Capital Shopping offers a haven in uncertain times
The Investment Column
Yesterday the shares edged down 2.5p to 394p, just off their high, despite the announcement of fully diluted net assets per share up by a quarter to 315p in the year to December - well above most forecasts from analysts, who were wrong-footed by a shift in yields.
That happened at the time of the group's pounds 203m rights issue of convertible bonds in November. Until then, the growth in CSC's net assets had been driven almost entirely by its ability to squeeze ever-higher rentals out of an expanding portfolio. But valuers have been nervous about the continuing lack of strength in the market and have been reluctant to apply yields much below 7 per cent to those rent figures. However, recent deals - notably the sale earlier this year of the Gyle shopping centre in Edinburgh to Marks & Spencer on a yield below 6.5 per cent - have seen a move towards lower values for prime property. Although the difference is small, applying this falling yield to CSC's rising rental value, taking account of a 31 per cent rise in rental income to pounds 113m last year, meant Thurrock alone represented almost half the pounds 217m increase in the portfolio to pounds 1.58bn by December.
There should be plenty more to go for. Construction has only just started on the pounds 250m shopping centre at Braehead in Glasgow, yet two-thirds of the 600,000 sq ft development is already pre-let. The net addition to the portfolio that could give on completion in two years could be worth pounds 100m or 25p a share.
Underpinning all this is the continuing strength of the retail sector. CSC centres in the South typically saw sales growth in double figures last year, well ahead of last year's Government figure of 7 per cent. Despite a slightly disappointing Christmas, the strong trend has continued and yields are almost certain to fall further as a result.
CSC's shares trade on a 27 per cent premium to net assets, against an average of 5 per cent for the sector. But if MeesPierson's forecast net asset value of 355p by the year-end is borne out, they are not out of line. Keep holding on.
Vardon's range of leisure attractions doesn't include a roller- coaster, but its shares have done their best to provide shareholders with that stomach-lurching brand of excitement. Worth 137p last May, they plunged to a low of 79p following disappointing interims last September and have bounced back since to 112p yesterday, up 2.5p.
The problems afflicting the interims were in evidence at the full-year stage reported yesterday but the market is more relaxed now that the right measures have been taken to put Vardon's house in order. Strip out the distorting effect of last year's acquisition of the Archer health clubs and underlying profits were up 12 per cent, arguably a better measure than the 30 per cent increase in reported pre-tax profits to pounds 11.8m (pounds 9.1m), if not quite as telling as flat earnings per share of 7.8p (7.6p). The well-covered dividend rose another 15 per cent to 1.9p.
The Sea Life Centres to London Dungeon Attractions division continued to suffer from the tiredness of its resort aquariums and the impact of terrorism, road and rail works on the Dungeon theme park on the South Bank. A new television advertising campaign, beefed up management and consumer promotions, however, have already started reversing declining admissions.
Bingo reported a like-for-like admissions drop of 7 per cent in the year, which the company maintains is a better performance than its rivals managed in the same period. Here too the worst of the impact from the lottery, especially its scratch cards, is over.
The key strategic move of the year was Vardon's entry into health and leisure clubs where it bought the Metropolitan chain of private clubs together with a raft of contracts to run public gyms for local authorities, which are increasingly contracting out this sort of peripheral operation. Health clubs give Vardon access to the fastest-growing part of the leisure market and it is directing half its capital expenditure at this division this year.
On the basis of forecast profits before tax of pounds 15.5m this year and earnings per share of 8.5p, the shares trade on a prospective p/e ratio of 13. That sort of discount to the sector is fair enough, but the outlook is brighter and the shares are a hold.
CU finds the
Full-year figures from Commercial Union, like the curate's egg, were good in parts, and the 23.5p fall in the shares to 666.5p had more to do with the way in which the company knocked on the head the froth surrounding recent takeover speculation and, in particular, a deal with BAT.
The company's own bearish view of the immediate prospects for motor and household insurance business in the UK, where it is continuing to defend its margins at the expense of losing market share, also worries some analysts.
Operating profits down 13 per cent to pounds 444m were quite reasonable given the withering effect of a strong pound on the overseas profits of a company which does 74 per cent of its business overseas, and most of that in France, the Netherlands and the US. Continuing competition almost halved the contribution from UK general insurance, while the doubling of bad weather claims in the US virtually wiped out profits.
Lurking in the details were some sharply improved results from Delta Lloyd's life business in the Netherlands and general insurance of Groupe Victoire in France. UK life and pensions business is also buoyant.
Some analysts were considering adding pounds 10m to forecasts for 1997 yesterday but the consensus view is that the company will do well to maintain its 1996 profits this year. The UK insurance market is still tough. While insurers are still making profits from motor and household business the rating cycle is unlikely to turn up. The general election could dramatically weaken the pound, but it probably will not.
The shares are still 20 per cent higher than they were six months ago. Without a bid premium the group's prospects look unexciting and the shares, priced at 16 times prospective earnings, look to be only a dull hold.
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