Cash and carry trouble at W&P

The Investment Column
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Hitting the market with a profits warning in only your second month as chief executive is nobody's idea of a dream start. But such was the lot of Colin Glass yesterday, just six weeks after taking the reins at Watson & Philip, the Alldays convenience store and cash-and-carry group.

W&P shares tumbled 10 per cent when the company warned that expansion costs at its Foodservice catering supplies business had run ahead of new orders. Added to this was a pounds 1.3m exceptional charge to cover the cost of closing unwanted depots. At Alldays stores, trading is in line with expectations though lottery takings were lower than expected. The net result was a signal that this year's profits would be at the lower end of expectations. Analysts are now expecting pounds 20m for W&P's financial year which has just ended.

Having only just taken over from David Bremner, who has rejoined Sainsbury's, it is too early to blame Mr Glass. But it is clear that the former Dixons man faces a challenging situation.

W&P's problem is that while Alldays is trading well, margins in its other two businesses, catering supplies and cash and carry, are extremely thin. The Trademark cash-and-carry business struck profits of just pounds 1.6m on sales of pounds 134m last year. The Foodservice division made pounds 3m on sales of pounds 118m and only a modest increase is expected in the financial year just ended.

W&P is bullish about prospects for Foodservice. It has been investing in its multi-temperature business to build a network of vans and depots which can cope with goods at chilled, ambient and frozen temperatures. However, the rising costs of doing this, together with a slower-than-hoped- for build-up of new orders, has put the squeeze on already wafer-thin margins.

Trademark, which operates solely in Scotland, is operating in a cash- and-carry market whose maturity has prompted the proposed Booker takeover of Nurdin & Peacock.

Yesterday's warning overshadowed a more upbeat announcement that Alldays is to link up with Total Oil to open more convenience stores on its petrol forecourts. Alldays already operates from 30 Total sites but there are now plans to add a further 200-250 over the next three years. There are 530 Alldays outlets across the UK, with plans to build a chain of 1,000.

Though the margins in convenience stores are better, the market is still highly competitive. The results of a wide-ranging review from Kwik Save are due next week. This could see the 900-strong chain move towards a more convenience store format which would make the sector even more cut- throat.

Watson & Philip shares have fallen sharply since their recent peak of 563p in January. Now at 420.5p, they trade on a forward rating of 12. Unexciting.

Bid prospects lift Grampian

First-half results from Grampian Television, the ITV franchise- holder for the north of Scotland, were bang in line with expectations, yet the shares rose a healthy 22p to 292p yesterday. The reason had less to do with pre-tax profits of pounds 8.15m (including a one-off gain of pounds 4.67m from the sale of Scot FM), than with the likelihood that Scottish Television will make a bid approach for its northern neighbour.

Hence Scottish saw its shares simultaneously drop to 732.5p from 753.5p, a warning from investors that STV had better not overpay for the privilege of owning all of ITV in Scotland.

The fundamentals look fine at Grampian: indeed, the company outperformed the ITV average in sales growth, with advertising sales rising by 4 per cent, compared to an average of 3.4 per cent across the system.

But the real question is: how much is Grampian worth to STV? The answer is that there is probably a further premium to be had in exchange for agreeing to a bid from STV.

By combining the two ITV companies, some pounds 3m could probably be added to the bottom line. For a start, the two could co-operate more closely in the production of regional programming, which they are required to make as a condition of the licences with the Independent Television Commission. On top of that, there are head office savings to be made, and some production cost-cuts, although strong unions will fight any such efforts.

Scottish could probably afford to pay up to about pounds 120m for the company, equivalent to 350p a share. That would, however, be at the very top of the range and the City would prefer a bid at about 330p or 340p.

In any event, any merger is bound to be agreed. STV and Grampian know each well, and have been talking on and off for several months about ways they could co-operate more closely. Moreover, their shareholder registers have many names in common.

Pre-tax profits for the full year are likely to hit about pounds 7m, rising to pounds 7.3m in 1997. On a fundamental basis, the shares on a current-year multiple of 21 times look pricey. But with a merger in the offing, they should be held.

Traditional pubs with big future

The AIM-listed Old English Pub Company spans three sexy areas of the stock market - pubs, restaurants and hotels. But OEPC is not one of the noisy, urban, themed chains now changing hands for heady prices, preferring to operate from olde worlde flagstone-floored and log-fired establishments in the prosperous south of England.

Having expanded from 10 pubs in 1992 to 63 now, including 19 acquired since March, the growth is anything but old-fashioned. Pre-tax profits soared from pounds 273,000 to pounds 811,000 in the six months to September.

The ingredients are in place for an exciting future for OEPC. Aimed at an upmarket clientele in the 35-plus age group, its outlets should appeal to the sort of well-heeled consumer who appears at last to be spending on leisure again. The group's income should be of equally high quality, with the 47 per cent of sales derived from food around double the level of the rest of the sector. That offers better margins and some protection from the power of the big brewers. Increasing advantage will be gleaned from the growing proportion of sales coming from the strengthening accommodation market, which will grow from 12 per cent to 18 per cent by the year end.

The founder and chief executive, Barry Warwick, who has expanded from an original base in the northern home counties and East Anglia to the west of England, believes there is scope to take the group to 150 outlets by 2001. However, he is cagey about splitting out the boost given by acquisitions. Organic sales growth is just 3 per cent, although only 65 per cent of the potential of the estate is being exploited, he says.

House brokers Rowan Dartington expect profits of pounds 1.5m for the full year, putting the shares, up 2p at 176p, on a forward p/e of 19. Reasonable value, with two takeover approaches resisted so far this year and a full listing in prospect.