Capital return by radio station

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Sparkling results from Capital Radio have put UK commercial radio solidly in the media spotlight - and with good reason. Radio has doubled its share of national advertising to about 4 per cent in only three years, and has room to grow. Capital, one of the largest and best-managed radio companies, is taking full advantage, reporting pre-tax profits of pounds 26.5m in the year to September, up 48 per cent.

While it is unlikely to repeat that performance in 1996, particularly since some of the growth came from the well-timed acquisition last year of Southern Radio, Capital is expected to be able to generate 20 per cent annual profit rises this year and next.

Minor doubts earlier this year about the state of the advertising market sent the shares drifting lower, to about the 440p mark, where they have been treading water. But the 15p rise yesterday, on the back of the profits announcement, suggest doubts have been overcome for now.

There are still a few concerns about what the company will do with its pounds 20m in cash, and analysts have been pressing for a firmer statement of strategy from Richard Eyre and his team. Yesterday they got it: plans to bid for a commercial radio licence in Yorkshire, among other franchises, expansion into multimedia, partnerships with overseas radio companies and, of all things, a "radio-themed" restaurant.

Of the four, only the vague "multimedia" push looks suspect. For a radio company to think about investing in on-line services seems a bit of a stretch, given how many big media companies are already sniffing around this potentially cash-draining sector.

But the restaurant scheme looks a bright idea. The company is moving into offices in Leicester Square, and plans to convert an existing ground- floor restaurant into a Planet Hollywood-style hang-out, with radio memorabilia on the walls.

Plans to discuss overseas opportunities with local partners likewise look promising. The company has assured shareholders and analysts it does not intend to spend freely in markets it doesn't know. But it feels, rightly, that its sales and management skill are exportable, given the right strategic partners and provided it sticks to deregulated, commercial markets.

Core radio remains the focus, however. And with pre-tax profits likely to grow to pounds 32m this year (30p a share) and pounds 38m next (38p), the shares look reasonably good value at 11 times next year's earnings.