BT eases the pain of small investors

The Investment Column

Is the misery finally over for BT's 2.3 million long-suffering small investors? A glance at the chart shows the scale of the turnaround since the tie-up with MCI was announced last November. The shares have risen by no less than 25 per cent since the 351p they traded at before the deal. At long last they are back above the 410p offer price of the Government's third and final public offering in July 1993.

It would be nice to say the increase has in part been due to a reappraisal of BT's underlying performance. It is certainly true that fears about the competitive threat from the cable companies have been largely overblown, at least for the time being. In reality, BT has managed to stabilise the slide in numbers of telephone lines, mainly because its "good to talk" advertising blitz, likely to total pounds 200m this year alone, has grown the overall UK market.

That led to a rise in third-quarter pre-tax profits from pounds 829m to pounds 909m, for a nine-month total of pounds 2.55bn (pounds 2.52bn). Earnings per share moved ahead from 8.7p to 9.4p in the three months and reached 25.7p (25.5p) after nine months.

But despite those apparently good third-quarter figures yesterday, analysts were less than impressed with the rise in BT's inland call volumes. Though they are growing at 7 per cent on a 12-month moving average basis, observers had hoped for an acceleration. In addition, tough price controls set by the regulator, Oftel, mean that this translates into static, rather than rising, revenues. The sharp fall in turnover from international calls also demonstrates just how stiff competition can be in markets where BT's monopoly has been substantially eroded.

The real truth behind the share price rise, however, is largely technical. When BT announced the pounds 13bn takeover of MCI, it promised to pay a special dividend of 35p a share in September. It also forecast that the payout for the current financial year to the end of March would be 19.85p, a 6.1 per cent increase on 1995. This was an acceleration on the average annual increase in dividends of some 5.6 per cent and related, the company argued, to the higher growth potential from MCI's lean and aggressive approach. Taking the two dividends together, tax-exempt City pension funds will get 68.5p gross this year, a yield of more than 15 per cent. It is no wonder tracking funds are still piling into the stock.

Analysts were also upgrading full-year profits forecasts for other reasons. BT disclosed that its huge pensions liabilities from the redundancy programme had probably eased. This should lift earnings to pounds 3.4bn this year.

So is the party over for those wanting to jump on the bandwagon? The answer is probably not, though long-standing investors have certainly seen the best of the increase - and breathed a deep sigh of relief in the process.

Westminster nursing wounds

The travails of the nursing home sector are clearly reflected in the problems the sector's leaders have been suffering recently. October's merger of industry leader Takare with Court Cavendish was quickly followed by last month's profits warning, and now arch-rival Westminster Health Care has reported a dive in first-half profits.

All operators are having to work against a background of falling occupancy levels as local authorities' budgets continue to be screwed down by the Government. Westminster's half-year numbers to November, which saw pre- tax profits slide from pounds 8.01m to just pounds 1.17m, reflect that backcloth, but the group was also hit by a number of one-off factors which should not recur.

First off was last summer's unsuccessful bid for the much smaller Goldsborough Healthcare, which has cost a hefty pounds 4.1m including losses on the continuing 9.1 per cent stake. But Westminster should be given credit for walking away rather than paying over the odds, and could have another go.

The group's move to depreciate property for the first time, resulting in a pounds 1.05m charge in these figures, is prudent, if bowing to the inevitable. Also eminently sensible is the pounds 3.07m hit following the decision to curtail new home openings, given the burden of overcapacity under which the industry is labouring. In contrast to TC, Westminster has not seen any further lengthening of the fill rate on the 15 per cent of its 6,000-bed capacity which is still relatively new, although at 18 months it takes around six times as long as a few years ago.

Pat Carter, chief executive, sees light at the end of the tunnel, with supply moving into balance with demand over the next 18 months to two years. Meanwhile, Westminster's move into new areas ranging from sheltered flats to emergency alarms and specialist medical units is taking up the slack. Margins in the behavioural and diagnostic medicine side have nearly tripled in the three years since start-up and non-nursing home activities are on course to provide half the group's profits by the year 2000, up from 21 per cent now.

Full-year profits before one-offs of around pounds 18.5m would put the shares on a forward multiple of 12. Westminster should be a winner in an industry with sound long-term fundamentals, even if the immediate outlook remains dull. Hold.

Crest gathers momentum

John Mathews, chairman of Surrey-based housebuilder Crest Nicholson, does not mince his words: "We shot ourselves in the foot in 1995. Shareholders have not had a good ride." He was right and huge cost overruns in the Midlands and Eastern regions led to a cull of a dozen senior managers and the arrival of John Calcutt as new chief executive.

As a result Crest is coming from a low base. In the year to October pre- tax profits rose by 61 per cent to pounds 10m on sales six per cent higher at pounds 332m. A 2.5p (2p) dividend was covered by earnings of 4.74p, up 57 per cent.

The core residential division benefited from an 11 per cent increase in the number of dwellings sold to 1,902 and a 5 per cent rise in average selling prices to pounds 94,700, largely due to a greater number of better located sites in the South-east. Operating margins almost doubled to 6.6 per cent, with Crest pencilling in 10 per cent for this year - still below the low teens returns achieved by the likes of Wilson Bowden.

But with net reservations in the first three months up 25 per cent on the previous period and house price rises being seen as far north as Harrogate, Crest is clearly moving in the right direction.

Earnings visibility, while improving due to fewer land sales, would be better if Crest was a pure housebuilder. Instead, it seems intent on persevering with its struggling construction and loss-making property activities.

That said, Crest has no plans to become a volume builder and looks well placed to achieve its modest medium-term ambitions - the balance sheet is healthy with gearing down to 36 per cent.

UBS has raised its 1997 profits forecast by pounds 3.5m to pounds 14.5m for a prospective price-earnings ratio of 12, falling to less than nine the following year with the shares up 3p to 91.5p. Good growth at a reasonable price. Good value.