a pounds 241m profit on the sale of the stake in AT&T and a pounds 75m gain on the early redemption of government debt.
Putting that lot on one side, underlying earnings per share grew 1.8 per cent. That is an impressive result, given the RPI-7.5 per cent price formula under which BT has been operating for about two years.
The price cuts forced on it by the new regime cost over pounds 800m in total last year, with more than pounds 600m, or 12 per cent, lopped off inland call revenue only partially made up for by 7 per cent growth in domestic call volumes.
And while BT faces a tough battle against the cable operators at home, growth in annualised international call volumes picked up to 5 per cent in the fourth quarter, after the worrying dip to 4 per cent seen in the second and third. It is also wisely providing for the future with Concert, the data-link joint venture with MCI which will lose money heavily in the short term but must represent the way forward.
Early gains in the shares were reversed yesterday as the market took on board a veiled warning from Sir Iain Vallance, BT chairman and chief executive, about the likely impact on dividend growth of increased competition, regulation and capital expenditure.
If growth in the payout is cut from last year's 6 per cent to 5 per cent in the current period, the shares, down 2.5p at 400.5p, stand on a prospective yield of 5.8 per cent. With profits unlikely to make much progress beyond pounds 2.9bn this year, that seems to fairly discount the risks.
Vosper waits for ships to come in
Building warships is a feast or famine business and unless Vosper Thornycroft secures a big order soon it may find itself going hungry. Vosper has had a good run, and yesterday's figures again show that the Southampton defence contractor has been skilfully managed in an industry stuffed with overcapacity.
Pre-tax profits up 16 per cent at pounds 25m, record turnover of pounds 232m, and a healthy pounds 600m order book paint a bright picture. Top this with pounds 107m stashed in the bank, and it looks like full steam ahead on the Solent.
But with the shares racing ahead in recent weeks, it is worth remembering that Vosper has a downside. The bulk of existing orders end in mid-1997, leaving Vosper with a contract to deliver just one minehunter a year until 2001, certainly not enough to sustain the current 3,100-strong workforce.
Vosper protests that there is plenty of work on the horizon but the time- lag between placing a defence order and starting work on it can be frustratingly long.In such a fiercely competitive industry Vosper is by no means certain of winning one, let alone the couple of contracts it needs for the long term. In the UK it faces stiff competition from VSEL and GEC. And Kuwait's decision to award a pounds 316m order for eight patrol boats to France's CMN shows the international market to be similarly tough.
The shares, which have benefited recently from the VSEL bid battle, were off 14p yesterday to 819p. Panmure Gordon's profit forecasts of pounds 27.3m this year and pounds 29.4m next put them on a forward rating of 15.5 and 13.4 respectively - demanding, but then Vosper has a record of turning orders into profits. The expected dividend - yesterday's final of 14.9p makes 21p for the year - is secure.
John Hoerner, Burton Group's American chief executive, says his ambition is for Burton to be treated as a real company and not just a plunder stock. Given the number of false dawns since his arrival in 1992, fulfilling that ambition may be some way off. But yesterday's improved results showed the company staggering towards some kind of respectability. Pre-tax profits for the half-year to March increased from pounds 35m to pounds 67m on sales steady at around pounds 1.03bn. The chain stores such as Burton menswear, Top Shop and Dorothy Perkins all made a profit for the first time in years.
Burton has done much to move away from being a mark-down masochist to one that charges full price for most of the year. But the company is still a mixed bag.
While the Debenhams department stores are powering ahead, the multiples are still proving problematic. Debenhams, which increased profits in the period from pounds 44m to pounds 51.6m, has identified 10 locations for new stores. The 1,200 multiples, meanwhile, could only manage pounds 15.8m, and Burton and Principles are still likely to slip into loss in the full year.
Burton is trying to inject life into a bunch of brands that looked dead several years ago. Around pounds 4m was spent on a Dorothy Perkins revamp during the first half. The Top Shop formats will all be re-fitted by the end of next year and Evans, the larger-size shops, by this year-end.
But Burton still has too many shops spread over too many formats, several of which overlap. While Sears is jettisoning old shoe-shop brands to concentrate on concepts such as Shoe Express and Shoe City, Burton soldiers on with the same old names. Chelsea Girl, the 1970s boutique retailer, bit the bullet in the late 1980s and has transformed itself into the highly successful River Island. Such radical action may be required at Burton if the menswear chain is ever to shrug off the ghost of its error-ridden past.
Analysts are forecasting full-year profits of around pounds 82m and so far the City likes what it sees, marking the shares up 5.5p to 85p yesterday. But with Mr Hoerner making cautious noises about consumer confidence, the shares, on a prospective p/e of over 20, look to have run too far.
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